Concerning retirement planning and investment strategies, after two decades as a Peter Lynch disciple, I have graduated to William Bernstein. Here's why:
My former investment Bible was ONE UP ON WALL STREET by Peter Lynch, who was famous for beating the market with his Fidelity Magellan Fund in the 1970's and '80's. He argued that common investors could beat Wall Street professionals by holding individual stocks instead of mutual funds, and by watching everyday things around them. For example, he said when he noticed his wife and daughters bringing home fist-sized plastic eggs with panty hose in them, he found out who was making the so-called LLEGS, then bought shares of the company and made a bundle.
Lynch advised readers to "water the flowers and kill the weeds," not the other way around, a trap most beginning investors fall into. People hate to sell losers so they hang on much too long, while selling the stocks that have done well to lock in small profits, thereby forgoing much larger profits if they had let the stocks run. He spawned a whole generation of amateur investors in search of the elusive "10-baggers", Lynch's term for stocks that increased ten-fold from their purchase price.
This book affected my investing philosophy for almost twenty years. It served me well in the 1990's because I was in the information technology business and invested heavily in this segment. Unfortunately the Internet Boom brought down all the tech stocks starting in 2000, so the Lynch strategy was devastating for my portfolio from 2000 to 2004.
Starting in 2005 I diversified into a combination of asset classes that more or less match the global market, including large cap, mid-cap, and small cap stocks, international stocks, bonds/preferred stocks, REITs, and gold. A little bit of segment specialties are thrown in like commodity hedge and energy, both oil and new energy sources such as solar and wind. I still speculate on 5% of my portfolio with individual stocks, but everything else is in electronically traded funds (ETF's) or individual bonds. I don't believe in bond funds, since they don't guarantee principal like individual bonds.
The best book I have found on the wisdom of asset allocation and indexing the market instead of investing in individual stocks or high-priced managed mutual funds is THE FOUR PILLARS OF INVESTMENT: LESSONS FOR BUILDING A WINNING PORTFOLIO, by William Bernstein (McGraw Hill, 2002). It is on Amazon, Barnes&Noble.com or in your local library. This book is one of the top-5 recommended investment books by the Wall Street Journal's Jonathan Clements, and the book that legend John C. Bogle, founder of The Vanguard Group, says he wish he had written. I recommend this 2002 book MUCH MORE highly than Peter Lynch's 1970's book.
Following the advice of THE FOUR PILLARS, you won't beat market, but nobody really does this anyway long-term. Bernstein proves it statistically, and even shows Peter Lynch could not sustain his Magellan record over the long term. But the good news is that you won't lose your shirt and you will always do as well as the overall market, which goes up given enough time. When one asset class gets clobbered, you can sleep well knowing that one of your other asset classes is doing well to make up for the one that is suffering. Reallocate once a year but don't try to time the market, which leads to high transaction fees and ultimately to lower returns.
And stay away from high priced brokers. They eat away your profits. Bernstein also warns against most newsletter gurus, whose most consistant personal profit predictions come from your subscription fees. Be content with 6% to 8% long-term annual return instead of gambling to get 15%+ and then end up with -30% or worse. I was too greedy in the 1990's and paid the price.
Good luck with your own portfolio.
David Marshall, Marshall Books, www.marshallbooks.net
