Thursday, February 7, 2008

“Worry-Free Investing” Book Review, Last Part

This is the last part of a review of the book “Worry-Free Investing”, by Zvi Bodie and Michael J. Clowes. This review began here.

On the positive side, this book contains a wealth of useful and unbiased information about investing and saving for such things as college and retirement. The authors are thorough and knowledgeable. Not counting differences of opinion, I found only one error in the book: at the top of page 113, the return in the example is actually 43.4% rather than 24.9%.

On the negative side, the book heavily stresses investing in I Bonds, which are safe, but give low investment returns. I fear that most people will not be able to save enough money each year to meet their goals if they stick to I Bonds. These people need to take some calculated risks to get what they want. It’s better to have a 90% chance of achieving your goals with stocks than having a 0% chance with I Bonds.

Even though I disagree with the authors’ main point that stocks are too risky, it’s a good idea to seek different points of view that challenge your assumptions. The authors do make good points about people exposing their finances to too much risk. For these reasons, I recommend this book.


  1. I just finished reading this book (and avoided reading your posts because I didn't want to taint my opinion) and my biggest problem with the book is that I totally disagree that real-return bonds don't have any risk. These bonds have one big risk that the good professors made no mention of: when the bonds mature and an investor wants to purchase new bonds, the real-return may be much less. They mention a 3% real-return in their book but current real yields are shy of 2%.

  2. Canadian Capitalist:

    I agree with you. To see what we would need to eliminate risk, let's imagine a 50-year old who wants to use his pot of money in equal amounts between ages 65 and 90. To do this he would need to buy several real-return bonds with maturities 15 to 40 years from now with guaranteed real rates over the years, and they would have to be in a stipped bond form where no interest payments are paid along the way (so that they can be bought for a discount now).

    Even then, there is a risk that he would live past 90, or worse, die before he reaches 65.

    Life involves risk. I think this guy would be better off investing some of his money in an index fund than demanding modified versions of real-return bonds.