Friday, November 3, 2017

The Smartest Investment Book and Portfolio

There is little doubt that the vast majority of investors would be better off investing in low-cost diversified index funds than attempting to beat the market. However, the best writers explaining this fact, like Charles D. Ellis, tend to be calm and reasonable, while the loudest proponents of expensive active management say silly alarmist things like “index funds will destroy capitalism.”

One voice on the index fund side that can take on hysterical active management proponents is Daniel R. Solin. His books The Smartest Investment Book You’ll Ever Read (Canadian Edition) and The Smartest Portfolio You’ll Ever Own pull no punches. While I prefer Ellis’s style, I like Solin’s chances of holding his own in a public debate.

Solin refers to active portfolio selection as “hyperactive management.” He says “The securities industry adds costs. It subtracts value.” He devotes many pages to the numerous failings of the investment industry. While he overstates some of his points (e.g., “Nobody Can Consistently Beat The Market”), most investors would do well to assume his absolutes are correct.

The 2006 book, The Smartest Investment Book You’ll Ever Read (Canadian Edition), is starting to get a little dated, but is still very useful. Many Management Expense Ratios (MERs) for index funds are now much lower, and there are more Exchange-Traded Fund (ETF) choices than there were back then. On the positive side, this Canadian edition really does have meaningful Canadian content.

The 2011 book, The Smartest Portfolio You’ll Ever Own, covers some of the same ground as the first book, but covers new ground as well. It offers several model portfolios. One ETF-based portfolio is essentially the same as the one recommended in the first book. Another portfolio is based on index mutual funds. A third is based on Vanguard target-date funds.

Solin calls these three model portfolios the “smartest portfolios.” To distinguish a fourth model portfolio from these three, he calls it “The SuperSmart Portfolio.” This portfolio is based on ETFs and is designed to capture size and value factors based on the Fama-French three-factor model. All four portfolios are intended for Americans, so Canadians will have to try to adapt them to investment choices available to us.

Here are a few interesting quotes:

“Wall Street is not completely lacking in skill. It takes considerable skill to convince you it has an expertise that doesn’t exist and that you should pay for this nonexistent skill.”

“Just say no to: Market timing; Buying individual stocks and bonds; Actively managed mutual funds; Alternative investments; Variable annuities; Equity indexed annuities; Private equity deals; Principal-protected notes; Currency trading; Commodities trading.”

“The true secret of giving advice is, after you have honestly given it, to be perfectly indifferent whether it is taken of not and never persist in trying to set people right.—Hannah Whitall Smith”

“If you are using a broker or adviser who claims to be able to beat the market, withdraw your money and close your account.”

Toward the end of the 2011 book, Solin gives somewhat of a commercial for Dimensional Fund Advisors (DFA), and he admits to being an advisor offering their funds. However, this comes after the bulk of the book that offers advice suitable for do-it-yourself investors.

Overall, I find these books useful for giving readers the indexing side of the active vs. indexing debate. Academics might cringe at the repeated absolutes, but the impact on readers is likely to be positive.


  1. Michael, even though I'm an 'undexer', I recognize that there are some hysterical arguments against indexing (and capitalism). I ignore them. But in general, I find index investors to be more absolute. I have no issue with indexing and can see how/when it works well, but most index investors don't see that there are different ways to approach active In their mind, there is only one way. For instance, I came across a quote from the guys at young and thrifty - "index investing using ultra-cheap ETFs is the way to go for 99.9999% of investors." Yes, there are some hysterical proponenets of active, but you have your fair share too. TB

    1. @Tom: I agree that there are index investors who take extreme and unreasonable positions, but I don't see them get space in major publications the way that anti-indexers with silly arguments do. I find it frustrating to see wide publication of silly emotional arguments sponsored by those who profit from offering high-priced investment services.

      To me, there is little point in being dogmatic about active vs. passive. The real battle is about costs. They should either be very low or the investor should be getting something for his or her money. For example, in broad terms, Steadyhand investors get two things: 1) continuing help with a sensible asset allocation and other types of advice, and 2) selection of equities within funds. For investors who could not handle managing their own portfolio of index ETFs without making significant mistakes (like selling in fear), the first part of Steadyhand's offering is enough to justify its cost. The statement at young and thrifty only applies to those who could manage their own ETFs successfully.