Monday, October 26, 2020

The Elements of Investing

When it comes to what really works in investing, two of the greats are Burton Malkiel (author of A Random Walk Down Wall Street) and Charles Ellis (author of Winning the Loser’s Game).  They came together to write the short book The Elements of Investing that leaves out “complex details that tend to overwhelm normal people.”  This book is full of excellent ideas that Canadians can apply, although the most detailed advice is U.S.-centric.

The elements of investing the authors chose are save, invest in indexes, diversify, avoid blunders, and keep it simple.  We all know that saving is easier said than done.  I was pleasantly surprised at the practical ideas on saving rather than just preachiness.

“Because they center their thinking on enjoying the benefits of achieving their goals, most savers and most slim people take pleasure in the process of saving and the process of keeping trim.  They do not think in terms of deprivation.”  “You can too.”

For couples, “practice ‘double positive’ shopping”: “agree that nothing gets purchased without both of you saying yes.”

“The only sensible limit on credit card debt is zero.”  “Every month or two, go over your expenditures, including credit card charges.”  Think about whether the purchases were all equally worthwhile, or whether you could easily have done without one of two of them.

The authors consider owning a home to be part of saving.  Under normal circumstances I would agree, but housing prices in big Canadian cities have run away from rent levels.  Parts of the authors’ reasoning about owning a home doesn’t apply in Canada.  “Your bank will not let you borrow more than you can sensibly handle given your income.”  This isn’t true here.  They also point to U.S. mortgage tax deductions which don’t exist in Canada.

The second chapter gives an excellent summary of the case for index investing, without the technical detail.  The authors explain that “The average actively managed mutual fund charges about one percentage point of assets each year for managing the portfolio.”  The case is even stronger in Canada where typical costs are 2% or higher.  These costs build up over an investing lifetime to consume one-third to half of a portfolio.

I liked the explanation of why market forecasters are useless.  “For a market forecaster to be right, the consensus of all others must be wrong and the forecaster must determine in which directionup or downthe market will be moved by changes in the consensus of those same active investors.”

On the subject of asset allocation, the authors make an interesting point about bequests.  “The appropriate allocation for planning bequests should be geared to the age of the recipient, not the age of the donor.”  So, even if you’re 90, the part of your portfolio you’re leaving to your grandchildren should be in stocks.

The authors each offer separate ideas on how your portfolio should become less risky as you age.  Ellis is more aggressive, suggesting still having 30-50% in stocks at age 80.  My own plan based on maintaining 5 years of spending in fixed income is more aggressive than either author, but my plans probably aren’t suitable for most people.

The book contains specific recommendations for mutual funds and exchange-traded funds (ETFs).  Canadians can’t buy U.S. mutual funds, and most Canadians prefer to avoid the currency exchanges necessary to buy ETFs in U.S. dollars.  However, it’s not too hard to find Canadian ETFs that meet the criteria the authors laid out for choosing investments.

Overall, I found this short book contains great investment advice.  I wish I had known these things decades ago before I made many mistakes.  Life is a great teacher but the tuition is very expensive.  This book can save investors a lot of money.


  1. Completely agree. When I was teaching, I used this book as the basis for my lessons on personal finance - yes, we do try to teach personal finance in high school! It was a tough sell for most 16 year old students.

    1. Hi Larry,

      Having tried to teach financial concepts to my own children, I agree about it being a tough sell. If I had this book at the time, it might have helped.