Book Review: Rethinking Investing

I liked Charles Ellis’ book Winning the Loser’s Game so much that I had to read his latest: Rethinking Investing.  It is very short at just over 100 small pages, but is packed with good advice.  Some of it is specific to U.S. tax laws, but most of it useful for Canadians.

Ellis takes on three huge areas of personal finance.  The first is your portfolio allocation, or what you should invest in.  The second is your savings plan, and the third is your “spending rule,” or how to spend your assets during retirement.  A detailed treatment of these areas could easily run to thousands of pages, so this book is necessarily at a high level.  Ellis wants you to get the broad ideas right, so that you won’t make big mistakes as you fill in the details.

Ellis calls compounding investment returns “your power curve.”  He explains that most of your investment growth comes at the end, which provides motivation to begin early.  Saving is “your first priority.”  

Saving

He offers thirteen specific suggestions for saving money, such as use employer matching, automate deductions from pay, invest bonuses, buy preowned cars, consider a smaller house, “self-insure for auto damages under $10,000—or whatever you can comfortably afford to pay in the unlikely event of a major accident,” and use term life insurance.

Unlike recent popular advice to focus only on big expenses, Ellis says that “Lots of small-expense items can add up and cut your potential savings.”

Investing

Ellis repeats the main themes of Winning the Loser’s Game to explain why low-cost index investing is the way to go.  “The growing market dominance of expert professional investment managers … has made the market harder and harder to beat.”

There are three factors slowing down the “widespread adoption of indexing.”  Referring to index investing as “passive” has negative connotations for most people.  “Nobody wants to be known as passive.”  The second factor is that “most investors find it hard to believe that talented active managers with superb information won’t beat the market.”  These active managers “fought against indexing as though they and their careers were seriously threatened—as they surely were and certainly are!”  The third factor comes from the media who know “that indexing’s persistent successes would not make for compelling or even interesting copy.”

When investors make active choices on market timing, they tend to perform poorly.  Unfortunately, Ellis points to reports from DALBAR for evidence of this pattern.  While it’s true that retail investors make poor market timing choices on average, DALBAR’s methodology for computing their losses is nonsense (https://www.michaeljamesonmoney.com/2026/04/dalbars-measure-of-retail-investor.html).

Bond allocation

Ellis makes an interesting pitch for investors to own more stocks and fewer bonds.  He asks investors to include the following as part of their bond allocation: “home equity, the present value of your Social Security benefits [CPP and OAS in Canada], and your future estimated savings plus any likely inheritance.”

While I think many people would be better off with a lower bond allocation during their working years, I have to push back on the future estimated savings and inheritances.  Maybe government workers can treat future savings as bond-like, those in the private sector have a lot of uncertainty in their future savings.  As for an inheritance, I see huge uncertainty in most cases.  A parent may end up needing the money for elder care, or may give it to someone else, or may have less money than you think.  The money I will leave to my sons is mostly invested in stocks, and they will get what’s left after all my spending.  The amount they will get does not have bond-like attributes.

All that said, if thinking about home equity, government payments, future savings, and an inheritance helps people tolerate the short-term swings in stock prices, then maybe Ellis is right to give this advice, even if it isn’t all technically correct.

Retirement spending rule

Ellis encourages people to think about drawing from their savings in retirement like a university endowment.  “First, average the year-end values of your assets over the prior several years (preferably more than five years) to dampen the impact of market fluctuations.”  Then choose a prudent annual withdrawal percentage, “likely 4–5%.”

“For example, if you settle on a 5% rate of withdrawal and a six-year moving average of the year-end value of your assets, a 30% drop in the stock market would lead to only a 5% reduction in your payout that year.”  This approach offers an alternative to “having a portfolio laden with low-return bonds.”

I have cast my lot in a strategy not too different from this book’s advice.  I’m retired and somewhat concerned about current very high stock valuations, yet I still have about 70% of my retirement assets in stocks.  But don’t follow me blindly; think for yourself.

Investment advisor

“You might be wise to explore retaining an [investment advisor] at a very handsome hourly rate to help create your long-term Personal Investment Plan that you should not need to alter often.  This arrangement will prove far less expensive than a recurring annual fee and will provide you with what you really need.”

Summary

Ellis closes with seven high-level points “to succeed as a long-term investor.”  The first five I’ve already discussed.  The final two are “Defer claiming Social Security [CPP and OAS in Canada],” and “Keep your focus on your long-term goals and investment program.”

Conclusion

Rethinking Investing is a great book for people who are more interested in life than finances, and are looking for the right direction for their saving and investing.  Ellis points readers to successful strategies that require minimal extra work.