Book Review: The Investment Answer

Weighing in at a scant 60 pages, Dan Goldie and Gordon Murray’s book The Investment Answer addresses a surprisingly wide array of investment and financial planning topics. Designed with novices in mind, the book provides simple, yet useful investment guidance in an accessible format. It also benefits from an easy-to-follow structure, dedicating a section to each of five key investment decisions.

Here’s a summary of their advice:

1. If you want help, hire an independent, fee-only advisor.

Given that Dan Goldie is a financial advisor, it is perhaps unsurprising that he and his co-author strongly recommend that investors should hire professional help. They make a compelling case, however, that a professional advisor can help you stay disciplined during periods of market turmoil, providing clarity and avoiding behavioral blunders. Specifically, they recommend hiring an independent, fee-only advisor who is legally required to act as a fiduciary for you, as opposed to a “broker” who lacks incentive to always put your best interests first.

2. Select investments that match your risk profile.

One of the most significant decisions you will make as an investor is choosing which asset classes (i.e., types of investments) to include in your portfolio. According to Goldie and Murray, making this decision is essentially the same as selecting which risks you want to take. As they point out, without risk, there is no return. And with the wrong risk, you might lose your investment. They recommend narrowing the investment universe down to equities, bonds, and cash because each of these asset classes has defined risks and a clear source of return. Investors with a longer time horizon are advised to tilt towards equities, while conservative investors are guided towards bonds.

3. Diversify across asset classes to reduce risk.

Once you have determined which asset classes to include, your next decision is how much of your portfolio to invest in each. The authors emphasize that your asset allocation (i.e., the amount you invest in stocks, bonds, cash, and other investments) will play a significant role in the expected return and risk of your portfolio. The primary objective in this phase is to combine investments that move differently from one another. Ideally, your allocation decisions will create a diversified portfolio that provides an emotional experience you can tolerate.

4. Stick with low-cost, passive investment options.

Goldie and Murray also make plain which side of the active vs. passive investment debate they are on, citing numerous studies which show that active managers may get “lucky” for a few years, but are unable to persistently outperform over the long run. The authors clearly favor low-cost managers that track a benchmark index. As they point out, management fees, trading costs, and tax expenses all tend to be higher for active managers, resulting in lower net returns for investors.

5. Rebalance your portfolio regularly.

The book’s final section drives home the importance of rebalancing. The authors explain how movements in the market will cause the relative weighting of your investments to shift, with the outperformers crowding out the securities that have struggled. As a result, your risk allocation will drift away from your intended exposures. To return to your original risk allocation, they point out that you will need to sell some of your “winners” and reallocate capital to the investments that have underperformed.

The Investment Answer Offers Basic, But Sound Advice

In our view, The Investment Answer delivers on the promise of its title. Investors are well served by reminders to avoid conflicted advisors, take risks intentionally, diversify across investments, keep costs low, and rebalance regularly. Although we might not be as enthusiastic about passive indexing (we generally prefer more sophisticated, factor-tilted funds), we didn’t find much to quibble within this book. While experienced investors are unlikely to learn anything that will change their investment approach, those who are new to investing will likely find The Investment Answer to be a helpful guide.

As always, if you’d like to discuss the book or ask us a question, please don’t hesitate to contact us!