Random Walk Down Wall St. Outline for Ch14-15 Essay

860 Words Oct 18th, 2008 4 Pages
Chapter 14 A Life-Cycle Guide to Investing
Basics: age & income & specific responsibilities in life matter in the mix of assets in one’s portfolio.
Five principles to allocate assets:
1. Risk & Reward
Higher risk is the price for more returns
2. Actual risk in stocks & bonds depends on the length of time you hold them – staying power.
The longer time you can hold, the greater should be the share of common stocks.
3. Dollar-cost averaging
- Periodic investments of equal dollar amounts
Drawback: (a). commission fee is high (b). unlikely to provide highest return
4. Rebalancing can help reduce investment risk and increase returns - Bringing the proportions of your assets devoted to different asset classes back
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ADV: guarantees that you will not outlive your money
DISADV: inconsistent with bequest motives/lacking flexibility of consumption/costly/taxable
Do-It-Yourself Method - The 4-half percent solution:
Two reasons to limit the take-out rate: 1. preserve the ability to allow your monthly payments to grow over time of inflation. 2. ensure that you could ride out of inevitable bear markets.
Other rules: let the amount you take out grow by 2% per year/rebalance and keep the risk level/tap assets to defer paying income taxes
Three ways to go about buying stocks

The No-Brainer Step: Investing in Index Funds – The Most Highly Recommended
The logic - the efficient-market theory
- ADV:
1. Index funds have regularly produced rates of return exceeding those of active managers
Reason: Small management fees and trading costs
2. Tax-friendly
Reason: they allow investors to defer or completely avoid the realization of capital gains
3. Relatively predictable
4. Easier to evaluate
- Broad diversification rules out extraordinary losses and also, gains. However, it doesn’t rule out risks (if the market goes down, your portfolio is guaranteed to follow suit).
- Other ADVs especially for small investors:
1. obtain very broad diversification with only a small investment
2. allow you to reduce brokerage charges
- A broader definition of index
Why broader?
1. The former S&P indexing strategy has become so popular that it may have affected the pricing of the

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