Book Review: All About Asset Allocation

All About Asset Allocation (McGraw-Hill, Sept 2005, 256 pp), written by Rick Ferri, CFA, seeks to educate individuals about the fundamentals of asset allocation and why implementing a sound strategy is key to long-term success.  Ferri first covers the basics of asset allocation, risk, and diversification, explaining why asset allocation accounts for largely 90% of one's portfolio performance (that is, market timing and security selection aren't nearly as significant).  He then goes on to break down each asset class and specific index funds to choose to represent such classes.  Ferri highly recommends low-cost index funds and explores US equity, international equity, fixed-income, real estate, and alternative investments (e.g. stamps, artwork, collectibles, commodities).  Finally, he speaks to managing and building a sound portfolio, realistic expectations, behavioral psychology and its influence on investment decisions, and fund and financial advisor expenses.

In the end, Ferri succeeds in his core mission to convince individual investors to ignore most of the "advice" spewed by Wall Street and CNBC and instead rely on a sound systematic and non-emotional portfolio of diversified index funds that explore all asset classes held in appropriate proportions based on age, goals, and risk tolerance.  He also provides a list of funds to look at near the end of each chapter.  Having said that, frankly, I found the book a bit boring as it is probably more well-suited for a novice investor.  He explains concepts in layman terms so that anybody can understand - a positive for most, but I found that it almost too simplistic and not terribly interesting.  Ferri simply stated things I already knew and didn't really add to my knowledge; it simply served as reinforcement (which certainly isn't a bad thing).   One portion where he did go above and beyond a typical book, however, is describing the asset allocation of fixed-income in quite some detail.  That certainly is a welcome addition.  Ferri stresses the importance of holding asset classes that have little correlation and then re-balancing; backing up these assertions with illustrations as to how this strategy increases overall long-term returns.

For an individual investor who wants an easy to read guide on how to develop and stick with a sound asset allocation, All About Asset Allocation is a great choice.  While I found it generally elementary in nature and simply reinforcing concepts I already knew, it certainly is a nice change of pace to read an author who holds a similar investing philosophy as I do.  I'd certainly recommend reading the book for those just starting out, individuals who want to simplify their investment approach and lower costs, or those who want confirmation that their portfolio currently covers all appropriate asset classes in reasonable percentages.

Rating: 4 out of 5 stars

4 comments:

  1. There are a lot of good books on asset allocation. I would recommend Bernstein's "The Intelligent Asset Allocator". From your review I will probably look to read only the fixed income part. This is typically glossed over and when it is covered tends to be covered in a poor way.
    Writers like to point out that longer duration funds haven't added much and are more volatile than shorter duration funds, therefore just stick with the shorter duration funds. In the same breath they'll argue that relying on historical data can be misleading.

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  2. Thanks for the suggestion Robert. I've heard great things about "The Intelligent Asset Allocator" and I am definitely going to pick it up. Another Bernstein text, "The Investor's Manifesto," was actually next on my list. I recently finished "The New Coffeehouse Investor" by Bill Schultheis, which is yet another interesting read by somebody who subscribes to the low-cost index fund approach.

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  3. Nothing holds risk in check like good asset allocation.

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  4. Hi, nice post. Well what can I say is that these is an interesting and very informative topic. Thanks for sharing your ideas, its not just entertaining but also gives your reader knowledge. Good blogs style too, Cheers!

    - The asset management ma

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