Guide to Investment Strategy: How To Understand Markets, Risk, Rewards and Behaviour is authored by Peter Stanyer and Stephen Satchell. It aims to help the readers to devise an investment plan for retirement.
Layout of Guide to Investment Strategy
Guide to Investment Strategy contains an introduction and 11 chapters.
Chapter One to Six form Part 1 which is The Big Picture. The authors explain the basics and provide a framework for thinking about the different aspects of risk and how savings and investments might be allocated to meet reasonable expectations.
The next five chapters form Part 2 which is Implementing More Complicated Strategies. Different asset classes are discussed in more detail in this part.
Highlights
Guide to Investment Strategy contains detailed discussion about most of the asset classes available in the market. It also talks a lot about risk.
Risk is about the chance of disappointing outcomes. It can be managed but disappointing outcomes cannot, and surprising things sometimes do happen. To understand how much risk we are taking, we need to think about how investments might perform in bad times.
The authors mention an old saying that to become wealthy, it is necessary to concentrate expertise, but to conserve wealth, it is necessary to diversify. I kind of agree with this but diversification is important to make sure that we do not lose our shirts. The authors also caution that risk concentration where there is no information advantage is a recipe for ruin.
Retirement challenge is the choice between self-insurance and paying insurance companies to insure your risks. But they think self-insurance ties up personal resources in excessive precautionary saving and reduces potential spending in retirement. Anyway, the starting point for any pension plan should be a comparison with the income offered by lifetime annuities from highly rated insurance companies. I think some form of self-insurance (through investment) is still important as the annuities or insurance plans might not be able to cover everything during retirement.
The expectations set at the outset for an investment can become as important as the subsequent performance in judging whether the investment is successful. Uncertainty cannot be avoided and needs to be considered when designing investment strategy. We need to be aware that actual experience can be a lot worse than would be suggested by the past average statistics for overall returns and volatility.
The authors think that higher volatility international investments such as equities do not need to be hedged for currency risk. I think this advice is applicable to most retail investors.
Conclusion
This book really lives up to its name. It is really a guide and the authors do not dictate any strategy to the readers. They just provide the knowledge required to construct an investment strategy. I feel this book is written for financial advisors as some parts can be quite technical. Nonetheless, the book is still worth my time as it did help me to identify some issues in my investment strategy. Furthermore, I also learned a few new things from the book. If you are looking for a sure-win formula in the book, you will be disappointed. Nonetheless, you should be able to devise or refine your personal investment strategy after reading this book.
As usual, let me end with some quotes from the book.
“Financial decisions are a mix of risk and uncertainty.”
“The financial markets should be seen as a place to protect and grow wealth, not as a place to grow wealthy.”
“So much for history: what matters for setting strategy is what we expect for the future.”
“The purpose of wealth, however large or small, is to fund expenditure in the future.”
“All investors need to be responsive to changes in the structure, risk and opportunities of the marketplace.”
“In the presence of uncertainty, the prudent approach is to err on the side of caution.”
Recommended book
If you are interested in The Psychology of Money, you may get the book through the link below*.
Get the book here from Kinokuniya Malaysia
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