Investing for Average Folks: A Book That Helps

Jan. 12, 2010 — -- Next time you are out for dinner, look around the restaurant. Nearly everyone seated at a table will be the owner of a 401(k) or some similar retirement savings plan.

Yet few of them, if any, are interested in the learning the intricacies of investing, explains Charles Ellis. They just want to know one thing: "What do I have to do?"

A new book by Ellis and coauthor Burton Malkiel attempts to answer that question in simple but meaningful terms.

"The Elements of Investing" is a short guidebook for average folks who find themselves in charge of their own retirement portfolios but feel they lack the knowledge needed to ensure a secure future.

The new book's format is modeled after "The Elements of Style," a classic instruction manual for young writers by William Strunk Jr. -- and later updated by E.B. White -- that boils down the essentials of good writing to a few simple rules.

With "The Elements of Investing," Ellis told me, the authors set out to produce a book that could be read in less than two hours and still provide individual investors with the information they need to become successful investors.

"The idea of making it really simple and useful at a minimum of expense and time, that's the whole objective," Ellis said.

The book is broken down into five, short chapters, and then to make it even easier, it provides provide a two-page summary near the end of the book.

Though they have written the simplest of investment books, Malkiel and Ellis are no lightweights in the investing world. Both men previously wrote important investment books that articulate the difficulty of beating the market and the advantages of passive investing.

Malkiel is a longtime Princeton University economics professor and author of "A Random Walk Down Wall Street." Ellis is a longtime consultant to institutional investors, a director of the Vanguard mutual fund firm and author of "Winning the Loser's Game."

Both books helped solidify my own belief that most investors are better off sticking to low-cost index mutual funds and exchange-traded funds rather than picking individual stocks or investing in actively managed mutual funds.

The KISS Rules

The new book, Ellis said, is "written in a more straightforward way for individuals" who want to know what to do rather than develop a detailed knowledge of investing.

The earlier books provide fuller explanations and assume the reader wants to learn more about investing.

In "The Elements of Investing," Ellis and Malkiel tout the merits of simplicity when it comes to financial matters by quoting Albert Einstein, who said, "Everything should be made as simple as possible -- but no simpler."

Toward that end, they offer a few basic rules that together serve as the foundation for what they call KISS (Keep It Simple, Sweetheart) Investing.

Some of their rules:

Save regularly and start early.

Avoid all credit card debt.

Use company- and government-sponsored retirement plans to supercharge savings and minimize taxes.

Diversify over different types of securities and asset classes using low-cost "total market" index funds. That includes diversifying into international investments.

Rebalance annually.

Stay the course and ignore market fluctuations as they are likely to lead to costly investing mistakes.

"Market timers are wrong at least as often as they are right, and when they are wrong, the cost of being wrong is quite substantial," Ellis and Malkiel write.

They say the KISS portfolio they outline "gets it right" for at least 90 percent of individual investors.

The asset allocation guidelines they provide to help investors decide how much money to put into stocks and how much into bonds are not particularly detailed compared to other investing books. But they are a good starting point if your investment knowledge is limited and you're looking to avoid making mistakes.

Follow their advice, and you will do better than the majority of people seated around in the restaurant you the next time you're dining out.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

David McPherson is founder and principal of Four Ponds Financial Planning in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at david@fourpondsfinancial.com.