Monday, October 20, 2008

Review: The Gone Fishin' Portfolio by Alex Green

The Gone Fishin' Portfolio offers a framework for saving, sound investment wisdom and no less important a step by step approach to their practical application up to a detailed asset allocation.


When I read through the first couple of chapters of The Gone Fishin' Portfolio by Alex Green I was surprised to find a philosophical reference to Plato's Apology and the Socratic Method. One of the bases of western philosophy, the Socratic Method dictates the constant inquiry of premises and assumptions and encourages an oppositional discussion as a path to knowledge. The Socratic Method is therefore a double-edged sword the author may end up facing himself. That was not the case.


Skepticism and the Socratic Method are a promising start to every book


As the story goes the Oracle of Delphi pointed Socrates out as the wisest of men (and women). Socrates, thinking it a paradox, set out to prove the Oracle wrong and turned to the wisest of Athenians who surely held knowledge that surpassed his own. Using his famous Socratic Method Socrates revealed none of these wise persons really held true knowledge as all failed to explain their concepts of truth, justice, good, beauty and happiness. Socrates found the oracle to be right as he was the only one aware of his ignorance, paradoxically making him the wisest of Athenians (He simply knew he didn't know). The author makes an equally strong argument when it comes to investing and managing our money.

The lesson Socrates had taught the world is a powerful and important one and when it comes to investing it seems we sometimes need a reminder. An author that advocates skepticism at the start of his book has already earned considerable credit in my eyes.


What is The Gone Fishin' Portfolio about exactly?


As aforementioned, much like Socrates, the author lays no claim to knowledge that is not available or is out of reach for all of us. The author quickly lays bare the claims of Wall-Street to "professional knowledge" which we, household investors lack. The case against professional money management is a bit strong, even demagogic at points but is essential for the author's main point. Managing our money isn't as complicated as other may want us to think.

The Gone Fishin' Portfolio is a book aimed at the household investor surrounded by never ending piles of knowledge leaving him (or her) even more confused and baffled. The book offers a simple and robust investment strategy that has proved itself over the long haul.


Much like Socrates and his paradox the author does not claim to hold knowledge of any special investment strategy which will enable us all to generate phantasmal abnormal returns. You will find no secrets to timing the market as there are none and you will be disappointed if you're looking for a safe riskless investment strategy that will generate return out of thin air (again, there is none).


The author simply turns to old investment wisdom that relies on the basics of finance. Long term investing, diversification, varying levels of correlation and wise asset allocation are fundamental to the approach offered by the author. That is also possibly the book's main shortfall. The book lacks in innovation but most certainly makes up for it in sound investment advice.


The book offers a specific portfolio and is aimed at the majority of household investors who wish to wisely invest their savings and spend as little time as possible maintaining them (which is, by the way, great advice for long term investors). The portfolio offered by the author is a sound one and is allocated very much accordingly to the text book.


The book offers more than just a portfolio. It offers a framework for those of us who seek a comfortable retirement and wish to balance the risk of a financial shortfall with the risk inherent to financial investments. It points out the conflicting interests many money managers face when dealing with out savings and sheds light on various financial truths with historical evidence.


I believe The Gone Fishin' Portfolio serves as a good financial education book and I would recommend it to those of us who are less proficient in finance and investments and are taking their first or second step in the saving world. For the more proficient of us who understand good asset allocation, the CAPM model, the importance of long term investing and discipline and the crucial difference between investing and trading this book might serve as a good reminder of the basics.


The book is well written even if a bit simplistic at some places. The author effectively repeats and stresses the main points brought forth and conveniently sums the essence of every chapter at the end.


What would Socrates ask after reading The Gone Fishin' Portfolio?


As the Socratic Method dictates I'd question two main issues. The first one is the level of risk offered in the portfolio. The author suggests a very detailed portfolio which comfortably enough leaves only with the buy command and yearly maintenance, which is really a breeze. The asset allocation offered is relatively aggressive with 70% stocks in the portfolio. That is very important for long term savers. Arguably, as the term of investment shortens it is important to consider the level of risk taken (read Long Term Investments Are Not Risk Free for more on the subject).


The second thing I'd question is the array of Vanguard mutual funds recommended. The author recommends, very wisely and objectively, to invest in index funds which are less costly in commissions when compared with managed mutual funds which have not proved to outperform the markets (on average, it's actually the other way around). The author recommends Vanguard funds in terms of cost effectiveness. I'd test this premise before investing but the concept of the portfolio is true enough.


The Gone Fishin' Portfolio apparently outperformed the S&P for the last 5 years but that is not something to take for granted (that is do not assume it will continue to do so in the future, as the author points out). Naturally the author does not promise the portfolio will outperform the S&P every year and he very well shouldn't. The strength of the Gone Fishin' Portfolio is in its utilization of basic investment wisdom of long term asset allocation and rebalancing which has proved itself in the past (read Know your Portfolio - Three Simple Charts Can Make a World of Difference for more on the subject).


Disclosure: Book reviews on The Personal Financier are entirely objective and are not paid for or sponsored in any way by the author, publisher or any other third party. The Personal Financier receives a 4% share of books sales referred by us which help support the efforts on this blog.

5 comments:

Anonymous said...

I am reading "The Gone Fishing Portfolio", and I just figured out the approximate performances of the ten components from Dec. 31, 2007 through closing on Oct. 21, 2008.

The percent of each fund in the mix is in ( ) next to the symbol.
These results are approximate because I interpolated from charts and rounded off:

VTSMX (15) -31%
NAESX (15) -30%
VEISX (10) -52%
VEURX (10) -45%
VPACX (10) -39%
VWEHX (10) -24%
VESTX (10) -02%
VIPSX (10) -00.4%
VGSIX (05) -35%
VGPMX (05) -59%

If my figures are correct, $100,000 invested in this portfolio on Dec. 31, 2007 would be down to $69,910 on Oct. 21, 2008 or 30.09%. The Dow was down 32.4% and the SPY was down 35.7% for the same period.

Doesn't appear to be much less risk to me.

Dorian Wales said...

Thank you for the great comment. First of all I wouldn't want to be in a position of supposedly defending the author but since you brought up an interesting issue I'll try and take the author's side on this one.

Alex green (the author) isn't suggesting a "less risky" portfolio. On the contrary even. Risk and return go hand in hand and when it rains everyone gets wet.

The portfolio (or any portfolio for that matter) should not be judged on a yearly basis, especially when it comes to buying high and "selling" very low.

The portfolio offered is for a long term investor (over 10 years in my opinion) who wishes to utilize basic finance in his favor.

The CAPM model shows how different assets with varying correlations may yield a certain return with lower risk (the efficient frontier...). It's a bit complicated but it really well explained on Wikipedia (I might write a post on the matter soon).

There's really no magic portfolio you can only win in as there would be no premium (no risk).

The stock market is a risky place. Please take the time to read my post on why long term investing isn't in itself risk free.

All we have to keep in mind is that not taking risks with our money leads to yet another risk - that of insufficient funds at retirement.

I'd love to hear more thoughts on the matter.

Best regards,

Dorian

Free Music said...

well these are really good reuslts

Anonymous said...

Thanks for replying to my email.

As I mentioned, I am presently reading "Gone Fishin", and Alex maintains that this portfolio is appropriate for retirees who want to stay ahead of inflation. I am retired and was considering investing my IRA in this portfolio. However, I would be in shock if I lost 30+% of the money that I will have to begin withdrawing in less than a year.

I have lost a considerable percentage of my IRA, but not as much as I would h lost with the "Gone Fishin" portfolio.

I would be happy to listen to your thoughts on the subject of how someone in retirement can survive this bloodbath.

Dorian Wales said...

Hi,

Excellent question since I've already answered it ;>

At the end of my post I wrote the following:
"As the Socratic Method dictates I'd question two main issues. The first one is the level of risk offered in the portfolio. The author suggests a very detailed portfolio which comfortably enough leaves only with the buy command and yearly maintenance, which is really a breeze. The asset allocation offered is relatively aggressive with 70% stocks in the portfolio. That is very important for long term savers. Arguably, as the term of investment shortens it is important to consider the level of risk taken (read Long Term Investments Are Not Risk Free for more on the subject)."

The Gone Fishin' Portfolio is not suitable, in my eyes to retirees who depend on their savings for monthly sustenance.

One of the biggest risks we face, as long term investors with a considerable saving term ahead of us (at least 10 years) is that of not meeting our retirement goal.

Retirees are more susceptible to specific "time" risks since their term of investment is significantly shorter. I don't recall Alex Green recommended this portfolio to retirees, as a form of beating inflation since there are many safer, easier ways to do that.

This portfolio is aggressive, and Alex Green states so himself. In short, I would't recommend this portfolio to a person who can't afford the risk inherent to it.

A possible form of investment, for spicing up the portfolio, would be investing 10% of a bigger portfolio in the gone fishin' portfolio, again just for the spice it ads.