Quotes from Richard A. Ferri

The problem with long-term investing is the short term.

The category of small-cap value represents approximately 3 percent of the capitalization of the broad U.S. market.

Investors who followed a broadly diversified asset allocation that included a total market fund and a small value index fund would have faired very well during the past decade.

The point on Figure 6-8 that is most interesting is a portfolio representing 70 percent in the broad market and 30 percent in the small value index. Over a 30-year period, a mix of 70 percent in the total market and 30 percent in the small-cap value index would have increased U.S. equity returns by 2.0 percent with very little increase in observed portfolio risk. Figure

Foreign stocks have historically offered several benefits for U.S. investors. First, foreign stocks do not always move in correlation with the U.S. equity markets, which creates a diversification opportunity. Second, international stocks trade in foreign currencies. This offers investors a hedge against a decline in the U.S. dollar. Both are important reasons to have some foreign stock exposure in a portfolio.

Mixing a broad index fund with small-cap value has produced the best results. U.S. equities are a core position in almost every growth investor's portfolio.

Stock investors should expect periods of time when equities do not make money after inflation. It is the nature of investment risk. This is also why time in the market is critical to stock investors. In the long run, equities have outpaced inflation by a wide margin, and they are expected to remain one of the best real return investments in the future. You have to stay invested during all market conditions to benefit from the gains. U.S.

The lesson we learn from Tables 2-2 and 2-3 is that higher volatility of returns leads to lower compounded returns and vice versa. Accordingly, any strategy that lowers the return volatility of the portfolio without lowering the simple average return will increase the compounded return.

Markowitz's ideas on stock diversification eventually became known as efficient market theory (EMT). This is the general concept that markets are efficiently pricing securities based on known information, and therefore a market portfolio is the most efficient portfolio.

It is not prudent to attempt to switch and swap asset classes based on short-term market predictions.

The Prussian General Karl von Clausewitz once said, "The greatest enemy of a good plan is the dream of a perfect plan.

The enemy of a good asset allocation is the quest for a perfect one. Fight the urge to be perfect.

The problem with long-term investing is the short term. Nothing destroys a good long-term plan like extreme short-term volatility. That throws people off track, and they often do things that are emotional rather than rational.

Volatility creates lower returns and thus is itself a risk. If you can reduce the volatility in a portfolio, then the compounded return moves higher, closer to the simple average return of the weighted investments in the portfolio. This is how lower portfolio price volatility increases portfolio return over time.

Trying to consistently pick investments that are going to beat their benchmarks is like trying to win a marathon wearing muddy boots. There is a lot of drag, and your odds of winning are very low. The high costs associated with attempting to beat the market will almost guarantee sluggish results.

Don't try to out-guess the markets because you will not be successful in the long term, and it will cost you dearly. Control what you can control: costs, taxes, risk. Then let the markets take care of the rest. This approach has the highest probability of financial success.

Diversifying across many investments that are dissimilar and rebalancing those investments to their original target at the end of the year can reduce the annual volatility of the portfolio over time by enough to increase the compounded return. This "free lunch" from rebalancing is the essence of modern portfolio theory.

Investors who take no investment risk should expect no return after adjusting for inflation and taxes. Unfortunately, taking investment risk also means that you can and will lose money at times. There is simply no way around this. There is no free lunch.

Asset allocation eliminates the need to predict the near-term future direction of the financial markets and eliminates the risk of being in the wrong market at the wrong time.

There are no risk-free investments after taxes and inflation.

Overconfident investors generally believe that they have more knowledge and information than they actually have. As a result, they tend to trade too much and underperform the market.