Leverage algorithms to take your investment approach to the next level Digital Wealth: An Automatic Way to Invest Successfully reveals core investment strategies that you can leverage to build long-term wealth. More than a simple review of traditional investment strategies, this innovative text proffers digital investment techniques that are driven not by people but by algorithms. Supported by asset allocation research, the secrets shared in this forward-thinking book have underpinned cutting-edge investment firms as they integrate algorithm-based strategies. In addition to presenting key concepts, this groundbreaking resource explains how these concepts can give you an edge over the professionals on Wall Street through details regarding achieving financial security and meeting financial goals rooted in a firm foundation in behavioral finance, portfolio tilts, and modern portfolio theory.
Investment strategies have evolved from one generation to the next, and the ability to leverage new digital tools calls for another overhaul of traditional investment concepts. Investment techniques implemented by algorithm rather than by human monitoring can, in some cases, prove more successful. The key to a balanced portfolio is understanding what these algorithm-based strategies are, and how to best use them.
- Explore insights from multiple Nobel Prize winning academics that can give your investment strategy an edge
- Consider how technology can open up powerful techniques to mainstream investors, including tax-loss harvesting and automated rebalancing
- Discuss how cost minimization and a strategic tax approach can boost your portfolio's compound growth
- Identify strategies that support the long-term growth of your wealth
Digital Wealth: An Automatic Way to Invest Successfully is an essential text for sophisticated individual investors and investment consultants alike who want to explore how digital tools can bolster financial success.
Table of Contents:
Preface xiii
Acknowledgments xvii
Chapter 1 America’s Savings Challenge 1
We Don’t Save Enough 1
The Key Change in America’s Retirement Planning Process 3
How Financial Innovation Helps 4
The Magic of a 15 Percent Savings Rate 5
Notes 8
Chapter 2 The Risk of Not Investing in Stocks 9
The Short‐Term Risks 10
The Historical Perspective 10
The Logic 12
Chapter 3 The Enemies of a Stock Portfolio 15
Why Inflation Matters 16
Treasury Inflation‐Protected Securities (TIPS) 17
Asset Confiscation 18
Recession 19
Chapter 4 The Value of Time for Investors 21
Why Long‐Term Stock Investing Is Less Risky than It May Seem 21
The Long‐Term Picture 22
How Bonds Can Help 24
Note 27
Chapter 5 Core Assets of a Robust Portfolio 29
Asset Classes We Include 29
Individual Asset Classes We Exclude 34
Notes 39
Chapter 6 Dynamic Asset Selection
Determining the Lowest‐Cost Option for Each Portfolio 41
Chapter 7 What Software Does Better than People 47
How Software Helps Investors 49
Example: All the Decisions an Algorithm Makes 50
Chapter 8 How International Investing Can Smooth Returns 53
Demographics Matter 54
Diversification Improves Your Industry Mix 56
Notes 58
Chapter 9 The Advantages of Exchange‐Traded Funds 59
The Benefits of ETFs 61
In‐Kind Transfers 62
The Risks of ETFs 63
Securities Lending Policies 65
Notes 67
Chapter 10 The Triumph of Low‐Cost Investing How Paying Less Gets You More 69
Fooled by Randomness 70
A Triumph of Marketing over Results 72
Notes 76
Chapter 11 Learning from Nobel Prize Winners 79
Milton Friedman, 1976 80
James Tobin, 1981 81
Harry Markowitz, 1990 81
William Sharpe, 1990 82
Daniel Kahnemann, 2002 83
Eugene Fama and Robert Shiller, 2013 83
Chapter 12 The Costs of Being Active 85
The Cost of Closet Indexing 87
The Other Costs of Active Management 88
Notes 90
Chapter 13 The Greatest Mistakes Made by Novice Investors 91
Starting Saving Too Late 92
Are You Using Tax Shelters Effectively? 93
Are You Taking Advantage of 401(k) Matching If Available? 93
Are You Diversified Internationally? 93
Are You Chasing Returns? 94
Are You Overpaying in Fees? 95
Are You Tracking the Right Index? 95
Do You Trade Too Much? 97
Chapter 14 Tilts and Other Ways to Help Long‐Term Performance 99
History of Market Thought 100
Data Mining 102
Debunking Strong‐Form Market Efficiency 103
Rationality 103
The January Effect 104
Sell in May and Go Away 104
Momentum 105
Value 105
Small Cap 106
Quality 106
Longer‐Term Mean Reversion 107
Assessing Tilts in a Portfolio Context 107
Notes 108
Chapter 15 Establishing a Tax‐Efficient Portfolio 109
Tax Shelters 111
Tax Efficiency for Retirement 111
Tax Efficiency for College 112
Tax Efficiency for Giving 113
Tax‐Efficient Asset Placement 114
Tax Loss Harvesting 115
Offsetting Gains with Losses 115
The Principal of Tax Deferral 116
How Tax Loss Harvesting Works 117
Challenges of Implementing Tax Loss Harvesting 117
Conclusion 119
Chapter 16 The Value of Rebalancing and Glidepaths 121
Rebalancing Keeps a Portfolio on Course 122
Tiered Rebalancing 125
Glidepaths 126
Notes 129
Chapter 17 How to Manage a Market Crash 131
Keep Stock Market Investing for Longer‐Term Money 133
Making Saving an Ongoing Activity 134
Pay Attention to Extremes of Long‐Term Valuation Signals 134
Don’t Consider Stocks in Isolation 135
Remember that You May Underestimate Your Risk Tolerance in Good Markets 136
Chapter 18 Your Own Worst Enemy Is in the Mirror 139
The Biggest Threat to Your Returns Is in the Mirror 140
Always a Reason to Avoid Staying Out 141
The Returns You See Aren’t the Ones You Get after Tax 141
The Media Isn’t Your Friend 142
Overtrading 142
Home Bias 143
Failing to Take a Long‐Term Perspective 143
Availability Bias 144
Chasing Performance 144
Ignoring Fees 144
Holding Too Much Cash 145
How Software Can Help 145
Note 146
Chapter 19 Saving for Goals beyond Retirement 147
Tax Efficiency 148
Portfolio Construction 149
Emergency Funds 150
Investment Flow Chart 150
Chapter 20 A History of Diversified Portfolio Performance 153
Stocks vs. Bonds 153
The Impact of Recessions 154
The Impact of Inflation 155
The Danger of Averages 155
The Benefits of Combination 155
An Emerging Market that Has Emerged 156
Chapter 21 The Future of Wealth Management 157
Lower Costs 158
Democratization of Services 159
Increasing Customer Intimacy 160
Improved Financial Awareness 160
Note 161
Chapter 22 Conclusion 163
Author’s Disclaimer 167
About the Author 169
Index 171
About the Author :
SIMON MOORE is Chief Investment Officer at FutureAdvisor, the award-winning digital asset manager. He has written about finance for Forbes, Huffington Post, and Yahoo! Finance, and is quoted regularly by such major media outlets as CNN and the Wall Street Journal.
