Book Review – Simple Wealth, Inevitable Wealth

I recently finished reading ‘Simple Wealth, Inevitable Wealth’ by Nick Murray and highly recommend it. This book had been highly recommended by a respected source, but it sat on my ‘to read’ list for a year or so. I’m glad I finally got around to reading it, because it really caused me to re-think and re-evaluate some of my investment strategies unlike many other personal finance books I’ve read. I won’t give away all the details, but I definitely recommend you pick up a copy. It’s worth adding to your library, but you’ll probably have to buy a used copy since I doubt any libraries will have it.

Below, I’ll highlight some of the key takeaways I got from the book and what I intend to do (or keep doing) as a result.

  1. Everyone needs a good financial advisor.

    The author believes that no matter how much you think you know about investing and the markets, you need a financial advisor. The main reason for this need is to protect you from yourself. Even the savviest of investors, without a good advisor, may fall into the trap of making THE BIG MISTAKE, which is to sell stocks based on fear. If a good advisor ever talks you out of doing this, they are worth whatever expenses you pay them (typically no more than 1% of your assets annually). I wholeheartedly agree that you should avoid THE BIG MISTAKE, and will concede that most people could use a trusted confidant to occasionally talk sense to them. Although I consider myself to be a complete DIY investor, I still do have a financial advisor. My advisor is a close friend who works for my former employer that I don’t have to pay for because of the amount of assets I have invested. While I don’t rely on him as much as many of his other clients, and he isn’t actually managing my investments on a daily basis, it has come in handy to have a single point of contact with whom to discuss my strategies and to get recommendations for ways to implement said strategies.

    This advice is especially timely considering the recent 500+ point decline in the Dow. These types of big movements in the markets always seem to cause investors to want to sell out of stocks and sit in cash “until things get better”. The problem is that once you’re in cash, it’s feels so good not losing any money that you won’t typically get back into the market until it has recovered all the losses you potentially avoided and more, such that you buy in at a higher price than where you sold. I used to call sitting in cash the ‘warm safety blanket that is secretly smothering you and killing your wealth accumulation potential’. This behavior is common enough that an annual study is published each year showing that the average mutual fund investor significantly underperforms the market, largely due to poor timing. See here for an example of the DALBAR study.

  2. Asset allocation is a poor strategy for wealth accumulation – true wealth can only come from disciplined investing in 100% equities.

    This part of the book was one that I had to sit and think about for a bit. I agree that over time, stocks (in the form of mutual funds) outperform bonds or cash. Therefore, adding bonds and cash to a portfolio will necessarily reduce your long term returns. That being said, it is also true that adding bonds and cash to a stock portfolio will reduce your short-term volatility, which can make it easier to continue to hold your investments and not make THE BIG MISTAKE. Stocks are a great long term investment, but I have generally advised that you would be better off avoiding stocks if you aren’t able to stay invested through volatility. Asset allocation, to me, has been a way to get some of the benefit of stock growth in a long-term portfolio, while minimizing the short-term volatility that causes investors to want to abandon ship.

    I clearly remember the last major downturn in the markets of 2008-09. I did not sell out of my portfolio, but I have held bonds in my portfolio for a long time. I have never been the type of investor to panic or sell, and my wife has been a strong voice of reason if I ever lament about short-term losses. Since I know that I am unlikely to sell stocks at inopportune times, and given that I have a good relationship with a trusted advisor and level-headed spouse, why then do I continue to hold bonds in my portfolio that is designated as ‘long-term’? The only difference between now and then is the magnitude of the potential losses, a 40% decline for me now would be 10x the dollar amount as it would have been just 7 years ago.

    Just as important as it is to not sell stocks, it is also important to have a disciplined approach to investing. The simplest example of a strategy to avoid is to change your investments every year to be whatever funds did the best in the previous year. This strategy is generally a poor one because there is no individual sector or investing style that is consistently the best to invest in, and chasing the latest hot fund will cause you to get in to an investment after the gains have already been made (and not by you).

    Since reading this book, I have begun the process of shifting some assets from bonds to stocks, with the intention of permanently and significantly reducing my bond holdings. I don’t know that I’ll go 100% to stocks, but definitely will be increasing my stock exposure. Because of this, I welcome the recent sell-off in stocks. I generally would be indifferent with short-term market sell-offs, but it pleases me to see things getting cheaper as I have begun to re-allocate some of my bonds to stocks.

  3. Investors should stick with stock mutual funds and not individual stocks.

    No convincing was needed for me to agree with this thought. The odds of an individual building a diversified portfolio with individual stocks that could outperform even a poorly managed stock mutual fund are extremely low. The few instances where I’ve see client accounts with good historical performance that were all in individual stocks, the portfolios tended to be not very diversified and heavily concentrated in just 2-3 stocks, which means it was luck that it had done well and there was a high risk of a future devastating blow to the portfolio. The majority of the time when I would see a lot of individual stocks, the performance of the overall portfolio was generally unimpressive.

In summary, I recommend this book to anyone looking to learn more about the philosophies and long-term strategies of investing. I’d also recommend it to financial advisors looking to hone their craft since the author was once a financial advisor himself, but now has made a career coaching financial advisors. Don’t read this book if you are expecting specific details on how or what to invest in. He gets into some basics, but the book primarily discusses financial missteps to avoid and some of the emotion and fear based decisions that could negatively impact your wealth building ability.

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