Bodie Zvi - Risk less and prosper: your guide to safer investing

Contents

Copyright 2012 by Zvi Bodie and Rachelle Taqqu. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Bodie, Zvi.

Risk less and prosper : your guide to safer investing / Zvi Bodie,

Rachelle Taqqu. 1

p. cm.

Includes index.

ISBN 978-1-118-01430-1 (hardback); ISBN 978-1-118-20623-2 (ebk);

ISBN 978-1-118-20624-9 (ebk); ISBN 978-1-118-20625-6 (ebk)

1. Investments. 2. Risk. 3. Finance, Personal. I. Taqqu, Rachelle,

1947- II. Title.

HG4521.B5643 2011

332.024dc23

2011035470

For my grandchildren, my most precious assets

ZB

For Yael and Jonathan

RT

Foreword

The arrival of Risk Less and Prosper, with its innovative perspective on how households can take charge of their essential financial decisions involving life-cycle saving and investment, could not have been better timed. These are difficult decisions in difficult times, surrounded by considerable uncertainty involving where we might be, what we might want, and the state of the economic environment, often decades into the future. We are amid a perplexing financial and economic crisis affecting most of the Western world, which further amplifies the uncertainty. How it will play out in the impending future, we do not know. But what we do know is that it is critically important to take charge of ones financial affairs now.

Even before the current crisis, as a result of major technological innovation and widespread deregulation, households have been called on to make a wide range of important and detailed financial decisions that they did not have to in the past. For instance, there is a widespread trend away from defined-benefit pension plans that require no management decisions by the employee toward defined-contribution plans that very much do. In the United States alone, there are more than 8,000 mutual funds and a vast array of other retail investment products to choose from. Along with insurance products and liquidity services, the household thus faces a daunting task to assemble these various components into a coherent effective lifetime financial plan and then implement it.

Some see this trend continuing and widening. Perhaps so, especially in the more immediate future, with the widespread growth of relatively inexpensive Internet access to financial advice engines to assist households with financial decisions. However, the creation of all these alternative investment products combined with financial advice offered from so many different sources has consequences: Households have been left with the responsibility for making important and technically complex microfinancial decisions involving riskdecisions that they did not have to make in the past , they are not trained to make in the present , and they are not likely to execute efficiently in the future , even with attempts at education. Financial planners, corporate pension-plan sponsors, and independent pension funds can be helpful, but still the complexity for the individual can be overwhelming.

This book offers a clear, foundational, analytical framework that explains how to go about determining the financial goals you want to achieve; creating a realistic plan to achieve those goals; and then implementing that plan. Writing in plain, jargon-free language, the authors patiently develop their theme and thesis that properly measuring and managing risk of well-specified goals is the foundation for good investment decisions, and they develop guiding principles to do so, based on finance science and informed by practical experience. These principles are applied to develop a risk-management strategy for investment success defined by achievement of goals and to help you avoid paths of error by exposing the flaws of frequently heard, but erroneous, investment rules.

You could not do better than have the Bodie-Taqqu team as your guides. A professor of finance at Boston University for more than 35 years, Zvi Bodie is a premier scientific researcher on retirement finance and investing, particularly on the risk of inflation and the incorporation of human capital into the investment optimization process. He has long been dedicated to creating financial literacy and is the coauthor of a best-selling investment textbook, now in its 9th edition. Rachelle Taqqu is a financial consultant practitioner who, like Bodie, is committed to improving financial decision making for households. She brings hands-on experience of working with individuals on setting and executing their financial course.

The book employs a clever and effective pedagogical approach by creating a story about a group of people with a common need to make financial decisions, who meet to discuss their individual challenges and opportunities with the idea of learning from one anothers knowledge and experiences. Although the group and its leader are hypothetical, their characters and challenges are composites drawn from real people and carefully crafted to illustrate a wide range of situations. Through the interactions among the characters, you come to recognize interests, types, and issues in common, and in that way feel a sense of active participation as a virtual member of the group. The journey of the group from knowing little about financial planning and feeling overwhelmed to learning how to execute a well crafted custom-fit plan, including how to select an advisor to help, is presented in three parts.