Allan S. Roth - How a Second Grader Beats Wall Street: Golden Rules Any Investor Can Learn

Contents

Additional Praise for How a Second Grader Beats Wall Street

I have a very strong feeling that sometime in the not-to-distant future I will happily be working for Allan Roths son! If you buy only one how-to book this year, this is the one! Allan Roth is a National Treasure.

Mike Causey , senior correspondent, FederalNewsRadio.com

Allan presents in a very clever way why a second grader can outperform most investors, professional and individual. He demonstrates why smart investing is both simple and also why it is not easy for adults to execute because of behavioral mistakes to which they are prone.

Larry Swedroe , author of Wise Investing Made Simple

Successful investing should be a matter of choice, not chance. Follow this books advice and your probabilities of success are 100% in your favor.

Paul Merriman , author , Live It Up Without Outliving Your Money! (Wiley), and publisher of FundAdvice.com

Allan Roth gets an A+. It is no surprise that a 2 nd grader beats Wall Street because everything we need to know about beating the pros is taught in the first grade. That is when we learn to add and subtract. And after subtracting the high fees and commissions that the pros charge, their results fall far short of a simple market return.

Richard Ferri, CFA , investment advisor and author of The ETF Book

Pablo Picasso spent a lifetime learning to paint like a child. Investors might be wise to do the same. Allan Roths How a Second Grader Beats Wall Street reminds us that the most important investment principles are actually simple truths that we lose sight of as our lives and investment approaches grow more complicated. By returning to the basics, we can both simplify our finances and improve our investment results.

Don Phillips , Managing Director, Morningstar, Inc .

Allan Roth shatters the Wall Street myth that investing is too complicated for ordinary investors. Using his son, Kevin, as an example, Allan shows us, in his easy-to-read writing style, how we can construct a simple personal portfolio that is almost certain to outperform the vast majority of investors. If you have been looking for an easy-to-understand book about how to invest successfullythis is it.

Taylor Larimore , co-author of The Bogleheads Guide to Investing

Using just a bit of logic and a dash of arithmetic, Allan Roth lucidly explains why low-cost index funds should be the investment of choice for 2 nd graders as well as their parents and grandparents.

John Allen Paulos , mathematics professor at Temple University and the author of Innumeracy and A Mathematician Plays the Stock Market

Kevin, the second grader, is really smart and cool! He knows what it took me decades to learn. A smart strategy is to diversify broadly across US stocks, international stocks and high-grade US bonds using low-cost, tax-efficient index funds. He even taught me how individuals can increase their fixed-income returns without incurring higher risks. By following Kevins advice, we, too, can be smart investors. But we may never be as cool as Kevin!

William Reichenstein , Powers Chair in Investment Management at Baylor University

Copyright 2009 by Allan Roth. All rights reserved.

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

Published simultaneously in Canada.

Data 2008 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; (3) does not constitute investment advice offered by Morningstar; and (4) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Use of information from Morningstar does not necessarily constitute agreement by Morningstar, Inc. of any investment philosophy or strategy presented in this publication.

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Library of Congress Cataloging-in-Publication Data:

Roth, Allan S., 1957

How a second grader beats Wall Street: golden rules any investor can learn/Allan S. Roth.

p. cm.

Includes bibliographical references and index. ISBN 978-0-470-37594-5 (cloth); ISBN 978-0-470-91903-3 (paper); ISBN 978-0-470-45484-8 (ebk); ISBN 978-0-470-45515-9 (ebk); ISBN 978-0-470-45516-6 (ebk)

1. Portfolio management. 2. Index mutual funds. 3. Investments. I. Title.

HG4529.5.R67 2009

332.6dc22

2008041525

To investors, like my son, Kevin, who know the truth of simple arithmetic

Foreword

I dont know about you, but I wouldnt go to a doctor who smoked. I also wouldnt use a personal trainer who looked like he gorged on fast food or a trial lawyer who lost most of her cases. Im sure you dont find any of these views surprising. Heres what is: Over 90 percent of individual investors rely on brokers or financial advisers who tell them they can beat the market.

It doesnt seem to matter that the objective evidence demonstrates this expertise doesnt exist with any persistence. In fact, on average stock market investors obtained only about 40 percent of market returns over the past 20 years because they relied on these so-called investment professionals. However, the fact is that achieving full market returns, less low fees, is yours for the asking.

There seems to be an overwhelming case of national cognitive dissonance when it comes to evaluating the merits of brokers. The brokerage industry participated in the bankruptcy of Orange County, California. It cost investors trillions of dollars when technology stocks crashed. It was exposed as participating in a massive fraud on its retail clients in the analyst scandal. Of course, all this pales when compared to recent events.