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BOOK REVIEW: 'The Safe Investor': Veteran Investor Tim McCarthy Outlines in Detail What Every Investor Should Do, How to Do It, and What Not to Do
When I told a good friend and former newspaper colleague -- who shall remain anonymous but whom I consider to be an outstanding investor -- about the book he emailed me:
Dave: Here's a good link about active vs passive investing.
I'm an active investor, meaning I actively manage my accounts; I watch
them daily, buying and selling individual stocks. for me, with time to
watch my investments and do the research required, it works. most of
the time. plus, I like it. and I get to learn about new industries,
And, if you are an active investor, you can bail out of the market
when things get really bad, like in 2007-8. I sold all of my stocks
and moved to all cash before the big downtown. passively investments
generally won't do that. most mutual funds are basically buy and hold
for the longterm. that's just not me.
* * *
McCarthy addresses people like my friend, saying that it's a workable strategy if you have the knowledge -- and the time.
For the rest of us, he goes into great detail about how to invest, how to get information, how to pick an investment advisor -- and much, much more, including how to avoid fraudsters like Bernie Madoff. At the end of each chapter, he summarizes in bullet points the lessons that should be learned in the chapter. This made it easy for me to glean the information necessary to follow a "safe investor" plan.
If you watch any TV, log on to the web or read a print newspaper, you'll quickly discover that Investing information is everywhere; there are blogs, newspapers, magazines, and cable TV shows all dedicated to helping individuals invest in smarter and more successful ways.
Yet despite all the efforts to educate the public on investing, McCarthy writes that most people still feel uncomfortable with how they should actually invest their money.
Recent predictions about slowing economic growth, historically low interest rates, and volatile markets have investors scratching their heads about what to do with their money. And more than ever, people are scared about whether they can grow their money enough to last through their lifetime.
Timothy McCarthy has spent the last 30 years in the US and overseas providing investment solutions to individuals and their advisors. His book is crammed full of real-life anecdotes and examples of what to do -- and, even more important, what not to do when it comes to investing money that you can't afford to lose.
I was particularly impressed with McCarthy's "Three Pockets" theory of investing, so I'm reproducing the information below, taken from the book:
The Safe Investor teaches investors how to organize their savings into three “pockets”. This makes it easier for them to budget their savings and investments into three categories: savings, investing, and trading. First, sit down with your financial advisor to discuss about a savings plan. Relevant information include your take home pay, monthly expenses, and a breakdown of what you spend on every month. Once you are ready to commit to putting aside some money periodically (usually monthly), then you are ready to put this money into the three pockets.
Below is a diagram of the three pockets: as seen on page 102 of The Safe Investor
The Savings Pocket has two objectives for. First is to not lose any principal. Second is to be liquid in case of any emergencies. Trade offs for the savings pocket is that cash sitting here will not have a real return.
The Investing Pocket is for true investments. This pocket is used to successfully minimize risks in a diversified portfolio. You and your financial advisor can decide which funds to invest in, while the book The Safe Investor, will expand on possible investments and recommended allocations. You will want to invest with a long term time horizon in order to capture compounding returns and further minimize risks of cyclical stock market activities. Meanwhile, the periodic deposits into this pocket will act as a buffer in order to lower the average price of your investments in case of a possible market bubble and crash.
The Trading Pocket is a psychological release valve. An investor that is constantly watching what the market does is also aware of popular trends and hot ipo issues going around. Rather than risk the majority of an investor’s capital, the Safe Investor can save and invest, and have a third account that is proportionately smaller in order to make these sorts of bets. This will keep any investor looking to make 15%+ returns satisfied.
Lessons of The Three Pockets:
- Savings Pocket is your “rainy day” pocket or for emergencies. This is short term money used for short term expenses.
- Investing Pocket grows more than your savings pocket but less risky than your trading pocket. The key thing is to diversify across a variety of asset classes, and across many country types and geographies. Use time in order to trickle in your investments.
- Trading Pocket helps to alleviate your brain’s response to either panic when the market goes down, or become greedy when the market goes up. With this account, you can go ahead and make concentrated bets on stocks.
Source: Information taken from The Safe Investor by Timothy F. McCarthy, published by Palgrave Macmillan, 2014.
* * *
McCarthy believes that understanding how to create a truly globally diverse portfolio while applying the magic of time will help all investors navigate risky markets. He writes that U.S. investors often neglect foreign investments out of fear and ignorance.
McCarthy also explores the fundamentals of picking and evaluating financial advisors for those who want to understand the principles of investing but not actually do the work themselves.
McCarthy helps guide the reader along a straightforward path to investment success by telling engaging and actual stories to illustrate each of his seven lessons of successful investing. "The Safe Investor" will help even those readers with little interest or aptitude for finance to be comfortable in knowing what to do to manage their life investment plan and how to manage their own advisors.
To show the kind of humor McCarthy uses, take a look at his "Trickle In, Trickle Out" anecdote on Pages 106-7:
"Some people will know at least the 'trickle in' part of the formula by its traditional name, 'Dollar Cost Averaging.' I used to use that phrase until an evening meeting years ago when a well-dressed woman in her mid-60s said, 'Please forgive me for being so upfront, but none of my friends understood what in God's name you mean by this 'dollar cost averaging' thing….After showing them on a sheet of paper how just putting in a little in every year really decreases your risk over time, one gentleman exclaimed, 'Oh, you just tinkle in a little money at a time!" His wife interrupted and said, 'George, I think you mean trickle, not tinkle. It's a bit more genteel.'
With anecdotes like this, and with the puppy his mother promised him at the age of three -- an anecdote that really broke me up! -- I found "The Safe Investor" to be an exception to my "MEGO" rule.
About the Author
Timothy F. McCarthy has the unique experience of heading up three of Asia’s largest financial services firms, Nikko Asset Management Co., Goodmorning Securities, and Jardine Fleming UT. He has also served as President and COO of The Charles Schwab Corporation and President of the Fidelity Investment Advisor Group. McCarthy earned his MBA degree at Harvard University in 1978.
His website, which contains information related to the book, a glossary of financial terms, financial planning tools, country evaluations and much more content, is www.timmccarthy.com
Publisher's website: www.palgrave.com