Investing Demystified (Video Series & Book Review)
Investing Demystified: How to Create the Best Investment Portfolio Whatever Your Risk Level by Lars Kroijer educates the general population on how to best invest. The author is a former hedge fund manager, so he has spent years of his life analyzing the markets and learning about portfolio theory.
As a result, the information in this 2017 guide is backed by the most current research into how markets work. Kroijer pays special attention to making his concepts applicable for investors all over the world, and you can implement his rational portfolio no matter where you live.
Let’s have a closer look at the concepts covered and whether this book could be valuable to you.
KEY TAKEAWAYS
- Kroijer bases the information in his book on the fact that most of us don’t have an edge when it comes to investing.
- You should set up a very simple portfolio with only 2-4 components, which might be government bonds in your own currency, and a world equity tracker fund.
- But you should adjust it to your situation. If our net worth is tied up in the local property market and your job is correlated to the local market, we might need to focus more on international securities to create a better balance.
- The reason why most investors underperform the markets is that they pay too much in fees and taxes, and they trade in and out of funds.
- Kroijer stresses risks of investing. We don’t often think about the fact that Equities don’t always have to rebound. As in the case of Japan, stock prices could stay flat for very long.
- The book highlights real estate risks. You don’t want to expose yourself to more local risk than your home, especially since a problem in your area will also affect your job.
Here is the full analysis
When considering your edge who is it exactly that you have an edge over? The other market participants obviously, but instead of a faceless mass think about who they actually are, what knowledge they have and what analysis they undertake.
The Premise of the Book: You Have No Edge
SNAPSHOT
Kroijer bases the information in his book on the fact that most of us don’t have an edge when it comes to investing.
How can you or I, regular people with full-time jobs in different industries, possibly outcompete those who spend 8-10 hours a day analyzing stocks and financial markets?
In one of the first chapters, the author explains that many finance professionals don’t reliably have an edge, so we shouldn’t expect to have one ourselves.
For this reason, a rational investor always favors a low-cost index fund that tracks the world markets.
If we can’t guess which country, sector, or individual stock will outperform, we should simply track everything.
For 95% of investors, this will produce the best results at the lowest level of risk, according to Kroijer.
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Who Is the Target Audience?
At the beginning of Investing Demystified, the author explains that people who are already investing or looking to start are the target demographic.
You might be overwhelmed with the complexity of financial products and worried that you will choose the wrong one.
In such a case, the book can be a great guide because it explains a simple and efficient way of participating in the market.
What’s more, Kroijer makes a point of using a variety of currencies in his examples, so people of all nations can benefit.
He has created a truly international work that could appeal to investors in various parts of the world.
However, people in their teens, at the start of their career, and those with no interest in finance might be overwhelmed by this book.
There are a lot of statistics, so I believe that it appeals the most to mathematically inclined readers.
The information is understandable for someone who already knows what equities and bonds are and who is ready to begin investing.
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WHAT YOU WILL LEARN
What is the Rational Portfolio?
Based on the assumption that you have no edge, you should set up a very simple portfolio with only 2-4 components.
The two main assets you’ll hold are a minimum risk investment, which might be government bonds in your own currency, and a world equity tracker fund.
You can adjust your risk level by changing the ratio of the two components.
If you decide to purchase just these two investments, you will already have a superior portfolio to most people.
Investors who are slightly more advanced could add other government and corporate bonds to further diversify.
These should exclude the bonds you may already hold, and they have to provide you with a higher expected return than your minimum risk investment to warrant the complexity.
However, Kroijer mentions that this is optional, and your rational portfolio could be complete with only the two initial investments.
A Holistic View of Investing
One thing that struck me about Investing Demystified is that it offers a much broader view on your finances than many other books. Kroijer heavily focuses on diversification, which he considers central to a well-constructed portfolio.
While many personal finance guides don’t look back further than 100 years and focus on the US or the UK in their examples, Kroijer takes a more comprehensive look at the market.
He includes the situation in Japan, where equities haven’t recovered in decades, and he speaks about the collapse in 1910s Russia.
Thus, he prepares the reader to weather all kinds of financial storms.
Kroijer encourages us to consider our asset allocation outside of the portfolio.
Is most of our net worth tied up in the local property market through our home?
Is our job correlated to the local market?
If so, we might need to focus more on international securities to create a better balance.
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As of 29/03/2024, Interactive Brokers offers rates up to 4.738% (GBP), 3.445% (EUR) and 4.83% (USD) on cash.
The Biggest Drags on Return
The reason why most investors underperform the markets is that they pay too much in fees and taxes, and they trade in and out of funds.
We can minimize these problems with the rational portfolio because we’ll be holding our low-cost bond and index trackers for the long term.
What’s more, such investments are often exceedingly tax-efficient because there is no fund manager who trades regularly.
Kroijer spends a chapter and a section in the appendix speaking about tax, which will appeal to wealthier readers who have maxed out their tax-efficient vehicles, such as the ISA and pension in the UK.
Being More Conscious of Risks
If there was only one thing I could take from this book, it would be an increased awareness of the risks of investing.
Everyone who has held equities for several years knows that markets go down as well as up.
However, we don’t often think about the fact that they don’t always have to rebound. As in the case of Japan, stock prices could stay flat for very long.
Many financial gurus advise us to pile money into the stock market after a crash.
Kroijer explains that this is very risky because the market is volatile, so you could lose a lot of money. However, the potential return is also much greater than usual.
Once you fully understand this, you can much better decide whether this kind of investing is worth it in your situation.
I really appreciated this fresh perspective on risk, and it helped me to understand asset allocations better.
This knowledge will be crucial in the years to come, as I move closer to the decumulation phase of my life.
Conceding that you don't have an edge is a sensible and very liberating conclusion for most investors. It makes a life a lot easier (and wealthier) if you acknowledge that you can't better the aggregate knowledge of a market swamped with thousands of experts that study Microsoft and the wider markets
Why Not Property?
As you can see, the rational portfolio is very simple and only contains bonds and stocks. Kroijer clearly explains why many of the other types of assets are left out.
For example, commodities don’t appreciate, so you can’t expect much return.
Private investments can be a good move if you have an edge, for example if you know the CEO, but they can also be very illiquid.
You should get compensated for this risk by achieving a greater return.
The big difference between the rational portfolio and many other investment strategies is that it doesn’t include property.
Kroijer mentions that many people own their homes as a lifestyle choice, but he wouldn’t advise buying more real estate in addition to this.
He gives several reasons for this.
Firstly, your own home will most likely already be a large part of your wealth.
You don’t want to expose yourself to more local risk than this, especially since a problem in your area will also affect your job.
It’s better to stick with global investments.
What’s more, many of the companies you hold in your world tracker will own some commercial property, so you have indirect exposure.
Although many investors might not agree to leave out real estate completely, Kroijer’s point of view makes sense.
If the property market drops in your area, not having all your eggs in one basket can protect you from losing everything.
Summary Video
SHOULD YOU BUY THIS BOOK?
How we rated the book
Our overall rating comprises five key considerations, including suitability for beginners and European and UK readers.
1. Beginner-Friendly
2. Investing Concepts
3. Investing How-to (Europe)
4. Financial Freedom Principles
5. Personal Finance Know-how
1. Beginner-Friendly
2. Investing Concepts
3.Investing How-to (Europe)
4. Financial Freedom Principles
5. Personal Finance Know-how
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Rating justification
Investing Demystified by Lars Kroijer is a guide to creating a rational investment portfolio that includes world equities and bonds.
The author is highly experienced in the finance world, and he has no ulterior motive except to improve the success of small investors.
As such, his advice on investing is helpful and can benefit a great range of people.
Because of the emphasis on simplicity and low fees, the rational portfolio can work well for those looking to achieve financial independence.
It is relevant to people all over the world, so European investors can benefit from the book.
Although the content can be suitable for those who have never invested before, they should familiarize themselves with the basic finance terms, such as stocks, bonds, inflation, and return before getting started.
The book will be most interesting for those who have more than a passing interest in personal finance and are keen to optimize their investment strategy.
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