Last Updated Jan 20, 2011 10:33 AM EST
Six months ago, Gordon Murray called his friend Dan Goldie, a financial adviser in Menlo Park, Calif and told him that his two-year-long battle with brain cancer was nearing its end. The doctors, Murray said, gave him six months to live. Goldie's response: "Then you better hurry up and write that book you've always wanted to write."
The book is The Investment Answer, a thin handbook that has suddenly become the 12th best-selling business title on Amazon, even though it won't be released for another seven weeks. The book is solid but elementary: Nothing in its 66 simply written pages would surprise anyone who reads Jane Bryant Quinn, Jill Schlesinger, Carla Fried, Larry Swedroe, Allan Roth, Nathan Hale or almost any of the other writers on this website. What gives the book its power is Gordon Murray's story.
Murray is a former institutional sales manager for Goldman Sachs and Lehman Brothers, among others, who had a Road-to-Damascus style conversion after 25 years on Wall Street. Having seen up close the sketchy place Wall Street had become, Murray decamped for Dimensional Fund Advisors, an investment management firm heavily influenced by the research of economists Eugene Fama and Kenneth French. DFA eschews the Street's most dubious activities-stock selection and market timing-and instead emphasizes simple, unleveraged, low-cost passively managed portfolios. It's about as complete a break with his past as Murray could make without, say, joining the Peace Corps. Lest there be any doubt how he feels towards his former industry, Murray, called to give Congressional testimony on financial regulatory reform, said, "...one has to wonder why not a single leader of a public Wall Street firm has yet to be criminally convicted." Fightin' words.
In the end, of course, it is just another investing book. Luckily, it's a good one. Murray and Goldie hold that to succeed as an investor all you need to do is answer five questions correctly:
- Where will you turn for advice? The book recommends an independent financial adviser who works for a fee, not a commission. No disagreement here-even though that's exactly what you'd expect Dan Goldie to say, since that's his business. The other problem is that independent fee-only advisers tend to work only with clients who have at least half a million in assets.
- How will you divide up your assets? Goldie and Murray are right: How you split your money between stocks, bonds and cash is the key factor in determining the risk you take and the return you come away with.
- Are you really diversified? Essentially the same as the question above, except that it slices stocks, bonds and cash into still finer categories, such as international stocks and growth and value funds.
- Will you invest actively or passively? Goldie and Murray believe, as does CBS MoneyWatch, that active investing--trying to pick stocks or mutual funds that beat the market--is a waste of time. You'll be happier and you'll beat most other investors if you stick with index funds that simply try to match the market.
- Will you rebalance your portfolio? When market movements knock your asset allocation out of whack, you sell some of your winning holdings and move money into the losing categories. It requires considerable discipline to carry off. Still, had you done that during the past 10 years, you'd have made money while most investors were suffering.
More on CBS MoneyWatch:
How to Get Rich: Stop Trying!
Be a Better than Average Investor
Are You a Smarter Investor than a Wharton MBA?