Book Review: The Intelligent Asset Allocator by William Bernstein

The Intelligent Asset Allocator by William Bernstein is one of my all-time favorite investing books. In fact, it was the primary inspiration for the name of this blog. Although quite accessible to most readers, it does take on a slightly technical side at times. It will certainly help you understand many of the examples if you’ve taken a statistics class or two in college. If you aren’t comfortable with the basics of statistics, you might want to read Bernstein’s other book, The Four Pillars Of Investing. It’s more or less the same information, but explained in a way that’s more friendly to novice investors. Either way, there is a wealth of priceless information here.

Portfolio Theory Explained

The Intelligent Asset Allocator amounts to an extended primer on modern portfolio theory. Not only will you learn the basics of diversification, coorelation and the relationship between risk and return but you will also learn how all these factors come together to effect the behaviour of real-world portfolios. Furthermore, Bernstein has included an excellent chapter titled “Implementing Your Asset Allocation Strategy” that walks you through designing your own portfolio step-by-step, offering several sample portfolios for those of different ages and risk tolerances to help get you started.

Berstein walks you though the portfolio-building process from the ground up and explains how diversification works through clever examples that really illustrate its importance. The trick, explains Bernstein, is to combine several different non-correlated asset classes in your portfolio. Through the magic of diversification, your combined portfolio will exhibit less risk and possibly achieve a higher return than any of the asset classes by themselves. Diversification is the only free lunch in investing. Through it, you can get something for nothing.

Numbers Numbers Numbers

What I like best about The Intelligent Asset Allocator is Bernstein’s extensive use of real-world examples with the numbers to back up his points. It’s easy to say “diversification lowers risk”, but Berstein goes two steps further. First, he defines risk in a simple and easy-to-understand way and then shows how diversification can, indeed must, lower it. There is also a fascinating chapter on “Market Efficiency” where Berstein explores the fact mutual fund managers tend to do so poorly relative to their unmanaged benchmarks. Among these reasons are higher expenses, the higher taxes inherent in a buy-and-sell strategy, and the intense competitive landscape. In the end, Bernstein concludes that while the market is not quite totally efficient, it is close enough to confound even the most skillful of investors. This chapter is a bit unnecessary to the main topic of the book, which is constructing a well-diversified portfolio, but if you’re an investing nerd like me you’re sure to find it fascinating.

This One’s A Keeper

I cannot recommend The Intelligent Asset Allocator enough. I loved the book so much it inspired me to start a blog on the topic. At just under 200 pages, it’s a relatively quick read, but the information contained therein is priceless. This book will without a doubt make you a better investor whether you’re an ambitious young investor just starting out or an old hand.

Buy The Intelligent Asset Allocator by William Bernstein from Amazon.