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4 Investment Lessons: Diversify, Diversify, Diversify, and Diversify

Book: The Four Pillars of Investing: Lessons for Building a Winning Portfolio

Author: William J. Bernstein

Genre: Personal Finance

Written by financial expert and neurologist William Bernstein, this book develops ideas he laid out in great detail in his first book The Intelligent Asset Allocator; that equity funds are the sensible way forward for the modern investor. This second book written in 2010, The Four Pillars of Investing offers the tools for investors to build up their wealth without trying to overwhelm the reader with complicated financial speak.

This book ranks 6 out of 22 in my personal rank of investing books. When read this book it provided further support for investing index funds, something that is suitable for nearly every investor. Bernstein highlights that most people like to think that they could pick stocks that are going to outperform. The reality is that even professionals can rarely do that. I found this book appealing because of Bernstein’s deep historical knowledge of markets and the weaving of that into the text. Definitely a book for people who enjoy the topic of investing.

The Four Pillars is for those who don’t want to be baffled with data and statistics. He breaks down investment into ‘Theory’, ‘History’, ‘Psychology’ and ‘Business’: his Pillars of Investing. Some of the examples may be outdated, but for the modern investor his perspective continues make sense for the stock market of today. Indeed, he compares stocks to being like a dog out for a walk on a long leash. It wanders back and forth wherever it likes, but the owner (the stock market) continues steadily in the right direction; a clear image (and pretty accurate description). His style is relaxed, and the book aims for simplicity over complexity; in the short-term stocks and equities go up and down, but in the long-run, they will –doggedly– go up.

Diversify. Diversify. Diversify

Bernstein’s biggest piece of advice is this, “the biggest risk of all is failing to diversify properly.” As he explains, investors can be their own worst enemy buying when stock prices are high and then selling again when they crash. Most investors have no idea what a share is worth. Bernstein suggests that as an individual investor you should just invest in the market, don’t try and pinpoint which companies will do well.

Review The Stock Market’s History

Now, don’t go and bog yourself down with dates and numbers but to gain an understanding of it, take a look at its colorful past. Avoid the “herd mentality” as Bernstein puts it, by learning from the past and not selling on impulse in bad times and buying in good ones, but doing the reverse.

Don’t Fall Victim to Overconfidence

Bernstein is another financial investment writer who advises against investors thinking they will be the ones to outsmart the smart money. Again, he puts forward index funds and asset allocation which he understands as not necessarily thrilling, and yes, gambling is exciting; but betting is entertainment, not investment. In his own words, “you are not capable of beating the stock market. But do not feel bad, because no one else can either.”

Haven’t read it yet? Do it!

Have you read The Four Pillars of Investing? What do you think about it?

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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article.