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Book Review – Potato’s Short Guide to DIY Investing

I just ordered and read the Potato’s Short Guide to DIY Investing. It’s a $5 read by a regular financial blogger at www.holypotato.net.

Here’s the quick summary. If you are at the point where you’re overwhelmed with how to invest, or if you can’t tell the difference between an RRSP and a mutual fund, this is a great starting point. $5 gets you an ebook of about 40 pages that you can read in an evening and will get you pointed in the right direction. The short conclusion is that if you simply pick up this 40 page book and follow it, doing nothing more than that, it’s plenty sufficient for almost all normal investors/savers out there.

Be aware that this is a beginner’s guide. Experienced investors won’t find anything new, this is basic information. In an interesting twist, the author deliberately provides the conclusions without all the backup material. In other words, he just tells you what to do, not why to do it. And frankly, for most of us that’s really all you need. If you want to determine ‘why’ he makes these recommendations then you need to do the acres of research that the author’s done. Of course for many investors there’s no need to do any such thing – they just want to be told what to do.

(Aside, and a mention – I’m a co-author of a beginner’s book as well, The Beginner’s Guide to Saving and Investing for Canadians. That book provides similiar conclusions to the potato’s book, but expands on many of the concepts. For the price, there’s little reason not to get both, start reading the pototo’s book and then delve into ours afterwards. At a minimum, you’ll have two alternate viewpoints on the same topic.)

Some of the things that the book does really well is step you through how to set up and manage a TD index investing account. Again, for most beginner investors this is where you’re going to end up. In addition, the TD web interface has some idiosyncracies so a step by step guide is a great idea.

The book also talks about rebalancing, something that I think needs more emphasis with many investors.

Anything to nitpick? Well, yes and no. If you’re going to start digging there’s three minor points I would suggest investigating further. If you’re not going to dig further, these points are moot – you can ignore them as a beginner investor.

First, the asset allocation he defines in the book is a fairly standard industry definition of setting the % of bonds based on your age. That seems right, but it’s something I question repeatedly as something that’s based on emotion and not facts. It ‘seems’ like a good idea to have more in bonds as you get older, but it’s based on the idea that people react emotionally to their investments. Frankly, you need to get over the idea that stocks go up and down in the short term and quit investing based on emotions. Once you get over the idea that you’re investing using emotions, it’s fairly easy to at least consider that your bond allocation has little to do with your age. Nevertheless, I don’t believe that following the advice is going to steer anyone far wrong, and it is perhaps one of the most accepted rules of thumb in the investment industry.

Secondly, he recommends your stock picking have three international components – Canada, U.S. and foreign. I’m not certain that this is a good strategy, or that it’s not a good strategy. I’d suggest further research is indicated (perhaps it exists, I don’t know.). I’m personally a fan of investing entirely within Canada – but I appreciate that doing so is an entirely emotional strategy not a financial strategy (and I normally berate strategies based on emotions, see my previous point). International investing does decrease volatility, but what split is best? In short, I’m less certain that dividing your investments into those three geographic locations results in better earnings. But again, you can likely use it as a rule of thumb – I’d take a guess that it’s as good as anything else, pending data :).

Lastly, as I mentioned before, the author talks about rebalancing. I believe this may be once of the most underutilized and yet best performing investment strategies available to us. I’m a big fan. Yet as far as I know, there’s been no real data proving that rebalancing increases your investment earnings over time. It makes sense that it does, but I’ve not seen any data proving it (perhaps it exists, I may delve into this later). Still, I’m such a fan of rebalancing that even without data I’d suggest you should be looking at that tactic – I can’t believe that it does anything other than increase your investments.

All in all? More advanced investors will nitpick some very fine details that can be argued either way (that’s about all I did). For beginning investors if you simply pick up the book and do what it says I think you’ll be ahead of 99% of the typical Canadian investor.

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