William J. Bernstein, PhD, MD, is a bestselling author known as a grassroots hero to independent investors. Formerly a practicing neurologist, Bernstein approaches the problems of saving and investing as someone who had to figure it out for himself-from first principles up. He is the author of The Intelligent Asset Allocator and The Four Pillars of Investing-highly regarded, plain-spoken guides on how to build a diversified portfolio without the help of a financial advisor-the editor of the asset allocation journal Efficient Frontier, and the founder of the popular website [...]. He has also written two volumes of economic history, The Birth of Plenty and A Splendid Exchange, and is a coprincipal in Efficient Frontier Advisors.

Foreword ix

Preface xiii

Chapter 1 A Brief History of Financial Time 1

In the Beginning 2

Near-Death in Venice 8

The Incredible Shrinking Risk Premium 11

Summary 12

Chapter 2 The Nature of the Beast 13

Of Ravens and Returns 13

History versus Math 18

Mr. Gordon's Curious Equation 25

Math Detail: The Discounted Dividend Model 29

Home Sweet Home? 35

Adventures in Equity 38

Math Detail: Risk 43

Throwing Dice with God 47

Gene Fama Looks for Angles and Finds None 49

Sandbagged by a Superstar 52

Jack Bogle Outfoxes the Suits 56

It Is Better to Be Lucky Than Smart 63

Bond Funds: A Flatter Playing Field 64

Summary 65

Chapter 3 The Nature of the Portfolio 69

Four Essential Preliminaries 71

The Asset Allocation Two-Step 74

Math Detail: Mean-Variance Analysis 83

With Luck, Zigs, and Zags 84

Chasing Rainbows 88

Summary 93

Chapter 4 The Enemy in the Mirror 95

Inner Demons 97

Behaving Badly 100

Bargain-Basement Psychotherapy 116

Summary 125

Chapter 5 Muggers and Worse 127

The World's Largest Bad Neighborhood 128

The Fund Funhouse 135

Summary 142

Chapter 6 Building Your Portfolio 143

Financial Planning for a Lifetime: The Basics 143

Saving for Retirement: Nuts and Bolts 145

How to Save: Dollar Cost Averaging and Value Averaging 152

Four Investors, Four Plans 154

The Rebalancing Question 166

Math Detail: Rebalancing, Momentum, and Mean Reversion 169

Teach Your Children Well 172

Summary 174

Chapter 7 The Name of the Game 179

Investment Theory and History: The Short Course 180

The Portfolio Theory of Everything 181

We Have Met the Enemy, and He Is Us 181

Heads I Win, Tails You Lose 182

Fire When Ready 182

The Books You Need . . . Aged Like Fine Wine 185

Notes 188

Acknowledgments 193

About the Author 195

Index 196