Worry-Free Investing: A Safe Approach to Achieving Your Lifetime Financial Goals

Investors still numb from their stock market losses in recent years will find some solace in the message of Worry-Free Investing by Zvi Bodie and Michael J. Clowes. They argue that stocks are "not safe in the long run" - a dismissal of Wharton School Professor Jeremy Siegel's extensively documented work on the subject. It is the nature of equity prices to be uncertain. The unpredictable risk of future stock market returns stems from the unexpected, 'random', flow of information that changes investor's perceptions of a company's value. Their argument is a bit heavy-handed. Equity prices may move unexpectedly in the intermediate term, but over the long run they appear to be positively linked with advances in our economy as measured by our GDP and mirrored in our standard of living. That should give some reassurance to long term investors, but the connection gets no mention here.The authors make the case for investing in inflation adjusted, government protected I Bonds and TIPS (Treasury Inflation-Indexed Securities also called Treasury Inflation Protected Securities). Focusing on the major goals of saving for retirement and providing for college education costs, Bodie and Clowes show how much an investor needs to save today. If the calculations seem a bit heady, readers are referred to the book's companion web site 'calculator'. At the heart of worry-free investing as defined by the authors is the defense of an individual's future buying power rather than the building of incremental wealth.Stocks have been widely touted as the only reliable hedge to inflation. However, during the 1970's sustained inflation ravaged stock market returns on an (inflation) adjusted basis. Had TIPS and I Bonds existed, they would have outperformed a diversified basket of stocks. Indeed, most investors today should use TIPS and I Bonds alone, we are boldly told. And all investors should invest at least some of their retirement assets in these two investment tools. Unfortunately for those inclined to follow this last advice, it is not clear if many (or any) company sponsored retirement plans (401(K)'s etc.) offer these products.The author's focus on inflation at a time when it is barely detectable may seem problematic, but a recovering economy, growing budget deficits, and a weakening dollar carry their own consequences. In the end, Bodie and Clowes overplay their case for I Bonds and TIPS. Not all products and services in the economy adjust in lockstep as do these bonds with Bureau of Labor Statistics measures of inflation. As a consequence a near exclusive reliance on these bonds may prove comforting but ultimately ineffective to reach a desired goal. Still, the understanding and use of these investment tools could prove important in a balanced portfolio in the years ahead. Now is the time to look at the issue.

Best source I've seen on advantages of Inflation Protected Securities . Written for non-financially sophisticated readers who want to avoid the risks inherent in the stock market.

excellent

It seems to me a bit too simple that all we need to save our money from inflation is to invest in TIPS and Inflation adjusted TBONDS.I hope the author knows what he is talking about.

I was VERY DISAPPOINTED to see how often and to the extreme extent, the booked was " marked with an ink pen "!

I first read this book around its initial publication. That was ten years ago and I was trading the market, mostly Covered Calls, and the occasional more risky option long shot. In fact, upon my retirement nearly 20 years ago, when we were flush with cash, we divided the money up into three accounts or buckets as I called them. One of the buckets was IBonds which my wife demanded to balance off the risk nature of stock trading. Another bucket was cash. So, let's see what happened since the 2001 purchase of IBonds with all three buckets at $60,000 in each. (Real life instead of all the hype from Financial Advisors and supposed Gurus.) My wife is a bit cautious because an annuity that was supposed to pay her $5000 a month at age 65 for life, went belly up. That is, the largest insurance company in California, went bankrupt. So if you think Annuities are guaranteed, forget it. Like the market, insurance companies come and go.1) The IBonds were purchased at 3% guaranteed fixed income in 2001 plus annual inflation (CPI). We have averaged about 5-6% a year over the past 12 years. They will double in value by next January (2014) to $120,000. Seems slow to me yet the stock market fared worse over the past ten years and many funds actually lost money. The important thing is I never worried about the ups or downs, we were protected from inflation, and it was truly risk free investing. When I cash them out some day (good for 30 years), there will be no state tax and only a federal tax based on how much we cash out at the time. In retirement today we are able to live off our social security income and we have not paid any taxes for the past ten or more years.2) Now...let's examine the other two buckets. The Trading bucket with the so called safety of Covered Calls was an interesting experience at the time but a disaster in the long run. It was a hard lesson to learn, to swallow my pride, and to agree that my wife was indeed correct. Some months I would be up $20,000. Other months down $20,000. It was fun, provocative, stimulating, and challenging. But...in the long run, due to the nature of stock trading, I lost everything in that bucket. Zero, nada, zilch.3) Cash Bucket. We love to travel so we bicycle toured over much of the world for several years. it was an incredible experience. Eventually much of our cash ran out and I invested $30,000 into going back to school to get another MA to Teach English abroad at the university level. That was a great investment as I made money teaching in the Middle East for four years, saved our social security income, and brought our cash back up to $60,000. Upon returning back to the USA six years ago, cash rich once again, we bought a used motorhome, eventually a Honda CRV as a tow vehicle, and live the life of a travel vagabond exploring the American West. By occasional seasonal work (Christmas season) and spending beneath our social security income, we have been the living the "Life of Riley" keeping our cash bucket full.Moral of story ... read and reread the book, "Worry Free Investing". The author was correct. The best invesments for most Americans are guaranteed I-Bonds. I notice that as I age (now in mid-seventies), financial peace of mind becomes more important. The razzle-dazzle days of stock trading and the market are gone, replaced with the certainity of I-Bonds. My wife is happy, I am happy, and we continue to travel and bicyle tour, and kayak our way through our retirement. We probably won't touch our I-bonds until they have doubled again to the $240,000 mark. It's all about compounding as Einstein once observed. And IBonds are right for most people. One other suggestion...Read the book, "Your Money or Your LIfe", by Joel Dominguez and Vicki Robin. It literally may change your life as it did mine!

The bottom line, the stock market is intrisically unpredictable and we are not saving enough. He makes a strong case for diminshing reliance on the stock market. He also has a great chapter on inflation that makes a strong case for I bonds and TIPS. The key issue is can we save enough money beginning at an early age to generate a large enough account to supplement social security. Bodie goes through specific examples and offers an on line calculator to help figure out what you need. I thought the formulas in the book were too complicated for the average person to use, but you can bypass them and go to the easy to plug in online calculator at [...] . Bodie suggests a way to invest safely. As of Sept 2009 I-bonds and TIPS are paying 0% interest. The US government Bond site lists the inflation rate at a -5%. However the principal is safe and will not go down. The interest rates change every 6 months. E bonds are paying 1.5% and are based on 5 year treasury notes. The book forced me to diminsh my holdings of stock and that has given me more comfort. This is a must read for any serious investor.