How a Second Grader Beats Wall Street: Golden Rules Any Investor Can Learn

291 Pages·2009·4.75 MB·English

by  Allan S. Roth

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Additional Praise for
How a Second Grader
Beats Wall Street
“ I have a very strong feeling that sometime in the not - to - distant future I
will happily be working for Allan Roth ’s son! If you buy only one how -
to book this year, this is the one! Allan Roth is a National Treasure. ”
— Mike Causey, s enior correspondent, FederalNewsRadio.com
“ Allan presents in a very clever way why a second grader can outper-
form most investors, professional and individual. He demonstrates why
smart investing is both simple and also why it is not easy for adults to
execute because of behavioral mistakes to which they are prone. ”
— Larry Swedroe , author of Wise Investing Made Simple
“ Successful investing should be a matter of choice, not chance. Follow
this book’ s advice and your probabilities of success are 100% in your
favor.”
— Paul Merriman, author, Live It Up Without Outliving
Your Money! (Wiley), and publisher of FundAdvice.com
“ Allan Roth gets an A+. It is no surprise that a 2n d grader beats Wall
Street because everything we need to know about beating the pros is
taught in the fi rst grade. That is when we learn to add and subtract. And
after subtracting the high fees and commissions that the pros charge,
their results fall far short of a simple market return.”
— Richard Ferri, CFA , investment advisor
and author of The ETF Book
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“ Pablo Picasso spent a lifetime learning to paint like a child. Investors
might be wise to do the same. Allan Roth ’s H ow a Second Grader Beats
Wall Street reminds us that the most important investment principles are
actually simple truths that we lose sight of as our lives and investment
approaches grow more complicated. By returning to the basics, we can
both simplify our fi nances and improve our investment results. ”
— Don Phillips, M anaging Director, Morningstar, Inc.
“ Allan Roth shatters the Wall Street myth that investing is too compli-
cated for ordinary investors. Using his son, Kevin, as an example, Allan
shows us, in his easy - to - read writing style, how we can construct a
simple personal portfolio that is almost certain to outperform the vast
majority of investors. If you have been looking for an easy - to - understand
book about how to invest successfully — this is it.”
— Taylor Larimore , co- author of
The Bogleheads ’ Guide to Investing
“ Using just a bit of logic and a dash of arithmetic, Allan Roth lucidly
explains why low - cost index funds should be the investment of choice
for 2nd graders as well as their parents and grandparents. ”
— John Allen Paulos, mathematics professor at
Temple University and the author of
Innumeracy and A Mathematician
Plays the Stock Market
“ Kevin, the second grader, is really smart and cool! He knows what it
took me decades to learn. A smart strategy is to diversify broadly across
US stocks, international stocks and high- grade US bonds using low -
cost, tax - effi cient index funds. He even taught me how individuals can
increase their fi xed - income returns without incurring higher risks. By
following Kevin ’s advice, we, too, can be smart investors. But we may
never be as cool as Kevin! ”
— William Reichenstein , Powers Chair in Investment
Management at Baylor University

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How a
Second Grader
Beats Wall Street
Golden Rules Any
Investor Can Learn
Allan S. Roth
John Wiley & Sons, Inc.
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Copyright © 2009 by Allan Roth. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
Data ©2008 Morningstar, Inc. All Rights Reserved. The information contained herein:
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Library of Congress Cataloging-in-Publication Data:
Roth, Allan S., 1957-
How a second grader beats Wall Street: golden rules any investor can learn/Allan S. Roth.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-470-37594-5 (cloth)
1. Portfolio management. 2. Index mutual funds. 3. Investments. I. Title.
HG4529.5.R67 2009
332.6–dc22
2008041525
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
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To investors, like my son, Kevin, who
know the truth of simple arithmetic
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Contents
Acknowledgments xi
Introduction: The Seeds of Financial Success xv
Chapter 1 The Claw Will Take Your Money:
“10 – 2 = 8” 1
Chapter 2 Own the World: “Don’t Put All of
Your Eggs in One Basket” 17
Chapter 3 The Advantage of Having Wall Street
Marketing Blinders (and Where Can I
Get Some?): “I Don’t Watch Cramer;
I Like SpongeBob” 41
Chapter 4 Adults Behaving Badly: “Don’t Act
Silly When Something Is Important” 67
vii
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viii contents
Chapter 5 Can You Beat a Second Grader’s
Portfolio?: “I’m Not Going to Win
All Three Spins ” 89
Chapter 6 Beyond the Second-Grader Portfolio:
“If Dad Says There’s a Better Way,
I Might Try It, but I’m Not So Sure” 107
Chapter 7 Bonds—Your Portfolio’s Shock
Absorber: “Don’t Lend Money to
Someone Who Won’t Pay You Back” 123
Chapter 8 Better Than Bonds: “If the Teacher
Promises You’ll Be Paid Back, Then It’s
Okay to Lend Randy Money ” 141
Chapter 9 Simply Brilliant or Brilliantly
Simple—Building Your Portfolio:
“Don’t Bet Your Lunch Money” 157
Chapter 10 Investors Who Love to Pay Taxes,
and the IRS Who Loves Them:
“Don’t Pay Taxes If Y ou
Don’t Have To” 179
Chapter 11 Nightmare off Wall Street—The Scary
Tale of Trick-or-Treat Investing:
“If the Game Is Too Hard to
Understand, I’m Not Playing ” 193
Chapter 12 Increase Your Return No Matter
What the Market Does: “If Y ou Pick
the Low-Hanging Fruit, You Don’t
Have to Climb the Tree” 215
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