Your Questions Answered by Jim O’Donnell

The Shortest Investment Book Ever: Wall Street Secrets for Making Every Dollar Count by James O'DonnellLast week, we closed the giveaway of five copies of The Shortest Investment Book Ever by James O’Donnell and Professor O’Donnell selected five questions from the thirty submitted queries to answer. For those who may have missed it, I wrote a review of The Shortest Investment Book Ever a few weeks ago and now five readers have won brand new copies of it for their own libraries!

Professor O’Donnell was very gracious in answer these questions, which range from the technical (modern portfolio theory) to the softer (how money perceptions have changed), and I hope you find value in them.

Question #1: Modder asks: My question: Is modern portfolio theory (Markowitz – efficient frontier based analysis) useful in today’s environment? The basis for the analyses, such as risk and return data, have to be totally skewed or noisy at this point given the recent volatility – what other approaches would you suggest to someone concerned with asset management short of putting all $$ under the mattress?

Dear Modder,
For sure, after what we’ve been through – and are still going through – it is tempting to look for answers to our mutual distress in any quarter other than where we have been operating. I doubt that you’ve yet read my book, The Shortest Investment Book Ever, but it does draw its investment principles from Modern Portfolio Theory and from the use of “the efficient frontier.”

So, is it time to throw the whole theory overboard? Maybe.

But I’m not ready to go there. You also, playfully, I’m sure, allude to putting money under a mattress. Others might say that “market timing” might save us. But I don’t think so. At the heart of Modern Portfolio Theory is the wisdom of understanding who I am as an investor in terms of age, risk tolerance, and goals. In light of that kind of intelligent investigation, we should set up a widely diversified portfolio of investments to pursue those goals.

History tells us, too, that diversification works best – not perfectly, perhaps – to dampen the risks associated with investing. Frankly, I’m not aware of what would work better to help us garner the bulk of long-term returns (about 10%) one might get on our long-term investments. To take my own case during the past year, for instance, I lost 30.5% on my overall portfolio — a dreadful outcome, indeed. But my results are considerably better than a pure equity mutual fund that lost, on average, about 40%. So, hang in there with the diversified, long term, low-cost, equity-oriented portfolio for your retirement savings.

Question 2: Thomas asks: I have not read the book, so maybe this is being covered but what do you specifically find attractive or unattractive about target based retirement funds? These are being pushed out to small investors as easy ways to take advantage of low cost funds and adhere to the rebalancing of an account automatically.

Dear Thomas,
“Target-dated” mutual funds, also called “lifecycle funds,” serve a good purpose for those of us who HATE or FEAR investing. After all, under our economic system, in which 62 million Americans save for their own retirements through 401(k and 403(b) plans, target-dated funds can offer a reasonable compromise to doing nothing, doing the wrong thing, or becoming a wreck thinking about what we don’t want to think about. They automatically do the needed, occasional rebalancing, which is a great plus for the “scaredy cat” and the unknowing. Where I think they can still be improved, in some cases, is in their expenses, and, too, in their diversification, which does not take many target-dated funds into enough worthwhile, asset class diversification. Too often, target-dated funds give an investor stocks and bonds only, which will do OK; but I’d prefer to see them include foreign stocks, emerging market equities, and real estate, too.

Question 3: John asks: What is the one piece of info you would repeat, repeat, repeat? Something that people hear about, know about, but always tend to overlook it, or gloss it over as not that important. The past few years of my studying personal finance and planning details for retirement in a few years, I completely overlooked taxes on my pension and IRA withdrawals, as well as on Social Security – now it’s part of my plan, but what a big mistake that would have been…

Dear John,
There is lots and lots of investment advice that bears repeating, but in this climate of fear and loss, I’d want to remind everyone that, while the long-term return from equities is about 10%, that return does not arrive in a consistent, steady return. Rather, investment returns are “lumpy.” What happens is that markets tend to go nowhere for years, and then, without a bell ringing, a siren going off, or an email alert, they go up substantially. And do so for years. Look back over the last century, which includes two world wars, the Great Depression, several recessions, oil embargoes, terrorist attacks, and what we find is about a 10% return from equities. If we look at just the last, say, 30 years, we had returns for close to 20 of them of about 19.85% per year (from 1982-2000). But since then, returns have been negative by a few percentage points a year.

The message I read from all this is simple: When returns have been rich and robust for years, it’s likely that a sharp downward correction is coming. And, on the other hand, when things have seemed dreadful for years on end, it’s not unlikely that investment returns are going to get better.

Question 4: Kim Varner asks: In what ways is today’s market similar and dissimilar from the Great Depression?

Dear Kim,
There are similarities in that both crises were related to banking crises. Both gave rise to catastrophic losses of confidence and trust, which fed on themselves driving confidence and trust lower and economic activity along with it. But – and this is an important “but” – I don’t think that we are entering another Great Depression. Why? Because I think governments around the world are too active in coordinating huge efforts at intervention. And while I wish there weren’t the need for governmental action, we’re at one of those unfortunate moments in history when I’m grateful that governments are as active in this mess as they are. For most definitely, that was not the case in the Great Depression and why, I believe, the “Great Recession” of the 1930s turned into the Great Depression.

Unlike the coordinated efforts today, back in the 1930s, governments made four very large policy errors that lengthened and deepened that turndown. One and two, they raised interest rates and raised taxes. Three and four, they shrank the money supply and built protective barriers against world trade. At its bottom, the Great Depression saw stock prices fall about 90%, national unemployment rise to 25% (with some cities seeing 75% unemployment), and productive output fell about 25%. I see no repetition today of the same policy errors that made a serious, cyclical recession morph into the Great Depression. But, like the rest of us, nor I don’t have a crystal ball to see the future. While I do not see a repeat of the Great Depression of the 1930s, I see some daunting challenges ahead – maybe a different kind of depression – because of possible future inflationary problems and/or a debased currency.

Question #5: Gopinath asks: My query is:
What are the indications that the market has hit the bottom so that we can put in the hard earned money for investing (rather than speculating and losing)?

Dear Gopi,
Markets will ALWAYS hold opportunities for both risk and return, so I’m not sure I can tell you when the “all clear” will be sounded. But here are a few things we all should be looking for to signal the likely return of better times. First, markets turn before economies, so, for example, don’t think that unemployment numbers will get better or even stop getting worse before markets move up.

Next, realize that markets begin to improve or even begin to go up when news gets less awful (not necessarily “good), then less bad, then not so bad, then mildly good. In fact, when bad news flows on a given day, and market does not tank (and we’ve seen some of this in recent weeks, that’s an encouraging sign that a bottom may be near. In other words, for those waiting to hear a constant stream of dramatically good news, by the time that comes, markets will long since have gotten a whole lot better. I’d also say that when a bottom has arrived, volatility will retreat (of course, before it spikes again on the way up). And volatility has come down, too. In Oct., Nov., and Dec. of 2008, market volatility went from being historically horrific to just plain bad. That was an improvement, even if only on a relative basis. But Jan. of ’09 has been just terrible, on the other hand, in its negative returns and in a pick-up in market volatility.

And lastly, while there’s no precise way to measure it, extreme bearishness is a good clue that the market has hit bottom. After all, when all the bears have sold, there’s nothing left but upside opportunity. By definition, the moment of maximum bearish sentiment is coincidentally the moment of greatest upside potential. Again, there aren’t precise measures of bearish sentiment, but in my opinion, right now, I’ve never lived through a time when there has been more predictions of gloom and doom. Hmmm…that may mean we’re actually near a bottom.

Thank you to all the readers who submitted questions, thank you to Professor Jim O’Donnell for taking the time to answer these questions, and congratulations to the winners!

 Personal Finance 

The Shortest Investment Book Ever Giveaway

The Shortest Investment Book Ever: Wall Street Secrets for Making Every Dollar Count by James O'DonnellIf you read my review of The Shortest Investment Book Ever by James O’Donnell then you’ll know that I’m a fan of this book because it simplifies retirement and investing. I had the opportunity to ask James O’Donnell a few questions in what turned out to be a great, albeit brief, interview.

The publisher sent me five copies to give away and I thought this would be a great opportunity to ask Jim some more questions. So, in this giveaway, I’ll be taking questions you want to ask Jim in the comments below, selecting the best five, and sending each a copy of Jim’s new book, The Shortest Investment Book Ever.

The only requirement to win is that you must have a shipping address is the United States and the contest will end at noon on January 23rd 2009. Void where prohibited.

The contest is now closed, I’ll be notifying the winners in the next few days once Professor O’Donnell has selected the five questions.


Interview with Jim O’Donnell, The Shortest Investment Book Ever

The Shortest Investment Book Ever: Wall Street Secrets for Making Every Dollar Count by James O'DonnellLast weekend, I reviewed The Shortest Investment Book Ever by Jim O’Donnell and today I have the opportunity to interview him. I thought that Jim’s extensive financial experience and his love to educate was something I should take advantage of and he willing subjected himself to my hard hitting investigative journalism. :)

Good morning Professor O’Donnell, I thought The Shortest Investment Book Ever lived up to its billing, being both short and informative in a way that is not intimidating in the least. Often times investing related books assault the reader with a mountain of data, but not so with your book. What led you to write The Shortest Investment Book Ever?

There is no shortage of investment and budgeting books out there already. But they don’t address the 401(k) and the 403(b), which is the chief retirement savings tool for about 62 million Americans. My book targets those many, many “savers” who are often overwhelmed by investment choices at work and may, therefore, do nothing or do the wrong thing.

I also don’t want people paying additional money (they may not have) to get “help” which often times is, even from honest brokers, a sales pitch. But my book is also intended for those who don’t have a 401(k) or a 403(b). It will help lots of people better understand Medicare, Social Security, and IRAs, which are also important aspects of retirement savings.

Were there any chapters that were cut from the book that you would have liked included?

Actually, no. In putting the I book together, my editors and I had some tussles over content. But I wanted LESS, while they wanted MORE, and kept suggesting more chapters that I might develop as briefly as I did the ones we have. Some of the chapters in the book, on, for instance, socially-responsible investing, were not my idea. I think they are good topics. But I didn’t think they belonged in the SHORTEST investment book ever.

What led you to leave Wall Street and begin teaching? In your book, I get the feeling that it’s a mentor speaking to a mentee; it works quite well in welcoming the novice to the world of retirement and investing.

I was a school teacher for seven years after college. In many ways, I loved it. All my life, I have wanted to have a life-long, and I hope positive, impact on others. I left teaching junior and senior high school, discouraged after our upstate New York community voted down the budget a couple of years in a row. I also seemed to think that my students were more capable of excellence than my administrators thought. I was then – and still am today – a demanding teacher. I’m not in the classroom to serve time and accrue retirement credit. That led to tension and some soul searching with my administrators.

So I went off to Columbia U. in New York City and got an MBA in finance and accounting with the hope of helping people in a new way. I continued to try to do that with clients and staff as I rose in the mutual fund world for a couple of decades. Then, a powerful, reorienting, religious experience in the mid-80s caused me, in time, to leave the business world and invest in the education of the next generation. In a sense, I went back to the classroom, sort of like “back to the future.”

With all the talk of a recession, what do you think most people should do to prepare for it and, should we be so lucky, what should we do to benefit from when we exit the recession?

To prepare for the recession that is upon us: We need to examine our own houses. We need to spend less, save more – sometimes LOTS LESS. We need to discipline our sometimes crazy natures to understand the difference between WANTS and NEEDS. I’m convinced that contented people – which should be our goal – don’t necessarily get what they want but they learn to live with and maybe like what they get.

For those near retirement, the recent market drubbing is, of course, more challenging. We may need to defer some dreams, keep working a bit longer, and rework our budgets and plans. We may need to learn to live on less and reinvigorate such easily overlooked joys as time with family and friends, being or becoming involved in community or church work, even enjoying simple, cheap pleasures, like a movie at home with friends or family.

We’ve got to challenge the cockamamy notion that, if I don’t spend a lot of money, we can’t enjoy life or that we’re not a “success”. Nonsense! For those of us – even if we’re near retirement – and still saving for retirement, check your asset allocations. Get them back in line. Don’t let the numbness of the disaster knock us silly or punchy.

Don’t chase the “hot” asset of today – cash or Treasuries – as if that will save you. (It won’t.) What you can save in your retirement plan today is being accumulated at bargain basement prices. This is especially helpful the farther we may be from retirement, but it can help “oldsters”, too. Young people are going to be great beneficiaries of this meltdown, if only they have the courage and discipline to save and accumulate quality, low-priced funds at these once-in-a-lifetime prices.

To benefit when we exit this recession: (And we will!) Read the above comments on preparing fro the recession.

I read a brief biography about you and saw that you had an extensive history of working with wealthy investors during your time at investment powerhouses such as Fidelity. What sorts of things have the wealthy done “right” with their investments that everyone can incorporate into their strategy?

The wealthy also can spend foolishly. But the smart ones are not extravagant. They know that capital is hard to make and still harder to accumulate. Many live very modestly, dressing and driving, for instance, NOT to stand out. Many have strong families and good marriages. A family breakup is a powerful stimulus to poverty, whatever we had before the blowup.

So, stability is something that the wealthy seem oftentimes to have. Many wealthy people I worked with are far less risk-oriented than one might expect. They almost sense that they have been lucky and don’t want to test fate. Much of their risk taking may be confined to a business, say, not to their investments. They – the smart ones – don’t put too many eggs in one basket, even if the baskets can be very large.

What do they do wrong that we should try to avoid?

Hard to generalize there. But it wasn’t investment stuff that marked “what they did wrong.” After all, they were paying me for advice. What the most foolish of the wealthy I met or worked with did was to let their pride or arrogance or the certainty that money can fix or buy anything go to their heads. Some feel that money is the standard by which all – including everyone around them – is to be measured. While most wealthy people I worked with were good folks, some were certifiable jerks – just like some of us who have no money. I worked with lottery winners, sports, movie, and TV stars that were princes and princesses and with others in the same fields who seemed to think everyone was a bellhop or a porter, fortunate to be in their presence and to take their abuse.

One question I’ve often asked myself is, knowing what I know about life in general, what advice would I give to myself ten years ago. Given your experiences and knowledge, what advice would you have liked to give yourself many years ago? (financial, or otherwise!)

What an interesting question, Jim.

First, I’d say that the important stuff is the relational stuff, not the money stuff. The money stuff is just a “funding vehicle” to enhance the relational. In the end, PEOPLE matter, not stuff or things. On the other hand, we have to be good stewards of much of the stuff and things we have been given. I’m a person of faith, so I put my trust in unseen things. I know others of great faith who seem to despise “stuff and things” and seem to value only what is eternal and invisible.

Here, I beg to differ with them. While we are in this world, we must not treasure our “stuff,” but neither should we neglect or misuse important, helpful things -even money – we have. They can helpfully serve us and others and, when cared for, can last, making us able to spend more on others or other NEEDED things. I’m uncomfortable with both those who think money is the measure of all things AND, too, with those who think it is the measure of nothing, that it is meaningless. The latter folks practice irresponsibility and think it is faithfulness or praiseworthy selflessness.

Lastly, I would say we all need to do the best we can with the gifts and talents we have been given. I think I used to believe that life would get easier as I grew older. It has not. It’s hard. There’s trial. There’s suffering. There’s reversal. There’s loss. (See my first book at But there’s lots of joy and lots of beauty. too. We have to manage through it all, not just through the good or the easy. We have to avoid fantasizing, too — a real, real problem in a world of endless pop culture and celebrities.

We need – all of us, young and old – to finally grow up into mature people who can make this broken world a better place for us and others.


The Shortest Investment Book Ever by James O’Donnell

The Shortest Investment Book Ever: Wall Street Secrets for Making Every Dollar Count by James O'DonnellI really liked The Shortest Investment Book Ever: Wall Street Secrets for Making Every Dollar Count by James O’Donnell because it was concise and to the point, not overly wordy. The book isn’t a thick tome designed to overwhelm you into thinking you are getting your money’s worth, it’s about a hundred and fifty five pages broken up into eighteen chapters, each of which probably take about 10 minutes to read. You would think it’s impossible to cover everything in investing in 155 pages and you’re right, he covers all the basics 99% of investors will need. He writes about various account types like 401(k)s and IRAs, he writes about diversification, he writes about the importance of time, he writes about life cycle funds, he writes about investing with a conscience, he writes about re-balancing, he writes about annuities, etc. He doesn’t discuss more advanced topics like investing in commodities or buying options and futures, but for 99% of individuals that stuff won’t matter.

(Click to continue reading…)

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