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Digital Wealth: An Automatic Way to Invest Successfully


Praise for Digital Wealth

"Simon is uniquely positioned to analyze the intersection of two defining trends of our time: software driven automation and ETF-based low cost investing. Digital Wealth clearly explains how the key elements of portfolio construction can be automated to reflect the latest advances in financial thinking and product availability. He argues persuasively that algorithmic investing using low cost, index-based, tax efficient vehicles can benefit us as individuals and collectively as a society."
—Aniket Ullal, Founder & CEO, First Bridge Data

"A great introduction to the thinking and processes behind digital investment management. The book draws on developments in finance, technology and academics to explain the value of digital investing."
—Ken Frier, CFA, Partner & Chief Investment Officer, Atlas Capital Advisors, LLC

"Digital Wealth is a fantastic read. It explores the underpinnings of multiple macro forces and transformations, which have come to unite modern technology with investment management. Simon Moore's book is well-organized and a solid reference for anyone wanting a fresh look at investing insights in the present-day digital age."
—Salil Mehta, Founder of the Statistical Ideas blog; author of the bestselling Statistics Topics; former U.S. Treasury/TARP Director of Analytics

"This book covers all of the important issues involved in becoming a better investor, and more importantly, it can help you make better decisions with your finances. Simon Moore walks you through every step you need to take to improve your portfolio and automate good decisions through the use of technology."
—Ben Carlson, Director, Institutional Asset Management, Ritholtz Wealth Management; author of A Wealth of Common Sense: How Simplicity Trumps Complexity in Any Investment Plan

"Recent years have seen a revolution in personal financial investment opportunities, but for many investors, the landscape remains confusing and opaque. This book helps to demonstrate how individuals can harness the power of technology to make better decisions for their financial future."
—Paul Frost, Chief Financial Officer, Shore Capital

"A useful guide to the principles of the emerging robo-advisor space. Digital Wealth draws on a host of evidence to show how effective portfolios can be automatically constructed and maintained. A timely overview of an important topic."
—Marc Gawley, CEO, XL Capital

Simon Moore is Chief Investment Officer at FutureAdvisor, the award-winning digital asset manager. He has written about finance for Forbes, Huffington Post, and Yahoo! Finance, and is quoted regularly by such major media outlets as CNN and the Wall Street Journal.

Preface xiii

Acknowledgments xvii

Chapter 1 America’s Savings Challenge 1

We Don’t Save Enough 1

The Key Change in America’s Retirement Planning Process 3

How Financial Innovation Helps 4

The Magic of a 15 Percent Savings Rate 5

Notes 8

Chapter 2 The Risk of Not Investing in Stocks 9

The Short]Term Risks 10

The Historical Perspective 10

The Logic 12

Chapter 3 The Enemies of a Stock Portfolio 15

Why Inflation Matters 16

Treasury Inflation]Protected Securities (TIPS) 17

Asset Confiscation 18

Recession 19

Chapter 4 The Value of Time for Investors 21

Why Long]Term Stock Investing Is Less Risky than It May Seem 21

The Long]Term Picture 22

How Bonds Can Help 24

Note 27

Chapter 5 Core Assets of a Robust Portfolio 29

Asset Classes We Include 29

Individual Asset Classes We Exclude 34

Notes 39

Chapter 6 Dynamic Asset Selection Determining the Lowest]Cost Option for Each Portfolio 41

Chapter 7 What Software Does Better than People 47

How Software Helps Investors 49

Example: All the Decisions an Algorithm Makes 50

Chapter 8 How International Investing Can Smooth Returns 53

Demographics Matter 54

Diversification Improves Your Industry Mix 56

Notes 58

Chapter 9 The Advantages of Exchange]Traded Funds 59

The Benefits of ETFs 61

In]Kind Transfers 62

The Risks of ETFs 63

Securities Lending Policies 65

Notes 67

Chapter 10 The Triumph of Low]Cost Investing How Paying Less Gets You More 69

Fooled by Randomness 70

A Triumph of Marketing over Results 72

Notes 76

Chapter 11 Learning from Nobel Prize Winners 79

Milton Friedman, 1976 80

James Tobin, 1981 81

Harry Markowitz, 1990 81

William Sharpe, 1990 82

Daniel Kahnemann, 2002 83

Eugene Fama and Robert Shiller, 2013 83

Chapter 12 The Costs of Being Active 85

The Cost of Closet Indexing 87

The Other Costs of Active Management 88

Notes 90

Chapter 13 The Greatest Mistakes Made by Novice Investors 91

Starting Saving Too Late 92

Are You Using Tax Shelters Effectively? 93

Are You Taking Advantage of 401(k)

Matching If Available? 93

Are You Diversified Internationally? 93

Are You Chasing Returns? 94

Are You Overpaying in Fees? 95

Are You Tracking the Right Index? 95

Do You Trade Too Much? 97

Chapter 14 Tilts and Other Ways to Help Long]Term Performance 99

History of Market Thought 100

Data Mining 102

Debunking Strong]Form Market Efficiency 103

Rationality 103

The January Effect 104

Sell in May and Go Away 104

Momentum 105

Value 105

Small Cap 106

Quality 106

Longer]Term Mean Reversion 107

Assessing Tilts in a Portfolio Context 107

Notes 108

Chapter 15 Establishing a Tax]Efficient Portfolio 109

Tax Shelters 111

Tax Efficiency for Retirement 111

Tax Efficiency for College 112

Tax Efficiency for Giving 113

Tax]Efficient Asset Placement 114

Tax Loss Harvesting 115

Offsetting Gains with Losses 115

The Principal of Tax Deferral 116

How Tax Loss Harvesting Works 117

Challenges of Implementing Tax Loss Harvesting 117

Conclusion 119

Chapter 16 The Value of Rebalancing and Glidepaths 121

Rebalancing Keeps a Portfolio on Course 122

Tiered Rebalancing 125

Glidepaths 126

Notes 129

Chapter 17 How to Manage a Market Crash 131

Keep Stock Market Investing for

Longer]Term Money 133

Making Saving an Ongoing Activity 134

Pay Attention to Extremes of Long]Term Valuation Signals 134

Don’t Consider Stocks in Isolation 135

Remember that You May Underestimate Your Risk Tolerance in Good Markets 136

Chapter 18 Your Own Worst Enemy Is in the Mirror 139

The Biggest Threat to Your Returns Is in the Mirror 140

Always a Reason to Avoid Staying Out 141

The Returns You See Aren’t the Ones You Get after Tax 141

The Media Isn’t Your Friend 142

Overtrading 142

Home Bias 143

Failing to Take a Long]Term Perspective 143

Availability Bias 144

Chasing Performance 144

Ignoring Fees 144

Holding Too Much Cash 145

How Software Can Help 145

Note 146

Chapter 19 Saving for Goals beyond Retirement 147

Tax Efficiency 148

Portfolio Construction 149

Emergency Funds 150

Investment Flow Chart 150

Chapter 20 A History of Diversified Portfolio Performance 153

Stocks vs. Bonds 153

The Impact of Recessions 154

The Impact of Inflation 155

The Danger of Averages 155

The Benefits of Combination 155

An Emerging Market that Has Emerged 156

Chapter 21 The Future of Wealth Management 157

Lower Costs 158

Democratization of Services 159

Increasing Customer Intimacy 160

Improved Financial Awareness 160

Note 161

Chapter 22 Conclusion 163

Author’s Disclaimer 167

About the Author 169

Index 171