Book Review: Worry-Free Investing

February 19th, 2008 · 10 Comments

[Front Cover of Worry-Free Investing Book]

I borrowed this book (affiliate link) from the local library after reading Jon Chevreau’s interview with one of the authors - Ziv Bodie. Prof. Bodie and co-author Michael Clowes suggest that investors would be better off eschewing equity risk and investing their savings in inflation-protected instruments such as real-return bonds.

There is a lot to like in this book - the authors cover estimating how much is needed for retirement, saving for college, the importance of a home in a financial plan, financial advisors etc. in a clear and concise manner. The book also details a six-step process to save the “worry-free” way for any financial goal.

While there is a lot to like in the book, there are some major problems with the “worry-free” approach:

Due to its low-risk nature, real-return bonds have very low yields, currently just shy of 2%. The low yields imply that most of the capital, even for someone who is very young and decades away from a goal such as retirement, must come from savings. Our savings rate is pretty close to zero, so how likely is it that investors can successfully save a significant portion of their paycheques?
Real-return bonds are not exactly risk-free. The real yields fluctuate and you could find that yields are lower when you invest in new bonds as old ones mature. To be fair, the authors do recognize this risk: “There is an element of risk, namely the risk that the real rate of interest on I Bonds (i.e., the promised fixed rate that is added to inflation) could go down. As you have seen, this rate has changed quite a bit in the past. It has been as high as 3.6% and was at the time of this writing lower. You have no way of knowing whether it will go up, down or stay the same in the future.” While recognizing the risk, in my opinion, the authors have glossed over it.
A little perspective is needed when considering the author’s contention that stocks are risky, even in the long run. How likely is it that stocks will lag “risk-free” investments over 30 years? Michael James figures it is more like 1 in 140.

If your local library has this book, it is well worth checking out. The book is published by FT Prentice Hall and the website also includes a “worry-free” retirement savings calculator. Blogger Michael James has also written a six-part review of this book, the first of which is available here.

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10 responses so far ↓

1 Michael James // Feb 19, 2008 at 9:54 am

During his interview with Chevreau, Zvi Bodie said that he wanted to counter one of the investment industry’s lies that there is no such thing as safe investing: “The reason I wrote Worry Free Investing was I wanted to tell investors that’s not true. There IS a safe long run investment.”

He’s right that there are safer investments than stocks and bonds. For the average investor, these safe investments will grow small savings into a small sum that is hopelessly inadequate for retirement.

Bodie should have gone after other investment industry lies. This particular “lie” has a lot of practical truth to it.
2 Canadian Capitalist // Feb 19, 2008 at 10:40 am

Michael: The amount of “worry-free” savings needed is truly staggering. Without considering CPP & OAS, for someone beginning to save for a retirement in 20 years (and assuming they would spend an equal amount of time in retirement) need to save 39% of their income. So, the choice is clear: you can either take a 100% chance of not meeting your goal or you can settle for a small chance of not meeting it by investing in equities.
3 Guerilla Investor // Feb 19, 2008 at 4:25 pm

Real returns by whose measure. I guess I must sound like a broken record about this but I just don’t believe the government line on the real rate of inflation. Since governments and their central banks are the agents responsible for the inflation believing them about the rate of inflation is like believing a thief when you ask him how much he stole. Look at how fast the money supply is growing? In the US I have seen figures for M3 as high as 14%.
In any case I would have to agree with Canadian Capitalists point here. A strategy like that is guaranteed to fall far short for retirement. Seems to me like a no brainer.
4 Phil S // Feb 19, 2008 at 4:52 pm

As the author is referring to I-bonds, then I am assuming that the book is American in nature. I-bonds are savings bonds in the USA that earn interest on a 6-month average core CPI inflation rate plus 1%. The other key feature of American I-bonds is that you do not get taxed on the interest accrued until you cash out that bond, so it is a good method of tax-deferred investing. Also, that makes I-bonds more sensible to hold outside of your retirement account, since an IRA or 401k in the USA is just another tax deferral method like a Canadian RSP. In other words, there’s no sense in buying a tax-deferred investment in a tax-deferred account!
5 FourPillars // Feb 19, 2008 at 5:23 pm

The idea of buying only RR bonds is interesting but as you guys mention, it’s mostly academic for retirement planning because you can’t save enough and retire at a decent age.

I’m no expert on risk but I think there is always a tradeoff - the 4% rule gives you a pretty good chance of not running out of money - it’s a better chance than the 5% rule gives you, but not as good as the 2% rule gives you. Problem is that the lower the percentage, the longer you have to work.

Probably the lowest risk form of retirement is to save as much as you can and continue working as long as you are able.
6 Riscario Insider // Feb 20, 2008 at 12:58 am

Real Return bonds = Really No Return bonds.

As FourPillars says, saving lots is a good strategy. Working as long as you can is not very appealing. Another strategy is to find ways to increase your work earnings, whether as an employee or self-employed. To quote JFK, a rising tide lifts all boats.
7 Middle Class Millionaire // Feb 20, 2008 at 9:45 am

If you have a long term time horizon I think the biggest risk investors take with equities is not being invested in them. I can see the logic in slowly shifting a portfolio from equities to fixed income as an individual gets closer to retirement. However, having a portfolio of 100% real return bonds seems not only foolish but also risky for those with many years until retirement. Perhaps the book should have been entitled “Worry Free Investing: How to Escape the Rat Race by Age 95”.

Cheers,
MCM
8 tracy ho // Feb 22, 2008 at 2:53 am

Thanks , wise & happy to read your post ,

Thank you in advance

Tracy Ho
wisdomgettingloaded
9 Sunday Roundup // Feb 24, 2008 at 2:35 pm

[...] Dollar Plan wrote a great post about the work/life mix. Canadian Capitalist did a book review on “Worry Free Investing” which takes a too conservative look at [...]
10 Monevator // Mar 1, 2008 at 9:34 am

I’m not familiar with the terminology of Canadian instruments, but I presume real return bonds are similar to TIPS in the US or Index-Linked Gilts here in the UK.

As others have said, the returns are so puny on these kind of vehicles that you do wonder if it’s worth bothering with at all.

Surely a better no worry portfolio would be a mix of equities and traditional government/corporate bonds. If it worries you, don’t look at the value! (Read Taleb for more on that).

Here in the UK the yield on Index-Linked Gilts has been driven down by pension funds buying huge amounts under direction/leaning by the government. We don’t need to make the same mistakes as them.

Some in your portfolio, fine. Maybe even 20-30% if you’re super cautious. 100% is madness, in my humble opinion.

Canadian Capitalist

A Canadian Personal Finance Weblog