If You Can by William J. Bernstein: Book Overview

Are you looking to build wealth over time? Do you want to learn how to make smart investment choices?

William J. Bernstein's If You Can book offers a roadmap for turning your income into lasting financial security. This concise guide covers key principles of saving, investing, and managing your money wisely. You'll learn about the power of compound growth, diversification strategies, and how to avoid common psychological pitfalls.

Read on to discover the essential lessons from Bernstein's book that can help you take control of your financial future.

Overview of If You Can

Building wealth over decades requires discipline and careful investment decisions. In the If You Can book, William J. Bernstein lays out principles for growing your savings into financial security.

Bernstein advocates allocating one-fifth of your income to investments like index funds from an early age. He explains the difference between higher-risk equities and lower-risk bonds, and how to assemble a diversified portfolio. The book also covers overcoming psychological biases like overconfidence, avoiding costly financial advisors, and seeking providers whose interests align with yours.

Start Saving Early and Consistently

To build wealth over time, you'll want to start saving as early as possible. Bernstein recommends aiming to save about 20% of your income. This might sound like a lot, but it's achievable if you start early and stick to it.

Let's break it down with an example. If you're earning $50,000 a year, you'd need to save $625 per month to hit that 20% target. Starting at age 25 and continuing until retirement at 65 can lead to significant wealth accumulation, thanks to the magic of compound interest.

But before you dive into investing, there's an important step you shouldn't skip. Pay off your high-interest debt first. While it's tempting to start investing right away, those credit card balances or personal loans with high interest rates can eat away at your potential gains. Make sure you're contributing enough to your 401(k) to get any employer match, then focus on clearing that debt. Once you're debt-free, you can really ramp up your retirement savings.

Create a Diversified Investment Strategy

When it comes to investing, simplicity and diversity are your friends. Bernstein suggests splitting your investments equally between domestic stocks, international stocks, and bonds. This approach gives you a good mix of growth potential and stability.

If you have access to Vanguard funds in your 401(k), you can easily implement this strategy. Look for a total domestic stock market index fund, a broad international stock index fund, and either a short-term bond index or total bond market index fund. This setup typically results in about two-thirds of your portfolio in higher-risk investments (stocks) and one-third in lower-risk investments (bonds).

Don't forget to use a variety of investment vehicles. Contribute to your employer-sponsored retirement plan, open an Individual Retirement Account (IRA), and consider taxable investment accounts too. This approach helps you maximize tax advantages and gives you more flexibility.

Once you've set up your portfolio, you can't just set it and forget it. Rebalance your investments once a year to maintain your target allocation. This means selling some of your better-performing assets and buying more of the underperforming ones to get back to your original mix. It might feel counterintuitive, but it helps manage risk and keeps your strategy on track.

Understand Basic Financial Principles

To make smart investment decisions, you need to grasp some fundamental concepts about how financial markets work. Let's start with the difference between stocks and bonds.

Stocks represent ownership in a company. When you buy a stock, you're buying a piece of that business and its future earnings potential. There's no limit to how much a stock can grow in value, but there's also more risk involved. Bonds, on the other hand, are like IOUs. When you buy a bond, you're lending money to a company or government. They promise to pay you back with interest, which limits your potential gains but also provides more stability.

Investors choose stocks when they're looking for higher returns and are willing to take on more risk. Bond investors prioritize safety over growth potential. This is why stocks tend to be more volatile – their prices can swing up and down dramatically based on company performance, market conditions, and investor sentiment.

It's also important to understand that past performance doesn't guarantee future results. Just because a stock or fund has done well in the past doesn't mean it will continue to do so. In fact, periods of high optimism in the market often lead to lower returns in the future.

Learn From Market History

Looking at past market trends can provide valuable insights, even if they can't predict the future. For instance, economic booms don't always lead to great stock market returns. In fact, some of the best stock market gains have come during times of economic uncertainty.

Why? When the economy is shaky, stocks need to offer higher potential returns to attract investors. This often means you can buy stocks at lower prices during downturns, setting yourself up for bigger gains when the market recovers. On the flip side, when everyone's feeling optimistic about the economy, stock prices tend to be high, leaving less room for growth.

We've seen this play out in history. Remember the dot-com boom of the late 1990s? Everyone was excited about the internet's potential, but that optimism didn't translate into sustained economic growth. The stock market ended up underperforming inflation for years afterward.

Or think back to 1929. The story goes that Joseph Kennedy Sr. sold his stocks after getting stock tips from a shoeshine boy. He figured if even shoeshine boys were giving stock advice, the market must be at its peak. Fast forward to the 1990s, and we saw a similar pattern with the rise of day trading and investment clubs. When everyone and their neighbor is jumping into the stock market, it often signals that prices are getting too high and a downturn might be coming.

Overcome Psychological Biases

Our brains can play tricks on us when it comes to investing. One of the biggest hurdles is overconfidence. Most of us think we're better at investing than we really are, just like how about 80% of people think they're above-average drivers (which is statistically impossible).

Another common bias is assuming current trends will continue indefinitely. In the 1970s, many investors thought high inflation would last forever. Today, many think we'll never see high inflation again. This kind of thinking can lead to poor investment decisions.

The key is to stick to your savings and investment plan, regardless of what the market is doing. It's tempting to react to market ups and downs, but these knee-jerk reactions often backfire. When the market drops, many people panic and sell, often at the worst possible time. Then when things improve, they buy back in at higher prices.

Remember, emotions like fear and greed can lead to poor decisions. Our instincts often tell us to buy when prices are high (because everyone else is buying) and sell when prices are low (because everyone else is selling). But successful investing often means doing the opposite of what your emotions are telling you to do.

Navigate the Financial Services Industry

The world of financial services can be tricky to navigate. There are lots of advisors, brokers, and fund managers out there, but not all of them have your best interests at heart.

Many financial professionals are more focused on their own profits than on helping you build wealth. Unlike doctors or lawyers, many financial advisors aren't held to strict educational or ethical standards. In fact, many "advisors" who sell stocks aren't legally required to put your interests ahead of their own profits.

This doesn't mean all financial advisors are bad, but it does mean you need to be careful. The 2008 financial crisis showed how following professional advice can sometimes lead to poor decisions, like selling stocks when the market was down and buying back in when prices were high.

One way to avoid potential conflicts of interest is to use low-cost index funds. These funds aim to match the performance of a market index, and they often outperform actively managed funds over the long term. Plus, they typically have lower fees, which can make a big difference in your returns over time.

Choose Aligned Investment Providers

When you're looking for a place to invest your money, try to find providers whose interests align with yours. One company that stands out in this regard is Vanguard.

Vanguard is unique because it's owned by the investors in its funds. This structure means Vanguard is more likely to focus on keeping costs low and acting in the best interests of its investors. They're known for offering funds with very low expense ratios, which can help boost your returns over time.

Speaking of costs, it's crucial to pay attention to fees and expenses, especially in retirement accounts like 401(k)s. High fees can eat away at your returns over time, significantly reducing how much money you end up with in retirement. Even small differences in fees can add up to big differences in your account balance over decades.

When you're choosing funds for your portfolio, look for ones with low expense ratios. These are the ongoing fees you pay for owning the fund, expressed as a percentage of your investment. Vanguard funds are often a good choice because of their low costs, but there are other providers that offer low-cost index funds too. The key is to understand what you're paying and how it impacts your long-term returns.

Remember, building wealth is a long-term game. By starting early, saving consistently, diversifying your investments, understanding market dynamics, overcoming psychological biases, and choosing the right investment providers, you can set yourself up for financial success. It's not always easy, but with patience and discipline, you can build the financial future you want.