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.