Do it yourself - the best investment advice that money can buy

BOOK REVIEW:THE WALL Street Self-Defense Manual is, in its defence, not just another throwaway paperback aimed at the "get rich quick" junkies, writes Fiona Reddan.

While it is an investment guide, its author, Henry Blodget, eschews traditional growth strategies and instead focuses on giving advice to the average consumer on how to invest more intelligently and avoid common mistakes.

"Investing well will mean ignoring almost everything you see and hear about the markets. It will mean committing to a strategy and sticking with it for decades. It will mean saying no to almost everything that seems exciting, challenging and interesting about the markets, including the chance to get rich quick," he says.

Indeed, Blodget's strategy for getting rich actually takes a lifetime: "Invest €100,000 in a low-cost equity index fund for 50 years. This should make you about €11 million."

For a wannabe investment guru, Blodget has a bit of a coloured past. In 1998, he became a star of Wall Street, having correctly predicted that Amazon.com's stock price would exceed $400, and in 2000 he was voted the number one internet and e-commerce analyst on Wall Street.

But his fame soon turned to infamy when he was charged with civil securities fraud by the US Securities and Exchange Commission for, as he puts it in the book, "privately trashing stocks he was publicly recommending".

After his ignominious departure from Wall Street, Blodget went back to his first job as a journalist, and writes for publications such as Newsweek and Slate.

The Wall Street Self-Defense Manual is Blodget's first book. In it, he takes a swipe at his former Wall Street colleagues, saying two good ways to make money are to "save more or work for the asset management industry, where you can make a pile of money even when your returns are poor".

He is particularly vocal when it comes to "actively" managed funds, whereby the fund manager tries to beat the market - and charges a handsome fee for doing so.

"Investors should think long and hard before buying an active fund over a passive fund," he advises, and is a firm proponent of passive strategies, whereby fund managers make as few transactions as possible and, in many cases, just track indices.

According to Blodget, passive strategies are better than active strategies because it is harder to distinguish between winners and losers than people think; passive strategies don't depend on prophecies about the future, they reduce the potential for human error and they are cheaper.

"Active investors do worse than the market return when their fees are deducted," he says, adding that active managers often don't survive on just their skill, but "in an average year at least a third of active investors should beat the market by luck alone".

But active management remains more profitable for asset managers than passive management. "Because active management is the bread and butter of Wall Street and the investment media, you hear less about the supremacy of passive management than you should," he says.

Perhaps his biggest message, however, is that investors should work on what they can control - and not spend time on what they can't - and he recommends the "investor's serenity prayer": "Accept what you can't know or control what you can and get wise enough to tell the difference."

So if you can't control what the market will do, along with other factors such as interest rates and inflation, what can you control?

"Diversification and costs," he says.

"The point of diversification is to own investments that have a positive expected real return and fluctuate somewhat independently of one another," Blodget writes, but he adds that, while diversification cannot eliminate risk, it can reduce it.

He recommends a top-down approach to building a portfolio, for example picking the assets rather than specifics such as stocks first.

"What you read about in a newspaper, watch on CNBC or hear from your friends may be interesting, but it is what you should spend the least amount of your investment attention worrying about . . . you should spend most of your investing time allocating your investments appropriately," he recommends.

He says investors should focus on about six asset classes, all of which can be bought cheaply through low-cost passive funds, and that no asset class should account for more than 30 per cent or less than 5 per cent of a portfolio.

Moreover, to maintain the appropriate risk/return profile, investors should rebalance their portfolio once a year or once every two years.

Blodget believes costs can make or break a portfolio. "Never make a move without first analysing costs. Never transact when you don't have to. Never pay higher fees than you have to. Never ignore the impact of taxes - and never forget that inflation means you're making a lot less than you think," he says.

While transaction costs can eat up to 1 per cent of an investor's assets each year, more worryingly, says Blodget, is the potential impact of management fees associated with investment funds.

"Fees can seem immaterial: 'One or 2 per cent a year? Who cares?' In fact, they are often debilitating," he writes.

And the real cost is not the fees themselves - although 1 per cent per annum on an investment of €100,000 will cost €1,000 a year in fees - it's the loss of the compounded value of the fees that really hurts.

"If you invest €100,000 today at a gross return of 10 per cent with no costs, you should have €12 million in 50 years, but if you invest the same €100,000 and pay just 1.5 per cent in annual costs, you will have less than half as much," says Blodget.

While it may not generate the same level of excitement as the average "retire before you're 40" investment manual, The Wall Street Self-Defense Manual offers the average investor some simple but crucial advice on how to maximise returns while minimising risk.

The Wall Street Self-Defense Manual: A Consumer's Guide to Intelligent Investing by Henry Blodget; Random House Business Books