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The Four Pillars of Investing

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The Four Pillars of Investing

Lessons for Building a Winning Portfolio


15 min read
10 take-aways
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What's inside?

William J. Bernstein believes stocks are your best bet for a retirement nest egg – but follow the crowd at your peril.

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Investment pro and author William J. Bernstein provides a crash course in the vagaries of Wall Street as he outlines his “four pillars of investing”: its theory, history, psychology and business. Wise, insightful, skeptical and snarky, Bernstein proves a friend of the everyday investor. In plain, entertaining language, he presents a strong case for investing in stocks, arguing that they’re the only way to hit your retirement goals. Bernstein urges discipline and caution. He disdains Wall Street’s herd mentality and advocates low-cost index funds. In a few cases, his analysis can get a bit confusing, and some of his examples in this classic have fallen out-of-date. Still, his solid primer offers a good grounding in the basics of wise investing. While never giving investment advice, getAbstract recommends Bernstein’s wisdom to investors seeking a commonsense, foundational guide to building their portfolios.


“The Theory of Investing”

From day to day, stock markets are unpredictable. They soar beyond all logic and plunge to unreasonable levels. The wise investor knows short-term moves are random, and trying to time them is a fool’s game. Over decades and centuries, though, the direction is clear: Stocks go up. If you had put $1 into US stocks in 1790, your portfolio would have been worth $23 million by 2000. If this purely hypothetical portfolio’s returns had decreased by even 1% per year, its value after 210 years would have shrunk to $3 million, and gain or loss, taxes and commissions would have eaten away at the profits.

Stocks remain the investment of choice. From 1901 to 2000, stocks averaged 9.89% in annual returns (6% after inflation), compared to 4.85% for bonds (1% after inflation) and 3.86% for Treasury bills (zero after inflation). The inflation-adjusted returns balance the safety of Treasury bills. You cannot lose on a Treasury bill investment, but you can’t beat inflation.

Stocks are the most lucrative investment in the long run, but they can produce gut-wrenching losses. In the market crashes of 1973 and 1974, stocks plunged 40% even as inflation...

About the Author

William J. Bernstein is a retired neurologist and co-founder of Efficient Frontier Advisors, an investment management firm. He is the author of five books, including A Splendid Exchange.

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