I have known Phil DeMuth for a number of years and I admire his common sense and views on many topics. Phil authored the recently-published book The Affluent Investor that fills a need in the crowded shelves of investment books. As a financial advisor to high-net-worth families, Phil brings valuable perspective to investors who have built substantial portfolios and seek to protect and grow their wealth effectively.
The motivation for this book was that there appeared to be an odd lack of books aimed at people who range from reasonably well-off to very wealthy, who are good at handling money in general, but who are not entirely confident of the best path for preserving and growing their assets. There are many good books that direct people to pay off their credit card loans and not to buy a more expensive car than they can really afford. Phil’s new book is not aimed at that audience. The Affluent Investor is aimed at people who don’t need help balancing their checkbooks, who don’t have credit card debt, and who know how to earn money. We are talking about executives, business owners, doctors, lawyers, engineers, and other professionals. These are not the people who call in to Suze Orman to ask whether they can afford the vacation they have been wanting to take.
This book is nominally aimed at people with at least $100,000 and as much as $10,000,000 in their investment portfolios. This is an enormous range in terms of wealth levels, of course, but I get where Phil is coming from here. Someone on the higher end of this range may put a chunk of her portfolio into hedge funds and someone on the low end is more likely to be concerned about brokerage costs, but there are some sensible core strategies that can form the foundation of a portfolio for investors over much of this spectrum of wealth levels. It is this common ground that the book seeks to explore.
The book starts with a review of some of the basics of how people become affluent in the first place. If you are already affluent, this section simply serves to demonstrate that there are some similarities among members of the audience at whom this book is aimed. Many people in this population became affluent by developing their human capital and doing high-value work, whether starting a business or working in a profession. These people also save a substantial portion of their income. Affluent investors are also likely to pay considerable attention to managing their assets and planning for the future.
The question of how best to invest a body of wealth is the focus of much of the book. Phil lays out a helpful hierarchy of the investment process. The first step is building a portfolio out of low-cost index mutual funds or ETFs. This would include domestic and international stocks and bonds and might hold as few as three funds. Investors who want to go beyond the simplest low-cost asset allocation can seek to boost returns by allocating to specific styles of stocks such as small-cap stocks, value stocks, and low-beta stocks. These three types of portfolio ‘tilts’ are well-researched and have historically added to portfolio return. The additional return gained from small cap and value stocks is well-documented in the research by Eugene Fama and Kenneth French. The value of low-beta stocks has been documented in considerable research over the past few years.
Dividend-paying stocks also receive some well-deserved attention as a special class of equities that investors may want to emphasize. A subsequent chapter deals more deeply with the specifics of income investing, a topic about which Phil and Ben Stein wrote a good book a number of years ago.
There is a useful chapter that deals with lifecycle investing and how your investments should change through your life. The following chapter explores how to refine this concept, depending upon your primary source of income. If the income from your job is entirely safe and not correlated to the stock market (if you are a tenured professor or a Federal employee, for example), you can afford to take on more stock market risk than a commissioned salesperson whose income is highly correlated with economic variability. Phil ties this idea to the peril of being among the high beta rich.
One of the over-arching themes of this book is that affluent investors need to be vigilant about all of the financial products and ‘opportunities’ that will come their way. There are many ways that you can risk your hard-earned wealth in the hopes of earning great riches. If you are already affluent, you have almost certainly experienced the onslaught of people who want to help you manage your investments. Some are probably good. Others, not so much. Phil provides a series of examples of how you may be parted from your wealth. Ultimately, he makes a compelling case that a key element of becoming affluent and remaining that way is to commit to being engaged in the appropriate stewardship of your wealth, whether or not you hire an advisor.
If you have accumulated a substantial portfolio and want a sensible and compact guide on how to proceed, this book provides a solid foundation. I recommend it.
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