I came across this week’s title via a book recommended in The Reformed Broker’s twitter feed. The author is Nick Murray, who’s been a financial adviser for longer than I’ve been on the planet!

Here’s a link to the book on Nick’s website.

The book is an easy read and the first pass through won’t take you long. It’s a good one to share with your family and discuss. My key take aways…

Volatility isn’t loss – while emotionally painful, adverse movements in asset prices only hurt me if I sell. So long as I can hold through the bottom, price movements have limited bearing on my life.

Dividends are indexed income that comes from appreciating tax-deferred assets. This point really hit home. Sample yields from my portfolio:

• US Equity – VTSAX => 1.82%
• US Bond – VBTLX => 2.00%
• Boulder Real Estate => 3.30%

Both the equity and the real estate have an option embedded via the potential for capital appreciation. The value of the asset can increase (or decrease), thereby increasing my total return on investment.

Nick would say the true risk on my portfolio lies at the far end because a long-term holding of bond-type assets has zero capacity for capital appreciation – I receive return of capital, taxable income and exposure to default risk.

Dollar Cost Averaging with a lump sum is only superior when there’s a crash within 2 to 3 years of receipt of funds. Very similar to the advice Vanguard gave a friend of mine and something I hadn’t fully considered. My lump sum article was written at 5.5 years into a bull market and my holdback capital has an investment rate of 2 to 3 years.

If your goal is long-term wealth creation then you should be close to 100% equity – this is similar to Warren Buffett’s advice for his daughter’s portfolio (90% US Equity index and 10% short-term government bonds). Nick makes the point that dividend income is indexed and we can afford to ride the volatility.

Protect your family by holding enough short-term securities so you don’t have to sell into the inevitable crashes and let long-term compounding do its work.

He also has a great example of the change in total dividends and total profitability across long periods when the market “doesn’t move.” Even when share prices are stagnant, the world makes forward progress.

The book contains very little advice on investment selection because Nick’s take home point is Behavior Drives 90% of Investor Return.

This mirrors my advice to athletes – until you can do, what you do doesn’t matter. Nick’s point is we focus too much on the type of Investment and not enough on making ourselves better Investors.

The final chapter was the best – Optimism is the only Realism. The pessimists in our lives will claim that their views are based in reality. While fear, anger and pessimism are supported by our media, Nick makes the point that long-term optimism is the only position supported by the facts.

Lots to discuss with my family and I recommend it to your own.