Intelligent Portfolio

CHRISTOPHER L. JONES is Chief Investment Officer and Executive Vice President of Investment Management for Financial Engines. Working closely with founder William F. Sharpe, Jones built and led the team of experts in finance, economics, and mathematics that developed the financial methodology for Financial Engines’ personalized investment advice and management services. Jones has led the investment management function at Financial Engines for more than a decade. He holds an MS in business technology, an MS in engineering-economic systems, and a BA in quantitative economics, all from Stanford University.FINANCIAL ENGINES, INC., is a leading provider of personalized investment advisory and management services to investors in workplace retirement plans. The company provides advisory services to more than 6.8 million employees, including workers at 109 Fortune 500 companies. In addition, Financial Engines manages more than $16 billion in defined contribution assets for individual employees as of year-end 2007. All advisory services are provided by Financial Engines Advisors L.L.C., an independent registered investment advisor and subsidiary of Financial Engines, Inc. Financial Engines does not receive compensation based on the investments it recommends.

• Foreword ixPreface xiAcknowledgments xviIntroduction to Financial Engines xviiiChapter 1 Now it’s Personal 1A Changing World 2The Grand Social Experiment: 401(k) 6The Knowledge Gap 7The Traditional Advice Model 8Institutional Tools of the Trade 10Chapter 2 No Free Lunch 25I’ll Take the one with the Highest Return. . . 26A Little Bit of Latin: Ex-Ante and Ex-Post 28How are the Prices of Risky Assets Set? 29The Link Between Risk and Return 31When High Risk does not Mean High Return 34Hidden Risks and the Peso Problem 36How Much Risk Am I Taking? 38Risks and Returns of Different Assets 42Does it Pass the Blush Test? 47Chapter 3 History is Bunk 49History and Expected Returns 51The Past is not the Future 52History is Sometimes not What it Seems 55Investing with Perfect Hindsight 57The Lucky and the Skillful 60Chapter 4 The Wisdom of the Market 73The Efficient Market? 74What is the Market Portfolio? 78What does the Market Portfolio Look Like? 79There’s no Place Like Home 81History of the Market Portfolio 83Betting Against the Market 85Avoiding Unintentional Bets 87Risk and the Market Portfolio 89The Market’s View of Future Returns 91Market Portfolio Simulations 97Final Thoughts 98Chapter 5 Getting the Risk Right 101How to Measure Risk 103Asset Mix and Short-Term Loss 106Risk and Portfolio Outcomes 109Risk and Time Horizon 113Factors to Consider in Selecting a Risk Level 120Examples of Informed Investor Behavior 121Chapter 6 An Unnecessary Gamble 125A Different Sort of Beast 128The Risk of Individual Stocks 130The Implications of Individual Stock Risk 132Expected Growth Rates 136The Biggest Mistake in Retirement Investing 142What About More Than One? 144Do You Feel Lucky? 149How to Invest in Stocks Safely 150Hidden Costs 152Dealing with Unwanted Stock Risk 154Chapter 7 How Fees Eat Your Lunch 157It’s Basic Arithmetic 158Big Business 160For Every Winner there Has to Be a Loser 161It Still Adds Up to Dollars 164A Wide, Wide World 167How Fees Eat Your Lunch 168It’s a Heavy Load to Bear 175Fees and the Bigger Picture 176Practical Considerations 179Chapter 8 Smart Diversification 183The Goals of Diversification 184The Big Picture 185Why Hierarchy is Bad for Portfolios 189The Value of Asset Class Diversification 193Diversification Ain’t What it Used to Be 197Diversification and Investment Choices 198The Big Picture: Part II 205The Search for Better Diversification 211Chapter 9 Picking the Good Ones 221The Stuff that Matters 224It’s About the Future 227Risk Tolerance and Fund Choice 227Investment Style 228Fund Expenses 232Predicting Mutual Fund Performance 233Rating Funds 236Putting the Pieces Together 257What it Takes to Rank Among the Best 259Chapter 10 Funding the Future 263The Benefits of Being Flexible 264Taxable and Tax-Deferred Savings 266How Much do you Need? 269From Wealth to Income 271The Myth of Absolutes 275Risk, Time, and Savings 281What it Takes to Get there 291Chapter 11 Investing and Uncle Sam 295Why you don’t Want to Minimize Taxes 297How Taxes Impact Investment Returns 298The Impact of Personal Tax Rates 301Tax Efficiency of Asset Classes 303Asset Placement 306Mutual Fund Tax Efficiency 308Municipal Bonds 312Capital Gains and Losses 316Putting it All Together 319Chapter 12 Wrapping it Up 321Appendix The Personal Online Advisor 331Notes 335Glossary 347About the Author 357Index 359

"The irreverence [Jones] displays toward history as a predictor for investment is one of dozens of viewpoints that fly in the face of conventional portfolio-building wisdom." --The Star-Telegram "A very comprehensive book which covers risk versus rewards, past performance versus future expected returns, market timing versus long term investing, and investing in individual stocks versus investing in mutual funds. He also discusses diversification, fees and expenses, and the tax consequences of investing. All of his recommendations are backed up with extensive research and presented in an easy-to-understand manner."--Stockerblog