Four Pillars of Investing

Four Pillars of Investing

The pillars of knowledge that Bernstein sifts through in his book The Four Pillars of Investing, were quite understandable to me. With the knowledge I have learned in my Finance and investing class I was able to comprehend and retain the investment jargon. There were topics; however, that were new to me; I am definitely new to the world of investing. While introducing his book, Bernstein says, "There is, in fact, a rich and informative scientific literature about what works and what doesn't in finance; it is routinely ignored". (Intro pg. X) He goes on to say that even finance professionals are unaware of the scientific basis of investing. This basis consists of four broad areas, the four pillars Bernstein talks about in his book. Bernstein explores his knowledge of investment in the four pillars at the same time reflecting off a historical mirror of the way things have been, "even before money first appeared in the form of small pellets of silver 5,000 years ago". (pg 6)

Bernstein talks about the key theme throughout investment; risk and return go hand in hand. If you want to obtain higher returns, you must face the prospect of higher losses. If you want to avoid the risk of losing money, you must reduce the chance of higher returns. High investment returns cannot be earned without taking substantial risk. Safe investments produce low returns. As with most cases where risk is involved there always seems to be a way to lessen risk. One of the ways talked about in The Four Pillars of Investing is portfolio diversification.

The biggest risk of all for the investor, according to Bernstein, is failing to diversify a portfolio. By diversifying properly an investor can choose different asset classes in order to minimize risk. Portfolio diversification in finance is a risk management technique designed to mix a wide variety of investments within a portfolio. It's the behavior of your portfolio as a whole, and not the assets in it that matters most.

Bernstein also talks about the mixing of different asset classes into an effective blend which is known as portfolio theory or portfolio management theory. One example of different asset classes includes having stocks and bonds in your portfolio. If you include the past ten years, the long-term return on stocks has been between 6% and 7% per year after inflation. And that return has dominated all other asset classes. Most government bonds aren't adjusted for inflation, so investors receive the same number of dollars in the future as they do today, even if inflation wipes out a substantial part of their purchasing power. In contrast, stocks are claims on real assets, such as land, factories and equipment, as well as the ideas, patents and all other capital that generate corporate profits and appreciate over time with the general level of prices. So that 7.1% yield on stocks can be