Book Report: How a Second Grader Beats Wall Street

Title:  How a Second Grader Beats Wall Street:  Golden Rules Any Investor Can Learn

Author:  Allan S. Roth


The author Allen Roth sets out to teach his son Kevin how to invest.  Kevin is in second grade.  This is Kevin’s simple portfolio:

Vanguard Total Stock Market Index FundVTSMX60%
Vanguard Total International Stock Index FundVGTSX30%
Vanguard Total Bond Market Index FundVBMFX10%

Chapter 1:  The Claw Will Take Your Money

People can debate about active management versus passive management and the efficient market hypothesis, but the real danger is expensive.  Fees will eat away at your profits.  Choose index funds to reduce fees and expenses.

Golden Rule:  10 – 2 = 8

Chapter 2:  Own the World

Diversify by buying index funds that track the entire market.

Total U.S. Index Funds

Total U.S. Stock Market Index Choices Symbol Expense Ratio Investment Minimum
Vanguard Total Stock Market Index Fund ETF VTI0.07% 1 share
Fidelity Spartan Total U.S. Market Index Mutual Fund FSTMX0.10% $10,000
Vanguard Total Stock Market Index Mutual Fund VTSMX0.5% $3000
iShares Dow Jones U.S. Index ETFIYY0.20% 1 share
State Street Spider Dow Jones Total U.S. Market ETF TMW0.20% 1 share

International Index Funds

Total International Index Choices Symbol Expense Ratio Minimum Investment
Fidelity Spartan Total International Stock Market Index Mutual Fund FSIIX0.10% $10,000
Vanguard FTSE All World Excluding U.S. ETF VEU0.25% 1 share
Vanguard Total International Stock Market Fund VGTSX0.32% $3000
iShares MSCI EAFE Index Fund ETF EFA0.32% 1 share
State Street Spider All World Excluding U.S. ETF CWI0.35%1 share
Vanguard FTSE All World Excluding U.S. Mutual Fund VFWIX0.40% $3000

Golden Rule:  Don’t put all of your eggs in one basket.

Chapter 3:  The Advantage of Having Wall Street Marketing Blinders (and Where Can I Get Some?)

The phrase “beat the market” is misleading.  When people say they beat the market, they are usually referring to the S&P 500 or some other similar index.  The S&P 500, however, only tracks the top companies and does not fully represent the entire market.  The S&P 500 also does not include dividends paid by these companies.  So by simply including the earnings from dividends in your portfolio, you can say that you’ve beaten the market.  Usually when managers say they beat the market, they are actually making an unfair comparison.

Chapter 4:  Adults Behaving Badly

value = benefit – cost

The main point of this chapter is don’t be superstitious.  This chapter goes over a several logical fallacies and human biases.

Golden Rule:  Don’t act silly with money.

Chapter 5:  Can You Be A Second Graders Portfolio

The answer is No.  While it is not impossible to beat the market, there is no product that you can buy that will outperform an low cost index fund in the long term due to expenses, fees, and taxes.

Chapter 6:  Beyond the Second Grader Portfolio

Hedge by investing in alternative asset classes that negatively correlate to the stock market such as bonds, real estate, and precious metal.

REIT Index Funds

REIT Index ChoicesSymbolExpense RatioInvestment Minimum
Vanguard REIT ETFVNQ0.10% 1 share
Vanguard REIT Index Mutual FundVGSIX0.20% $3,000
Street TRACKS DJ Wilshire REIT ETFRWR0.25% 1 share
iShares Cohen & Steers Realty MajorsICF0.35% 1 share
iShares Dow Jones U.S. Real EstateIYR0.48% 1 share

Precious Metals Funds

Precious Metals and Mining ChoicesSymbolExpense RatioInvestment Minimum
Vanguard Precious Metal and Mining FundVGPMX0.28% $3,000
Van Eck Gold Miners ETF GDX0.55% 1 share

Chapter 7:  Bonds — Your Portfolio’s Shock Absorber

Bonds have a lower return than stocks.   They help stabilize and reduce risk to your portfolio, but don’t buy junk bonds.  Do you remember the housing bubble?

Total Bond Index Choices Symbol Expense Ratio Minimum Investment
Vanguard Total Bond Market ETF BND0.11% 1 share
Vanguard Total Market Index Mutual Fund VBMFX0.19% $3,000
iShares Lehman Aggregate Bond ETS AGG0.20% 1 share

Chapter 8:  Better Than Bonds

Buy CD’s.  CD’s are essentially risk-free investment if your bank is insured by the Federal Government (FDIC).

Chapter 9:  Simply Brilliant or Brilliantly Simple — Building Your Portfolio

Put any funds you won’t need in 10 years into the stock market

Chapter 10:  Investors Who Love to Pay Taxes, and the IRS Who Loves Them

Hold stocks for over a year to get the long term tax rate.  Avoid taxes by using a 401k and a Roth IRA.

Chapter 11:  Nightmare off Wall Street — The Scary Tale of Trick-or-Treat Investing

Avoid scams such as insurance investment.  Don’t subscribe to investment newsletters.  Avoid seminars and software.  Don’t buy hedge funds.

Chapter 12:  Increase Your Return No Matter What the Market Does

Put your cash somewhere where it will make money like CD’s.  Pay off your most expensive debt.

Chapter 13:  Keep It Simple Stupid (KISS)

Don’t gamble.



Buy low cost index funds.


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