Way to beat 50 % of the other investors

Paras sijoitus: Itsepuolustusopas sijoittajille - Marko Erola, Talentum

This review is about a book available in Finnish only. If you are interested in the passive investing but would like to read about it in English, you can start for example in here: www.ifa.com.

Paras sijoitus: Itsepuolustusopas sijoittajille – Marko Erola

Marko Erola has managed to write an excellent book about passive index investments. It is easy to read, compact and full of important ideas about investing. Finnish investing related literature has been fairly homogenous and mainly about active investing. Passive investing to index funds and ETFs is fairly new theme. Unlike in the USA only a small amount of investments in Finland is made to passive funds.

Erola’s book explains the theme trough and trough starting from why active investing loses to passive investing, what passive investing actually means, how to do it yourself and ends in some suggestions how you could start your life as a passive investor.

These two subjects stood out the most for me in the book:

  • Cost control is important also in investing
  • Make investing as easy as possible and aim to automate your finances – invest passively

I have heard of the importance of cost control ever since I was a kid. My dad always keeps repeating one of his most favorite lines “Its not the big income, but the small costs that are important.” Paras sijoitus – book aims to prove that this is true for the investments as well. Even the big wins disappear if the costs eat the gains. This is due to the effect of “compound interest”. If you plan to invest, you should aim to reduce the costs from selling and buying by investing passively.

Passively managed funds as well as ETFs are very cost efficient way to invest compared to the funds managed actively. Erola estimates that the management costs of an actively managed fund in Finland are on average 3-4% per year. At the same time passively managed fund “Seligson Finland” charges only 0,45% + 0.1% for the trading costs. This sounds like a small difference, but in a long period of time this has huge effect on the gains.

Make investing as easy as possible by making it automatic. For me this is the most interesting theme of the book. Automating you finances is reoccurring theme in the current day personal finance literature. For example, Ramit Sethi keeps repeating the importance of automated finances in his “I will teach you to be rich” – blog. Even though you might know enough to be able to manage your own finances, you still do not do it. Active investing done properly requires a lot of time. Time that most of us are not willing to sacrifice.

Therefore it would be useful and important that you make investing as easy as possible for yourself. In his book Erola offers one way of doing this in the form of passive investing. As stated in the end of the book, passive investor checks his investments once or twice a year in order to match them with the original allocation of the investments. In between those checks there is no need to think about them and it is possible to concentrate on other things without the unnecessary stress. And in the end he still achieves the average gains in the stock market.

If want to know more about passive investing, you can find more information in Finnish from valistunutsijoittaja.com and seligson.fi. In English you can find more information in multiple places. You can start for example from www.ifa.com.

The book is available in Finnish from Bookplus. (If you buy the book trough this link bookstore pays small commission for the owner of this blog. This doesn’t cost you anything, but it supports the blog.)

  • http://www.twitter.com/MrEsko Siim Esko

    Although I won’t be interested in passive investing (again) before I get money to do that, there’s also the other classic that is invaluable as a base in this area – Rich Dad, Poor Dad.

  • http://www.businessbooksmakeyourich.com/ Hanno Vainio

    Hi Siim, thanks for your comment!

    You are correct in that “Rich Dad, Poor Dad” is something often mentioned within investing literature. However that book actually in quite controversial.

    Many consider the investing advice in this book the be questionable due to the fact that the author actually made his money by writing books, not by investing. His investing advice regarding the retail estate is said to be downright dangerous.

    Despite the bad reviews it has gotten, I still consider it important book for two reasons.

    First of all, it is really motivating. As a second reason, it explains you clearly and well why it is so important to invest. I found the cash flow explanations with income – expense and assets – liabilities figures really educating. It is easy to dismiss them as something obvious, but even after three years in the university I considered that as some sort of an eye opener.

    So in sort, you are correct, it is a good book. However using it as an investing advice – tread carefully. You have to be educated enough in personal finance to understand which advice to follow and which one to classify as useless.