My Favorite Finance and Investing Books in May

Erik Goodge | May 31, 2021

Portfolio Design: A Modern Approach to Asset Allocation by Richard C. Marston

This book is all about how individuals and institutions ought to best invest their assets in an uncertain world. The book includes analysis of all major asset classes as well as alternative asset classes such as hedge funds, private equity, and venture capital, and real estate.

Notably, a few chapters of the book places emphasis on the importance of including such alternative asset classes in a diversified portfolio. I particularly enjoyed approaches to estimating future inflation-adjusted returns for asset classes when data for such asset classes is limited.

Other highlights include analysis of portfolio spending rules for endowment funds and individuals in retirement which stresses that spending in retirement (or for an endowment) must be based on conservative estimates for future inflation-adjusted returns. Absent such spending rules, portfolios face an unacceptable risk of running out of money.

Overall, I would recommend this book to many advisors or those who find themselves on the board of a non-profit endowment fund.

Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation by Richard and Robert Michaud

This was a fascinating, but highly technical book about portfolio optimization. The main question the book is addressing is how to increase the value and effectiveness of mean-variance optimized portfolios. Mean-variance optimization in very simple terms, is the process of plotting a range of assets on a graph with their expected returns on the y-axis and standard deviation(risk) on the x-axis. With assets plotted on the graph you can then combine the assets in varying proportions until you find that asset mix that gives you the highest expected return for the lowest amount of standard deviation (risk).

The problem with mean-variance optimization is that it is highly unstable and prone to suggesting asset mixes that most investors would never pursue. The reason for this instability, according to the authors, is that mean-variance optimization has no way to deal with the uncertainty inherent in estimates of future risk and returns.

To improve this weakness the authors recommend using a technique called re-sampled efficiency (sometimes called robust optimization) that increases the uncertainty in future estimates of risk and return. The authors show convincing evidence that such “re-sampled efficient” portfolios perform better than traditional mean-variance optimized portfolios.

I really liked this book because it showed me ways to enhance the portfolio optimization process I use for my own clients. Unless you are another advisor or a serious investment nerd, I would stay away from this one.

How to Defi by CoinGecko

This is a very quick and easy read and I highly recommend it to anyone interested in “decentralized finance”. The book covers such topics as introducing the concept of decentralized finance and the applications that are being developed in that space. And since most of the decentralized finance ecosystem is being developed on the Ethereum network, the book gives some insight into how these applications behave on top of the Ethereum network.

To me, the most interesting topics in the book were such topics as Synthetix, a decentralized derivatives market that ties the value of real-world assets to tokens on the blockchain; TokenSets and the ongoing work to create asset management solutions on the blockchain; and decentralized exchanges that allow for participants to trade assets among themselves with little to no intermediation from brokers or banks.

Token Economy: How the Web3 Reinvents the Internet by Shermin Voshmgir

This is a slightly repetitive but interesting look at the real-world applications that cryptocurrencies and blockchains could have on our existing internet infrastructure. The book is broken into 4 parts; the first 2 parts of the book introduces the reader to the concept of Web 3.0, Web3 for short.

Web3 is the latest iteration of internet infrastructure; Web1 brought us static web pages and email, Web2 brought content creators and consumers together via social media, search engines, and video streaming. Web3 is supposed to get rid of privacy destroying data silos at companies like Facebook and Google while also opening up financial markets to more global participation.

The second part of the book talks about crypto currencies and tokens. This half of the book introduces the reader to the different use cases being worked on in the world of cryptocurrencies as well as the risks they face. While the book suffers from a slightly repetitive style, such a style can be helpful for a reader who is just starting to learn (like yours truly) about the true value proposition of digital assets and blockchains.

Stay away from this one unless you, like me, are very interested in the future of digital assets

That’s all for May! What did you think? Have you read any of these or do you have any requests?