Book Summary: A Wealth of Common Sense by Ben Carlson

Are you looking for a book summary of A Wealth of Common Sense by Ben Carlson? You have come to the right place.

Last week, I finished reading this book and jotted down some key insights from Ben Carlson.

You don’t have to read the whole book if you don’t have time. This summary will provide you with an overview of everything you can learn from this book.

Without further ado, let’s get started.

In this A Wealth of Common Sense book summary, I’m going to cover the following topics:

What is A Wealth of Common Sense About?

The book explains how sound decisions can lead to long-term success as an investor. You will learn how to create a diverse, consistent strategy that will last for years with this book, which provides tips that every investor should know.

Who is the Author of A Wealth of Common Sense?

Ben Carlson, director of institutional asset management at Ritholtz Wealth Management, specializes in financial planning and asset management. 

Also, he blogs at, which provides vital information on wealth management, financial markets, and investor psychology.

Who is A Wealth of Common Sense For?

A Wealth of Common Sense is not for everyone. If you are the following types of people, you may like the book:

  • Those who have suffered since the financial crisis
  • New investors feel a little lost
  • Investors who are unsure if they should start investing

A Wealth of Common Sense Book Summary


Imagine a world where a man who stumbles across a treasure can become the richest person in the kingdom in an instant. There are some “experts” who also live in this fantasy when you search the internet for investment advice (or maybe they just like fairy tales).

However, their investment schemes do not work in the modern era. Nevertheless, successful investing is possible. There is no need to have a finance degree. This pack will help you put together a personal portfolio based on your specific goals, temperament, and situation by using your common sense.

Additionally, you’ll learn about a few costly and common mistakes – and about how to keep your money safe during turbulent times.

Lesson 1: Investors aren’t all the same

Ever considered investing in the same way as a filthy-rich company? Although risky and complex, it seems to have worked for them. Could it work for you, too? I think there are several reasons for that! Investment conditions for institutional investors differ greatly from those of individual investors.

First of all, institutional investors find trading to be less expensive. Why is that? As a result of their size, they are able to negotiate lower fees when dealing with investment platforms. A second reason is that institutions employ multiple professionals, including full-time staff, to manage their portfolios on a daily basis. Individual investors do not have the resources to afford this kind of staffing.

Institutional investors aren’t all created equal as well. Funds available to them vary considerably, and as a result, so do the deals they make. Yale University is one example. Yale’s endowment fund receives tens of millions in grants and donations every year. These are all managed by David Swensen, Yale’s chief investment officer. So far, Swensen has been doing an excellent job. Swensen’s portfolio management style has seen 14 percent gains each year since the mid-1990s, earning the title of the “Yale Model.”.

Yale’s massive investment is not possible for most institutions. Yale is one of the only large-scale investors who can afford the high minimum investments needed to invest in the funds with low management fees that are so attractive.

Additionally, Yale is a nonprofit as well as a large-scale investor. As a nonprofit, Yale has additional advantages other investors don’t have. Since Yale is an academic institution, Yale has a perpetual time horizon. The investment returns are not limited by the time of year. Having this flexibility means Yale is not bound to a short-term investment strategy. Similarly, non-profit organizations will likely be exempt from paying taxes, whereas a private investor will likely face significant tax burdens.

Institutional giants aren’t going to help you much with their investment strategies. Finding your own path will help you succeed as an individual investor. As you begin your journey, let’s examine some common mistakes you’d be wise to avoid.

Lesson 2: Know what not to do before you begin investing

Many books will tell you what you need to do as an investor, but few will tell you what not to do. While avoiding bad habits and silly mistakes can have a huge impact, it is not always easy to do. Investing mistakes can reduce an investor’s returns by 3 to 4%, according to financial advisor Nick Murray.

If there’s one thing you shouldn’t expect, it’s rapid financial success. These days, we’re captivated by the quest to discover a way to become rich immediately. But there is no such thing! It is either a lie or an attempt to trick you if someone claims to have the secret to instant success. Don’t believe them!

Overconfidence is also a common mistake. As humans, we cannot control many variables in markets, making them extremely difficult to predict. The overconfident investor often forgets this, and calls the shots as if he knows exactly what is going to happen. Investing large sums in a stock that does well for a few months, then suffering substantial losses shortly afterwards, might be an example.

Lastly, don’t follow the herd. Most of us follow the crowd because it makes us feel safer. After all, so many people can’t be wrong, can they? Sadly, they can.

During the mid-2000s real estate bubble, we witnessed this phenomenon. Buying property beyond their means was not uncommon since everyone else was doing the same. However, the bubble burst, causing lives to be ruined. Do yourself a favor and think for yourself when investing!

Knowing what to avoid isn’t the only thing to remember. Investors also need certain traits to achieve success. Keep reading to find out whether you have them.

Lesson 3: Successful investors remain calm under pressure

Your intelligence may seem fairly high to you. However, is this enough for success? Maybe. It isn’t just IQ that determines intelligence. You also need emotional intelligence to succeed.

Daniel Goleman, a psychologist, defines emotional intelligence as the ability to recognize, understand, and manage one’s own feelings and those of others. To put it another way, it’s important to know how our emotions affect our actions and those around us. How, then, does this apply to investing?

Very much. Investors who feel upbeat and adventurous can make reckless, potentially damaging decisions if they aren’t careful. You can save yourself a lot of trouble if you recognize when your emotions are clouding your judgment.

Staying calm and composed is another trait of successful investors. Especially when finances are in peril. How do you do that? Let’s look at an example from the past.

Time is running out in the 1989 Super Bowl, and the opposing team is leading by three points. Joe Montana, despite this, remains calm, reassures his teammates, and scores a perfect touchdown to win the game. Staying composed led to four Super Bowl victories!

Market crashes and economic crises are just two of the challenges investors can learn from Montana’s experience. The solution is to keep a cool head by assessing the situation without panicking and creating a sustainable strategy rather than selling their assets for pennies.

The last, but not the least, is that the best investors are always cautious. Simply put, they know when they aren’t sure of something. They stay away from markets or schemes that they do not understand. Consider, for example, whether you know what you’re doing if you were planning to invest in the Chinese stock market. Don’t participate if you don’t know what you’re doing. It’s simply impossible to spot risks, like a developing bubble, before it’s too late.

If you possess all of these attributes and are destined to be an investor, what’s next? Prepare yourself for the risks you’ll face along the way by learning about them now.

Lesson 4: A high reward comes with a high risk

Investors tend to throw around the word risk a lot. But it can mean many different things depending on who you ask. Some associate risk with losing money, while others see it as volatility. There’s always a risk to reward relationship in investing, one that shapes your decisions as well.

Risks lead to greater rewards, simply put. To put it differently, if you play it safe, you shouldn’t expect a lot of payouts. You should also expect a bumpy ride if you’re searching for big rewards. There is no free lunch! This is true for different kinds of investments.

Stocks, bonds, and cash have all returned average yearly returns of 6.5 percent, 1.9 percent, and 0.5 percent (all adjusted for inflation) from 1928 through 2013.

Stocks offer the highest returns, and they can also suffer the greatest losses at certain points. How can stocks be so inconsistent? The value of stocks is derived from future dividends and other earnings. However, they are dependent on the financial markets and the humans running the business. The high-risk premium attached to stocks indicates that stocks come with a lot of risks.

Bonds have a lower return than stocks and are considered less risky. Why is that? A fair amount of time gives investors a better chance of getting their returns. Consequently, the risk premiums on bonds are lower.

There is no risk involved in investing in cash, as it returns a stable annual return and has no losses. It would take you 150 years to double your investment with an annual return of 0.5 percent (after inflation).

Since we have investigated the pros and cons of these three asset classes, you are ready to begin planning your journey. Continue reading to learn how to develop your investment roadmap.

Lesson 5: Create a personal investment plan

Have you taken a personality test? They are a lot of fun, and you can use them to make money when you start investing. What’s the point? Investors need to determine their identity and find the right label to fit them.

Is your approach trend-following, short-term trading, or diversifying? You must choose one that matches your personality like a glove out of the endless list available. Find out what your investing values are, and if a particular investment style fits your behavior and situation. Would you consider yourself a risk taker? Do you plan to hold onto your assets over time?

As soon as you figure this out, you will need to develop your own investment strategy. Do not undervalue the importance of this step! You will be able to avoid acting recklessly every time you are tempted to act impulsively.

You can reach your long-term goals by developing an investment plan. Your plan will prevent unnecessary errors by telling you what kinds of stocks and bonds to mix in your portfolio, as well as the circumstances in which you’ll buy and sell.

Coach Nick Saban won four national championships with his Alabama Crimson Tide team in a similar way. Rather than following the latest trends in offensive and defensive ballplay, Saban sticks to one strategy. He and his team strictly follow this method. When you create your own custom investment strategy, you will be able to ignore dodgy advice from self-proclaimed investment “gurus.” Stay the course and enjoy the rewards.

Lesson 6: Build a diverse portfolio for your future and stick with it

Did you see the sequel to Back to the Future? Marty McFly buys a sports stats record in the future to take back to the past in this film. He hopes that by knowing the results of every sports event in the “future” he can make a killing. As with Marty McFly, we cannot predict the future. Investing in diverse assets makes our bets safer, however.

The best way to prepare for a recession is to diversify among asset classes and risk factors. In the event of a problem in one class, the losses will be offset by gains in the other classes. Spreading your assets across multiple assets might mean you miss out on extra big gains in one of them, but safeguarding yourself against going bankrupt is worth making this sacrifice.

Don’t reallocate assets after you have already allocated them unless there is a very good reason for doing so. It’s bad news when you suddenly restructure a well-designed portfolio. Fidelity Investments conducted a study and found that top-performing portfolios were those owners had forgotten about. This means they were those with no changes for years.

It is often detrimental to your portfolio to continually second-guess your decisions. This can increase your trading costs, have tax implications, and be emotionally draining. In your decision to change your portfolio, you will need more compelling reasons than “I was afraid of . . .” or “because I got so excited about . . .” The market fluctuates, but these fluctuations should not justify changing your portfolio.

Final Summary

When making investment decisions, keep in mind your financial situation, your personality, as well as your emotional state. Common sense is your guide to becoming a successful investor when you use a simple strategy and consistent approach.

Further Reading

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