I read it a while ago, but I figured it’s about time I posted my review of Allan Roth’s How a Second Grader Beats Wall Street. The premise of the book is that investing is so simple that a second grader can understand it. Also, not only can a second grader understand it, but adults often mess things up because they’re tricked by Wall Street into making complex and risky investment decisions.

In general, Wall Street makes its money when people invest in risky or complex ways. Investors who buy individual stocks and constantly buy and sell help fuel the profits of Wall Street. Wall Street leads us to believe that investing is rocket-science, and without their guidance we will fail. Allan Roth urges the reader to “cut through the baloney that Wall Street wants us to believe and return to basic simplicity.”

Simply put, How a Second Grader Beats Wall Street proposes investing in a very simple portfolio of index funds. Small tweaks can then be made to this portfolio to fit personal circumstances. Emphasis on the “small”. The main reasons that Allan Roth lays our for his approach are:

  • You can’t predict what the stock market is going to do over the short-term.
  • If the people on Wall Street knew how to make guaranteed money, why would they tell you? They would just do it themselves over and over with their own money.
  • Fees significantly impact your long-term returns in a negative way.
  • Most people don’t construct their portfolio in a tax-efficient way.

To keep things very simple, the Second Grader portfolio is constructed using only three index funds. They’re all Vanguard index funds due to the low-fee philosophy than Vanguard pioneered and continues to follow. These three index funds are:

  • Vanguard Total Bond Market Index Fund (VBMFX)
  • Vanguard Total Stock Market Index Fund (VTSMX)
  • Vanguard Total International Stock Index Fund (VGTSX)

How a Second Grader Beats Wall Street ReviewRoth explains his reasons for picking these specific index funds, and in Chapter 5 he goes over the statistics of why this portfolio outperforms the market. I actually keep a very similar allocation in my Roth IRA. I use the three index funds that Allan Roth proposed, and I additionally index in the Vanguard REIT Index Fund (VGSIX) to invest in real estate.

If you’re new to investing and are exploring asset allocations and simplified portfolios, then this is a great book to check out. If you’re an advanced investor who has read at least five other asset allocation books, then this book won’t provide you much except for reconfirming what you already know. However, whether you’re a new investor or a long-time investor, the book is still entertaining and the slant taken is engaging.