Scott Burns' review of 
The Intelligent Asset Allocator by William Bernstein
       “Is there some way to tweak the Couch Potato Portfolio, to make it sexier, to take it to the next level?”
       That’s the most common question readers have about the Couch Potato Portfolio, my tool for the incurious and slothful who want to manage their money with as little time, effort and expense as possible, but still get life-sustaining results.
       There is.
       The sexy next level comes from William Bernstein, an Oregon neurologist who has pursued his hobby of statistics and portfolio theory with such passion that he first created an online publication, Journal of the Efficient Frontier, then started writing for outfits like Morningstar, and now has published a book, “The Intelligent Asset Allocator” (McGraw-Hill, $29.95) — all in his proverbial “spare time, at home.”
       While not intended as beach reading, Bernstein’s book makes such direct and lucid connections between statistical analysis, probability and the workings of investment management that anyone who would like to know about the connection without actually doing the work should read it.
       Dozens of investment books cross my desk every year; few are retained, let alone mentioned in my column. But Bernstein’s book is a keeper — something that should be in the basic library of every serious investor.
       So what’s the basic idea?
       Build your portfolio with multiple classes of assets, invest entirely in index funds because professional stock and bond picking is a waste of time and money, and rebalance your portfolio regularly so it maintains its original propertion for each asset class.
       While Bernstein himself is an admitted “asset-class junkie,” wanting as many asset types in his portfolio as possible, his easiest model portfolio is a mixture of four types of assets:
 • U.S. large stocks, such as the stocks in the S&P 500 index;
 • U.S. small stocks, such as the stocks in the Russell 2000 index;
 • foreign stocks, such as the stocks in the EAFE index;
 • and U.S. short-term bonds.
       All four of these classes are available as inexpensive, no-load mutual funds. Bernstein says, “if history is any guide, a portfolio divided equally among these four assets will most likely outperform the overwhelming majority of investment professionals over the next few decades.”
       Skeptical readers are likely to wonder how foreign stocks could compete, since they have wrecked diversified portfolios for more than five years. They might also wonder about small stocks, knowing that the Russell 2000 index has trailed the S&P 500 index by 5.5 percent a year, compounded, for the past 15 years.
       In fact, Bernstein shows that while an equal mix of the three equity classes — the S&P 500, small stocks and foreign stocks — would have provided wildly different returns from a pure S&P 500 investment in each of the five-year periods from 1969 to 1998, the mixed portfolio was within a hair of the S&P 500 over the entire period, 12.50 percent and 12.67 percent, respectively.
       In turn, the S&P 500 index beat the vast majority of professionally managed equity funds.
       To visit Bernstein’s Web site, go to
       Questions about personal finance and investments may be sent to: Scott Bums, The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; faxed to (214) 977-8776; or e-mailed to