5 Must-Read Books for Rookie Investors

No one jumps into battle without undergoing basic training. Likewise, you should do your homework and read up to prepare yourself for financial success.

Nick Colas, chief market strategist at ConvergEx, says that the books he finds most helpful for investing are ones that “really challenge what I know or what I thought I knew about investing and [make] me think about things in a new and more accurate and more effective way.”

Here are five books that money experts say will give you the tools you need to navigate the markets.

Stocks for the Long Run by Jeremy Siegel

Reading this book is a “good way to have you overcome your fear of stocks in general,” says Sam Stovall, U.S. equity strategist at S&P Capital IQ. Siegel makes the case for owning stocks, and maintains that stocks are less risky than bonds in the long run.

The book “explains why an investor who wants to outpace taxes and inflation really needs to be invested in stocks. He proves his point by going back to the 1800s and shows how consistently stocks have performed over the long haul,” says Stovall.

Detailing the return on investment of a dollar through inflation and reinvestment of dividends, Siegel aims to point out that a diversified portfolio of stocks is the best approach to investing.

From the classic book itself, Siegel writes, “The principle of this book is that through time the after-inflation returns on a well-diversified portfolio of common stocks have not only exceeded that of fixed income assets but have actually done so with less risk. Which stocks you own is secondary to whether you own stocks, especially if you maintain a balanced portfolio.”

The Intelligent Investorby Benjamin Graham

The book that Amazon.com refers to as “the stock market bible since its original publication in 1949,” has had 4 new editions, with the most recent 2003 publication having a preface written by Warren Buffet, who called it “the best book on investing ever written.”

Graham teaches a long-term value investing approach using discipline and research to unearth bargains relative to current value, rather than speculating based on recent market trends. This book is very much for the “investor” rather than the “speculator.”

The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Riskby William Bernstein

Focusing on risk/reward ratio, Bernstein’s book, published in 2000, shows how to build a diversified portfolio without the help of a financial advisor. He talks about why stocks are important, but also about how having a diversified portfolio is key.

When managing your portfolio, “he uses 3 rules: diversify, rebalance, ignore. Diversify among low-correlated assets so that when one zigs, the other zags. Rebalance annually to force yourself to buy low and sell high. Ignore the fluctuations,” says Stovall.

Basically, the lesson here is that you should build a portfolio based on your age, time horizon, and risk tolerance, and then mostly leave it alone; resisting the urge to get nervous and sell with market fluctuations.

The Psychology of Investing by John R. Nofsinger

Originally written in 2002, Josh Strauss, portfolio manager of the Appleseed Fund, says this book is “as good as it gets.” It had its newest edition published in 2013. Analyzing how psychology affects investing, Nofsinger explains why certain behaviors negatively impact investors and what to do about it.

“There are a lot of good books out there, but none of them are very good in terms of how to avoid errors. Behavioral psychology really matters,” says Strauss.

Recognizing detrimental behaviors and figuring out how to avoid or fix them is just as helpful as any hot stock tip. This book will help shape who you should be as an investor; knowledge that is invaluable for your financial wealth over the span of your lifetime.

The Black Swan by Nassim Nicholas Taleb

Using his metaphor of the “black swan theory,” Taleb writes about unpredictable events and human reactions to them. Swans were presumed to be white only, so coming across a black swan was a surprise occurrence--making “black swan events” a rare occasion that is unexpected.

“[It’s a] very powerful book because it basically says the inherent construct that we all learned is wrong, and that unusual events occur more frequently than statistical models say they should. It has to do with opening up your mind to the notion that unexpected events occur more frequently than we’ve been taught,” says Colas.

According to Taleb, all it takes to disprove a theory is one outlier, so he focuses on how every system of thought, or financial system, is delicate and fragile because of the random events that occur throughout time.

“The advice you get from an advisor, the way you think about constructing a portfolio, the chances of a negative outcome … you have to understand just how possible those things are in order to assess your risk appropriately. Good investing is understanding your risk profile and understanding if it’s right for you, and you can’t do that if you don’t understand the statistical models behind it,” Colas says.