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Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerBurton Malkiel is one of the greatest investment thinkers of all time. Regardless of whether you agree completely with his landmark bestseller A Random Walk Down Wall Street, he provides a compelling case for a low-cost, low-turnover investment strategy as the road to wealth for most people. He had an interesting editorial in Monday's Wall Street Journal where he discussed the possibility of irrational complacency about the current status of the economy.
After going through a series of possible concerns for stock market investors (instability in the Middle East, the trade deficit, income inequality, etc.), he writes that "As a believer in efficient markets, I hesitate to conclude that our markets are being irrationally complacent. I believe that markets are high and risk spreads compressed because of massive increases in world liquidity...So what should investors do as the Dow rises to new highs? Should they "sell in May and go away," as one stock-market bromide suggests? As a student of markets for over 50 years, I am convinced that attempting to time the market is a fool's game. But new highs in the market should induce investors to review their asset allocations. If the rising stock market has pushed your allocation of equities well above the level consistent with your risk tolerances, it makes sense to consider rebalancing..."
He also cautions that investors are unlikely to make money in the long-run betting against the strength of the U.S. economy. His investing strategy has remained essentially unchanged since his book was originally published in 1973, and it's a strategy that has outperformed the vast, vast majority of market pundits with a lot less work.
I'm inclined to agree with his advice for investors -- Don't jump in and out based on the market's movement. Rebalance annually and relax. And read Malkiel's book.
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Reader Comments (Page 1 of 1)
4-30-2007 @ 11:36PM
Robert Freedland said...
Burton Malkiel is brilliant and I have the greatest of respect for him. It is his belief in the efficiency of markets that has led to the ETF strategy and index fund investments that dominate the investment world today. In fact, enough people have chosen to work with these indices and funds of funds that the opportunities to pick individual stocks becomes more apparent for the individual investor.
As I write about on my blog, Stock Picks Bob's Advice at http://bobsadviceforstocks.tripod.com/bobsadviceforstocks/
it is wisest to limit oneself to the highest quality investments rather than just a basket of stocks that makes the most sense. Instead of trying to time the market, I choose to respond to market events by limiting losses and selling portions of gaining stocks at targeted price levels. It is this combination of discriminating investment rather than baskets of stocks that should outperform the efficient market over time.
Burton Malkiel is brilliant. But his influence over the investment world has made it easier not harder to beat the market. At least I hope so.
Bob
5-01-2007 @ 8:48AM
Michael Schneider said...
There appear to be several efficient market hypotheses and most of them seem misguided. Sure if you buy and index fund you won't get beat by the averages- assuming you select the right index and compare yourself to the right average. You will make the same as everybody else, a prospect that is fine for many people- but will that method get you where you want to be financially? When the market generally is doing great, the averages can be good enough and sometimes hard to match but as John Templeton used to say if you buy what everybody else buys you will have the same return as everybody else. Buying index funds won't get you the kinds of returns achieved by great investors like John Templeton and Warren Buffett. You can find items about investment legends like Jim Rogers and Warren Buffett and Carl Icahn and much info about their current holdings at http://www.Barrelomoney.com. I expect you will make more money betting on their stock selections or those selected in our own Barrel View mailings than you will make with an index fund.