A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

by Burton G. Malkiel

In investing money, the amount of interest you want should depend on whether you want to eat well or sleep well. —J. Kenfield Morley, Some Things I Believe

Every year you put off investing makes your ultimate retirement goals more difficult to achieve. Trust in time rather than in timing.

The secret of getting rich slowly (but surely) is the miracle of compound interest. Albert Einstein described compound interest as the “greatest mathematical discovery of all time.”

If you need further discipline, remember that the only thing worse than being dead is to outlive the money you have put aside for retirement.

No one can say for sure what the returns on common stocks will be. But the stock market, as Oskar Morgenstern once observed, is like a gambling casino where the odds are rigged in favor of the players. Although stock prices do plummet, as they did so disastrously in the early 2000s and in 2007, the overall return during the entire twentieth century was about 9 percent per year, including both dividends and capital gains.

But the real estate market is less efficient than the stock market. Hundreds of knowledgeable investors study the worth of every common stock. Only a handful of prospective buyers assess the worth of a particular real estate property. Hence, individual pieces of property are not always appropriately priced. Finally, real estate returns seem to be higher than stock returns during periods when inflation is accelerating, but do less well during periods of disinflation. In sum, real estate has proved to be a good investment providing generous returns and excellent inflation-hedging characteristics.

What about diamonds, which are often described as everybody’s best friend? They pose enormous risks and disadvantages for individual investors. One must remember that buying diamonds involves large commission costs. It’s also extraordinarily hard for an individual to judge quality, and I can assure you that the number of telephone calls you get from folks wishing to sell diamonds will greatly exceed the calls from those who want to buy them.

There are two times in a man’s life when he should not speculate: when he can’t afford it, and when he can. —Mark Twain, Following the Equator

If possible, keep a small reserve (in a money fund) to take advantage of market declines and buy a few extra shares if the market is down sharply. I’m not suggesting for a minute that you try to forecast the market. However, it’s usually a good time to buy after the market has fallen out of bed. Just as hope and greed can sometimes feed on themselves to produce speculative bubbles, so do pessimism and despair react to produce market panics. The greatest market panics are just as unfounded as the most pathological speculative explosions. For the stock market as a whole (not for individual stocks), Newton’s law has always worked in reverse: What goes down has come back up.

We all wish that we had a little genie who could reliably tell us to “buy low and sell high.” Systematic rebalancing is the closest analogue we have.

By the age of fifty-five, investors should start thinking about the transition to retirement and moving the portfolio toward income production.

A general rule of thumb used to be that the proportion of bonds in one’s portfolio should equal one’s age. Nevertheless, even in one’s late sixties, I suggest that 40 percent of the portfolio be committed to ordinary common stocks and 15 percent to real estate equities (REITs) to give some income growth to cope with inflation.

So what should smart investors do? Here are my rules: At least partial annuitization usually does make sense. It is the only no-risk way of ensuring that you will not outlive your income. Reputable companies, such as Vanguard, offer annuities with low costs and no sales commissions. In order to make sensible decisions on annuities, you should do some comparison shopping on the Internet at http://www.valic.com. You will find considerable variation in rates from different providers.

Now that you are ready to crack open the nest egg for living expenses in retirement, how much can you spend if you want to be sure that your money will last as long as you do? I suggested in previous editions that you use “the 4 percent solution.”‡ Under the “4 percent solution,” you should spend no more than 4 percent of the total value of your nest egg annually. At that rate the odds are good that you will not run out of money even if you live to a hundred. It is highly likely, too, that you will also be able to leave your heirs with a sum of money that has the same purchasing power as the total of your retirement nest egg.

Small wonder that many institutional investors, including Intel, Exxon, Ford, American Telephone and Telegraph, Harvard University, the College Retirement Equity Fund, and the New York State Teachers Association, have put substantial portions of their assets into index funds. By 2014, about one-third of investment funds were “indexed.”

The S&P 500 omits the thousands of small companies that are among the most dynamic in the economy. Thus, I believe that if an investor is to buy only one U.S. index fund, the best general U.S. index to emulate is one of the broader indexes such as the Russell 3000, the Wilshire 5000 Total Market Index, the CRSP Index, or the MSCI U.S. Broad Market Index—not the S&P 500.

I suggest that you avoid the temptation to buy or sell ETFs at any hour of the day and to buy such funds on margin. I agree with John Bogle, founder of the Vanguard Group, who says, “Investors cut their own throats when they trade ETFs.”

you want an easy, time-tested method to achieve superior investment results, you can stop reading here. The indexed mutual funds or ETFs that I have listed will provide broad diversification, tax efficiency, and low expenses.

First, with the exception of Warren Buffett, those managers have now retired from active portfolio management, and Buffett himself was well above retirement age in 2014. Second, I have become increasingly convinced that the past records of mutual-fund managers are essentially worthless in predicting future success. The few examples of consistently superior performance occur no more frequently than can be expected by chance.