PDF Summary:A Random Walk Down Wall Street, by Burton G. Malkiel
Book Summary: Learn the key points in minutes.
Below is a preview of the Shortform book summary of A Random Walk Down Wall Street by Burton G. Malkiel. Read the full comprehensive summary at Shortform.
1-Page PDF Summary of A Random Walk Down Wall Street
A massive bestseller now in its 13th edition, Burton Malkiel’s A Random Walk Down Wall Street provides a comprehensive and entertaining introduction to the world of finance. Malkiel leverages his experience as an academic economist and former Wall Street portfolio manager to explain for the lay reader the intricacies of security analysis, asset valuation, and investment theory. He also offers a wealth of practical investment principles that will be useful for novice and seasoned investors alike.
(continued)...
1) Don’t Follow the Crowd
Studies in behavioral finance have shown that word of mouth is a frequent driver of stock purchases. When some new investment is the talk of the town, it’s natural to want to take part. But resist the urge: Stocks or funds that are hot one quarter are almost invariably losers the next. It’s generally better to stick with “value” stocks—securities issued by tried-and-true companies with steady revenues—than gamble on “growth” stocks with high risk.
2) Don’t Overtrade
When investors trade to realize short-term gains, they tend to incur high transaction costs and taxes. One study of 66,000 households found that the households that traded the most earned an 11.4% return on their investments—while the market returned 17.9%.
If you have to trade, trade losers. The tax benefits of incurring a loss are likely better than the gains of selling a winner.
Part 2: The Basics
Valuable for the novice and experienced investor alike, these 10 principles are essential to realizing returns.
Principle #1: Start Saving Sooner Rather Than Later
In investing, there is truly no such thing as getting rich quick. The best way to realize returns is to begin investing as soon as possible and keep investing steadily, whether through the automatic reinvestment of dividends or regular contributions to a tax-advantaged retirement plan.
Principle #2: Back Yourself Up With Cash and Insurance
Even the most successful investor needs liquid assets that can be called upon in a pinch (or the financial protection of insurance). In terms of cash reserves, if you have decent health and disability insurance, three months’ worth of living expenses is a good benchmark.
As for insurance, home, auto, health, and disability are musts. As is life insurance, if you’re the primary breadwinner for a family with dependents. Malkiel favors buying low-premium term life insurance.
Principle #3: Set Up Your Cash to Keep Pace With Inflation
Keeping your cash in a low-interest savings account can be a losing proposition when inflation outpaces the interest you’re earning.
Malkiel believes money-market mutual funds are the best product in general for cash reserves. Make sure to choose a low-expense option like those offered by Vanguard or Fidelity. There are also tax-exempt money-market funds that are ideal for high-income investors.
If you know the date of a sizable future expenditure, certificates of deposit (or “CDs”) are your best choice.
Additional products include internet banks, which can offer higher interest rates because of low overhead, and U.S. Treasury bills, which can offer decent (and tax-free returns).
Principle #4: Sidestep the Tax Collector
There is no good reason you should pay taxes on investment earnings for retirement or expenses like college tuition.
First, take advantage of individual retirement accounts (IRAs). Earnings on IRA holdings aren’t taxed, and, by the time you actually withdraw the funds from the IRA, you’re likely to be in a lower tax bracket than you are currently.
There are also Roth IRAs. The key difference between a traditional IRA and Roth IRA concerns tax advantages: With traditional IRAs, contributions are tax deductible, but you’ll pay taxes when you eventually withdraw your funds; with Roth IRAs, you pay taxes upfront, but withdrawals (including earnings) are tax-free.
Which IRA is best depends on your personal financial situation. Investors with low taxes now might opt for a Roth IRA. Investors with high taxes now might go with a traditional IRA.
If you have access to a retirement plan like a 401(k) or 403(b), which are tax-free, Malkiel’s advice is to max them out wherever possible. And if you want to save for a child or grandchild’s college tuition, tax-advantaged “529” accounts are the way to go.
Principle #5: Know Yourself
One way to align your goals with the products available is to determine your tolerance for risk. Those who are nearing retirement (or who just want to sleep well at night) should opt for “low” and “moderate” risk assets like broad market index funds and high-quality corporate bonds. Younger (or thrill-seeking) investors might opt for high-risk assets like small-cap stocks and/or equities in developing nations.
Principle #6: Invest in Real Estate
Owning a home has proven to be a reliable means for families to hedge against inflation and realize returns. For those investors without the means or desire to buy a home, real estate investment trusts (or REITs) provide a nice alternative. REITs consist of real estate assets—apartment buildings, offices, and the like—packaged into securities that can be traded like common stock.
Principle #7: Buy Bonds Wisely
Bonds are an essential component of a well-diversified portfolio. There are a number of bond options in addition to the traditional, interest-earning bond, including zero-coupon bonds (or “zeroes”), which sell at a discount and simply pay out their face value at maturity, and tax-exempt bonds, which comprise state or municipal debt that earns interest tax-free.
If you’re planning to buy bonds directly—rather than gaining exposure through a mutual fund—then your best bets are new issues. Newer bonds generally offer better yields than established bonds, but only buy bonds rated A or above by Moody’s or S&P.
Investors interested in exposure to a wide range of bonds can opt for bond mutual funds from companies like Fidelity and Vanguard. Popular bond substitutes include Treasury inflation-protected securities (TIPS), whose face value rises to keep pace with inflation, and high-dividend stocks.
Principle #8: Tread Carefully in Gold, Collectibles, and Commodities
Assets like gold, fine art, baseball cards, and commodities futures are extremely fickle and don’t pay interest or dividends. Unless you have ample resources in other instruments, assets like these should only occupy a modest part of your portfolio.
Principle #9: Limit Costs Wherever You Can
With the advent of commission-free brokerage services, stock trading has become accessible to even the humblest investor. That said, there are still high-expense products that investors need to be aware of and avoid.
Steer clear of “wrap accounts.” Offered by various brokerages, these accounts can run you up to 3% per year, which makes outpacing the market almost impossible.
You should also be wary of mutual funds and ETFs with high expense ratios. (An expense ratio is the percent of a fund’s assets deducted annually for operating expenses.) Anything above 1% is worth second-guessing. Index ETFs and mutual funds, for example, can be had for a few hundredths of a percent.
Principle #10: Diversify!
The key to consistent and positive returns over the long run is (a) diversification among asset classes (stocks, bonds, REITs, and so on.) and (b) diversification within asset classes (negatively correlated common stocks, a mix of corporate bonds and TIPS, etc.).
Age-Dependent Investing
Age may be the most important factor in deciding how to allocate your investments. For example, a fully employed 30-year-old, with many years of labor income ahead of her, can weather more losses (and thus tolerate more risk) than a retired 70-year-old who relies on his investment income to get by.
In terms of age-dependent investing, Malkiel’s advice boils down to this: The longer you’re able to hold on to your investments, the more common stock you should have in your portfolio.
For example, a fully employed person in their mid-twenties should have a high-risk allocation: 70% stocks, 15% bonds, 10% real estate, 5% cash. A person in their sixties and about to retire should have a low-risk allocation: 40% stocks, 35% bonds, 15% real estate, 10% cash.
Saving for (and in) Retirement
Retirees’ investment options depend on how much they’ve been able to save.
For retirees with low savings, the options are narrow. Malkiel suggests continuing to work part time—which can have ulterior health benefits by keeping seniors active and social—and delaying taking Social Security for as long as possible to maximize those benefits. (Seniors in poor health with lower life expectancy might opt to begin taking Social Security as soon as possible to realize the benefits while they can.)
For retirees who’ve managed to build up a nest egg, there are two primary options: annuitizing your savings or holding onto your portfolio and establishing a spending rate. Malkiel recommends at least a partial annuitization of your retirement savings and, if you choose to manage your own investments, spending only 4% of the total value of your nest egg annually.
Annuities
An “annuity”—or “long-life insurance”—is a contract with an insurance company for regular payments as long as the purchaser lives.
Malkiel’s take is that while annuities offer the security of never running out of money, they can be tax inefficient and unwieldy, especially if you want to vary your spending year over year or leave a bequest to descendants.
Establishing Your Own Spending Rate
Retirees who opt to manage their investments themselves—or only annuitize a portion of their nest egg—should spend no more than 4% of their retirement savings annually (the “4% rule”).
First, 4% is likely to be below the average return rate of a diversified portfolio of stocks and bonds minus inflation. This means that the portfolio will continue to offset the reduction in purchasing power inflicted by inflation.
Second, 4% protects you from the inevitable volatility in returns. If you limit your annual withdrawals in bull years, you create a backstop against bear markets.
Picking Investments
Once you’ve determined the ideal asset allocation for your age, economic situation, and risk tolerance, the next step is to decide which precise securities to purchase. Malkiel proposes three strategies for picking stocks: The “autopilot” strategy, the “interested-and-engaged” strategy, and the “trust-the-experts” strategy.
The Autopilot Strategy
The autopilot strategy consists of purchasing broad index mutual funds or exchange-traded index funds (ETFs) rather than individual stocks or industries.
The autopilot strategy is Malkiel’s preferred method of investing. No matter how knowledgeable or engaged the investor, Malkiel advises building the core of a portfolio around index funds and only making active bets with excess cash.
While the S&P 500 index funds are generally the most popular type of index fund, Malkiel actually recommends that investors choose a total market index fund over an S&P 500 fund. This is because the S&P 500 index excludes smaller stocks that, historically and on average, have outperformed larger ones. Try to find a fund indexed to the Russell 3000, the Wilshire Total Market Index, the CRSP Index, or the MSCI US Broad Market Index.
Of course, diversification is the key to a successful portfolio. But one need not abandon index funds to diversify: There are funds that track REIT, corporate bonds, international capital, and emerging market indices.
The Interested-and-Engaged Strategy
No matter what, for large sums like your retirement savings, a diverse portfolio of index funds is the strategy that Malkiel recommends. That said, some investors—for example, those with a taste for gambling—will find indexing an entire portfolio boring and may want to try their luck picking winners. Malkiel advises that thrillseekers only speculate with secondary monies that they can afford to lose, and that they follow four key principles.
Principle #1: Only buy stocks whose earnings growth promises to be above average for at least five years
Simply put, earnings growth is what produces winners. Not only do consistently above-average earnings boost dividends, they also result in higher price-earnings (P/E) multiples. That means higher capital gains on top of dividends.
Principle #2: Never overpay for a stock without a firm foundation of value
The ideal stock is reasonably priced with positive growth prospects. Although determining the precise value of a stock is effectively impossible, you can tell whether a stock is reasonably priced by comparing its P/E multiple to that of the market as a whole. If a stock’s P/E is well beyond the market’s, you might be wise to stay away. (Note that it’s OK to buy stocks with P/E multiples greater than market’s as long as growth prospects are above average as well.)
Principle #3: Keep an eye out for castles in the air, and take advantage
If you come across a firm-foundation stock around which buzz might build—for example, because the company is about to hire a charismatic CEO or debut a new technology—those are stocks worth purchasing. The key is to buy in before the builders of castles of air drive the price up.
Principle #4: Trade as little as possible
You should hold your purchases as long as possible, and, if you have to trade, sell your losers before your winners—the tax benefits of incurring a loss are likely to be more beneficial than the tax burden of realizing a gain.
The “Trust-the-Experts” Strategy
Some investors might prefer to entrust their money to a professional. But Malkiel’s years of studying actively managed mutual funds have yielded two key insights: One, that fund managers’ past performance has little bearing on future performance, and two, actively managed funds rarely beat the average market return for long.
Want to learn the rest of A Random Walk Down Wall Street in 21 minutes?
Unlock the full book summary of A Random Walk Down Wall Street by signing up for Shortform.
Shortform summaries help you learn 10x faster by:
- Being 100% comprehensive: you learn the most important points in the book
- Cutting out the fluff: you don't spend your time wondering what the author's point is.
- Interactive exercises: apply the book's ideas to your own life with our educators' guidance.
Here's a preview of the rest of Shortform's A Random Walk Down Wall Street PDF summary:
PDF Summary Shortform Introduction
...
Whatever your priority, if you only take one thing from Malkiel’s book, it should be this: Investors are better off putting their money in a passively managed index fund—a total market index fund, to be precise—than trading stocks themselves or investing in an actively managed mutual fund. For example, an investor who put $10,000 into an S&P 500 Index Fund in 1969 would have had a $1,092,489 portfolio in April 2018 (assuming all dividends were reinvested). An investor who put the same amount of money into an actively managed fund would’ve only had $817,741.
PDF Summary Part 1: Valuing Stocks | Chapter 1: Two Theories of Asset Valuation
...
Keynes’s understanding of the castle-in-the-air theory made him a fortune. His process was as follows: Because no one can know with any certainty the future revenues or dividends of a given stock, he invested based on what he thought other investors would value. For example, if he sensed there was prevailing optimism in a certain sector of the economy, say in steel production, he would invest in steel companies regardless of their underlying fundamentals, simply because he anticipated other investors would soon rush into steel.
The key to the castle-in-the-air theory is timing: The successful investor will buy an asset just before mass enthusiasm causes its price to rise and sell before that enthusiasm wanes. A less charitable name for the castle-in-the-air theory is the “greater fool” theory—the less attuned an investor is to the prevailing winds, the more likely she’ll end up owning a stock that’s worth far less than she paid for it.
PDF Summary Chapter 2: Booms and Busts
...
The Great Crash of 1929
Speculative crazes like the tulipmania in Holland and the South Sea Bubble in 18th-century England—during which a trading firm called the South Sea Company rose in value by nearly 700% in a matter of months and fell by the same amount shortly thereafter—aren’t just a thing of the distant past. The stock market crash of 1929, which precipitated the Great Depression, is another example of irresponsible castle-in-the-air thinking.
Wide prosperity in the U.S. had boosted the stock market, and increased optimism among investors, and investing on margin—that is, borrowing to speculate in the stock market—had become commonplace. Traders were also engaging in some unsavory practices, like forming investment pools, to manipulate stock prices. (An investment pool consisted of a group of traders who would collude to bid up a stock price and then sell once those outside the pool began buying the stock.)
A key indicator of investors’ irrational optimism was the price of shares of closed-end funds. (Closed-end funds are pooled assets managed by an investment company, in which investors can buy shares.) Shares in these funds typically sell at small discounts...
What Our Readers Say
This is the best summary of A Random Walk Down Wall Street I've ever read. I learned all the main points in just 20 minutes.
Learn more about our summaries →PDF Summary Chapter 3: The Insecurity of Institutions
...
The Conglomerate Boom
Firms were able to impart the perception of growth by absorbing companies of equal or lesser value, often in wildly different industries from themselves. The crux of this boom was, again, the price-earnings multiplier: As a conglomerate absorbed more companies, thereby raising earnings, its multiplier would grow as well—but the multiplier would often outpace the actual earnings. When the conglomerates’ earnings came in far lower than the multiplier’s calculation, prices tumbled.
The Rise of “Concept” Stocks
In the later years of the decade, risk-taking fund managers banked on so-called “concept” stocks—shares in firms with a dynamic leader or good “story.” Of course, in many cases, the stories were too good to be true—the firms had no revenue-generating potential, and the stock prices were revealed to be absurdly inflated.
The 1970s
The Turn to Blue-Chip Companies
After the boom and bust of conglomerates and concept stocks in the ’60s, finance professionals placed their bets on so-called “blue-chip” companies: Firms with household names, like IBM, Disney, and McDonalds, whose growth potential was taken for granted....
PDF Summary Chapter 4: 21st-Century Booms and Busts
...
Of course, this is precisely what happened. In January of 2000, the price-earnings multiples of stocks in the NASDAQ Index—the index of technology and Internet stocks—were over 100, and investors expected returns of between 15 and 25 percent on Internet stocks. When the bubble burst later in the year, many Internet stocks became worthless, and blue-chip Internet stocks like Cisco and Amazon lost 86.5% and 98.7% of their value.
(Shortform note: From a high of $75.25 in 2000, Amazon fell to a low of $5.51 in 2001–2002. In May 2020, Amazon stock traded for $2,411.03.)
The Role of Finance Professionals
Driving the absurdly bullish attitude toward tech stocks were the finance professionals with whom many Americans trust their life savings.
One major moral hazard that encouraged financial professionals’ magical thinking was the porous boundary between Wall Street firms’ research and investment banking arms. An investment company’s analysts are supposed to work on behalf of investors, communicating information as truthful and accurate as possible to the ones risking their money. A firm’s investment banking business, on the other hand,** caters to corporate clients who...
PDF Summary Part 2: Classic Methods of Analysis | Chapter 5: The Canard of Technical Analysis
...
In practice, what this means is that technical analysts will study a stock’s charts to deduce trends. If there’s an “uptrend”—in other words, the stock price has risen over the course of a day or several days—then the chartist will be bullish on the stock. A head-and-shoulders pattern—where there’s a rise and fall, a greater rise and fall, and then a rise and fall similar to the first—indicates that a stock may have reached its “resistance level” and is due for a downturn.
Does Technical Analysis Have Any Validity?
Despite its seeming arbitrariness, technical analysis does indeed have a logic.
- Technical analysts bank on mass psychology. They presume that when investors see a stock rising, they’ll hop on the bandwagon, driving the price even higher.
- Technical analysts assume unequal access to information. If a price is rising, chartists theorize that company insiders or more expert observers know something the wider market doesn’t and are driving up the price by buying stock.
- Technical analysts believe prices have a delayed reaction to new information. Some research suggests that when “earnings surprises,” either good or bad, for a company are...
PDF Summary Chapters 6-7: Fundamental Analysis: The Equally Flawed Alternative
...
Generally speaking, the fundamentalist investor will pay a higher price for stock in a high-growth company (especially if that company is built to last).
Principle #2: Accept a Higher Price for Large Dividends
Depending on a company’s size, management, and capital strategy, the percentage of a company’s earnings paid out in dividends will vary. Which presents a dilemma for investors: Should one invest in a high-growth-potential stock that pays near zero in dividends (as high-potential stocks commonly do)? Or go with a near-peak company that pays out a lot in dividends but won’t grow much larger?
If two companies have the same expected growth rate (in other words, the same or similar P/E multiples), the fundamentalist investor will pay a higher price for the company that disburses a higher proportion of earnings as dividends.
Principle #3: Accept a Higher Price the Less Risky the Stock
Stock prices often reflect the relative risk of an investor’s stake. For example, a “blue chip” stock—that is, stock in a well-established company more or less resilient to recessions—will sell at a premium, whereas shares in an unproven company will likely be...
PDF Summary Part 3: New Investment Strategies | Chapter 8: Modern Portfolio Theory (MPT)
...
Economists of finance typically define risk in terms of returns’ “variance” from the mean return. Simply put, the more widely dispersed real returns are around the average, the more risky the stock. For example, consider Stock 1, whose returns over the last three years are -5%, 0%, and 5%. The mean return for Stock 1 is 0%. Now examine Stock 2, whose returns over the last three years are -25%, 3%, and 22%. The mean return for Stock 2 is also 0%, but the variance is greater due to the wider dispersion around the mean—that is, an investor in Stock 2 will be assuming more risk.
How MPT Manages Risk
Essentially, MPT mitigates a portfolio’s overall risk by offsetting the risks of certain stocks with those of other stocks. These various levels of risk are determined by analyzing the “covariance”—that is, the relative variance—between two or more stocks and deducing a “correlation coefficient”—a single number between 1 and -1 that defines their relation.
For example, take two stocks, one an airline company, another a commercial aircraft manufacturer. If real-world events—say, a global pandemic—severely reduce consumers’ air travel, both stocks will suffer...
Why are Shortform Summaries the Best?
We're the most efficient way to learn the most useful ideas from a book.
Cuts Out the Fluff
Ever feel a book rambles on, giving anecdotes that aren't useful? Often get frustrated by an author who doesn't get to the point?
We cut out the fluff, keeping only the most useful examples and ideas. We also re-organize books for clarity, putting the most important principles first, so you can learn faster.
Always Comprehensive
Other summaries give you just a highlight of some of the ideas in a book. We find these too vague to be satisfying.
At Shortform, we want to cover every point worth knowing in the book. Learn nuances, key examples, and critical details on how to apply the ideas.
3 Different Levels of Detail
You want different levels of detail at different times. That's why every book is summarized in three lengths:
1) Paragraph to get the gist
2) 1-page summary, to get the main takeaways
3) Full comprehensive summary and analysis, containing every useful point and example
PDF Summary Chapter 9: Leveraging Risk
...
A stock’s “systematic” risk—its “beta”—consists in its sensitivity to the stock market in general. For example, say that the biopharma company we’ve been discussing has received funds for five years of work. For those five years, the company might have relatively low systematic risk—given the fact its funding is already in hand, its operations might not be much affected by market volatility.
As you might expect, beta cannot be diversified away. This is because all stocks, to some degree or other, parallel the market (that is, when the market falls, by definition so too do stocks in general). At least in terms of common stocks, there is no such thing as a risk-free investment; even the most diversified holdings—for example, those contained in a broad market index fund—entail some risk.
Individual betas are calculated using relatively high-level mathematics, but the concept behind the math is simple: A stock’s beta consists in a comparison of its price movements over a certain period of time with the market’s movements over that same period.
In practice, beta analysis looks like this: A broad market index is assigned a beta of 1, and stocks’ betas...
PDF Summary Chapter 10: The New New Portfolio Theories
...
Four Flavors
Four common portfolio flavors that investors tend toward include:
Value
Preached by early investment sages like David Dodd and Benjamin Graham—and later adopted by Warren Buffett—“value” investing consists in buying stocks with (1) low price-earnings multiples and (2) low price–book value ratios. More rudimentarily, it means investing in companies that are realizing revenues currently and consistently rather than those promising exponential future growth.
Small Companies
A portfolio flavored in favor of smaller stocks may result in larger returns. One study examined returns from 1926 to the present and found small-company stocks produced returns about 2% higher than large-companies’. The Sharpe ratio of small-company stocks over approximately the same period was .23—which means that a diversified portfolio with a tilt toward smaller stocks might raise the overall portfolio’s ratio above the market’s.
Momentum
As noted above, in the long run, there’s no discernable “momentum” in stocks’ prices—rather, their price increases and decreases resemble a “random walk.” However, in the short run, **there is some evidence to...
PDF Summary Chapter 11: Irrational Investors
...
As always, a buy-and-hold strategy is superior to trying to beat the market.
3) Sell Losers, Not Winners
If you do decide to trade, make sure you sell your losers, not your winners.
Most investors think it’s best to unload stocks that have risen in value (to realize a gain) and hold on to stocks that have declined in value (to avoid realizing a loss). As noted above, selling a winning stock can result in prohibitive tax liability.
And although holding on to a sinking stock can be worthwhile—if the stock has a chance to rebound—it’s often better to unload that stock and realize the tax breaks of the loss.
4) Don’t Fall for IPOs
Even the savviest investors are prone to falling for “get rich quick” schemes, and few are as prevalent and as pernicious as highly publicized initial public offerings.
Simply put, an individual investor should never buy an IPO at its initial price. Though the stock may pop right after trading begins—because institutional investors are snapping up the stock at the offering price—studies have shown that IPOs underperform the stock market by about 4% per annum. And it’s common to see** IPO values drop exactly six...
PDF Summary Part 4: A User’s Guide to Investing | Chapter 12: The Basics
...
Although the high-premium products have advantages—primarily tax-free contributions—the commissions and fees can be prohibitive. Thus Malkiel favors buying low-premium term insurance and investing the difference between the high-premium product and the low-premium product in a tax-deferred retirement plan.
(The same advice applies to variable-annuity products, which typically tack on an insurance feature to an investment product like a mutual fund. These products often entail steep commissions and fees—unnecessary expenses for the typical investor. Only extremely high-wealth individuals who’ve maxed out all other tax-deferred alternatives should consider annuities.)
Ideally, the term insurance product will be renewable without the need for a doctor’s visit and feature an “A” rating from A.M. Best (don’t buy anything with a rating lower than “A”). And you should shop around for the best product on your own rather than consulting an insurance agent—the agent’s commission will be tacked onto your premium payment.
Principle #3: Set Up Your Cash to Keep Pace With Inflation
Keeping a robust cash reserve is essential for emergencies, but it can also be a losing...
PDF Summary Chapter 13: Projecting Returns
...
To calculate returns in the short run, investors must include a third term: the price/earnings multiple. (Analysts will also sometimes use the price/dividend multiple). These ratios of share price to earnings/dividends are highly variable year to year, and so they better reflect the impact of short-run market conditions on returns.
Take Thingamajig again. You’ve bought a share at $100, with a dividend yield of 5% and an estimated annual growth rate of 5%. Let’s say Thingamajig reports earnings of $10 per share. That means its P/E multiple is 10 (because a share of Thingamajig sells for 10x its per-share earnings). Now, imagine a year after you bought Thingamajig, the market enters a recession, and its price plummets to $50. Even if earnings and dividends stay constant, you end up with a lower return at the end of that year—because the P/E multiple has been reduced by half.
The Decline of Dividends
Some security analysts argue that dividends are no longer a useful indicator of future returns. This is because more and more companies are electing to distribute profits to shareholders through stock buybacks rather than dividends.
The rationale for...
PDF Summary Chapter 14: Age-Calibrated Strategies
...
Bonds, too, mellow with age. If you’re able to hold a bond until maturity, you should see a return at or near the initial yield. If you have to sell the bond a year after you’ve purchased it, though, you might see a null or negative return.
As noted above, the longer you can hold onto your investments—that is, if you’re currently earning a wage and have no need to sell assets to maintain your quality of life—the more common stock you should have in your portfolio. If you’re past working age and need a reliable stream of income from your investments, a higher concentration of bonds is the more prudent choice.
3) Reduce Risk Further With Dollar-Cost Averaging
Dollar-cost averaging is simply a fancy term for investing in fixed amounts at regular intervals over a long period of time. The classic example is electing to contribute some percentage of your monthly paycheck to a 401(k). By investing regularly and in consistent amounts over an extended period, you mitigate the risk of buying into the market at inflated prices (because the market will fluctuate over the period you’re investing).
For example, if you had made an initial investment of $500...
PDF Summary Chapter 15: Picking Stocks
...
Not only are returns better with broad market index funds, fees and expenses tend to be, too. Because index funds are passively managed—that is, they adjust their holdings more or less automatically on the basis of market values—they tend to have extremely low expense ratios (.0005% or less for some). And because index funds only trade to rebalance their weights, they incur low trading costs as well.
While the S&P 500 index funds are generally the most popular type of index fund—and they will outperform actively managed funds on average—Malkiel actually recommends that investors choose a total market index fund over an S&P 500 fund. This is because the S&P 500 index excludes smaller stocks that, historically and on average, have outperformed larger ones. Try to find a fund indexed to the Russell 3000, the Wilshire Total Market Index, the CRSP Index, or the MSCI US Broad Market Index.
Of course, as Modern Portfolio Theory teaches (see Chapter 8), diversification is the key to a successful portfolio. But one need not abandon index funds to diversify:** There are funds that track REIT, corporate bonds, international capital, and emerging market...
PDF Summary Epilogue: The Index Fund Backlash
...
Simply put, as far Malkiel is concerned, index funds are a clear positive for individual investors—and for society as a whole.