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768ae62
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As an investor, what should you do about forecasts--forecasts of the stock market, forecasts of interest rates, forecasts of the economy? Answer: Nothing. You can save time, anxiety, and money by ignoring all market forecasts.
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Burton G. Malkiel |
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1f4bef6
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Just as contagious euphoria leads investors to take greater and greater risks, the same self-destructive behavior leads many investors to throw in the towel and sell out near the market's bottom when pessimism is rampant and seems most convincing. One of the most important lessons you can learn about investing is to avoid following the herd and getting caught up in market-based overconfidence or discouragement. Beware of "Mr. Market."
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Burton G. Malkiel |
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da54fcd
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Note also that during the punishing bear market of 2007-2008, new record withdrawals were made by investors who threw in the towel and sold their mutual fund shares--at record lows--just before the first, and often best, part of a market recovery.
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Burton G. Malkiel |
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3c1c46e
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Indeed, when pessimism is rampant and market prices are down is the worst time to sell out or to stop making regular investment contributions. The time to buy is when stocks are on sale.
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Burton G. Malkiel |
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f8149c5
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You don't care if it's cold and raining or warm and sunny 10,000 miles away because it's not your weather. The same detachment should apply to your 401(k) investments until you approach retirement. Even
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Burton G. Malkiel |
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1c17e0c
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The stock market as a whole has delivered an average rate of return of about 9 1/2 percent over long periods of time. But that return only measures what a buy-and-hold investor would earn by putting money in at the start of the period and keeping her money invested through thick and thin. In
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Burton G. Malkiel |
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728421d
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The right response to a fall in the price of one asset class is never to panic and sell out. Rather, you need the long-term discipline and personal fortitude to buy more. Remember: The lower stock prices go, the better the bargains if you are truly a long-term investor. Sharp market declines may make rebalancing appear a frustrating "way to lose even more money." But in the long run, investors who rebalance their portfolios in a disciplined..
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Burton G. Malkiel |
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47023ed
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There are few, if any, absolute rules in saving and investing, but here's ours: Never, never, never take on credit card debt. This rule comes as close as any to being an inviolable commandment. Scott
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Burton G. Malkiel |
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886b942
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The secret of getting rich slowly but surely is the miracle of compound interest. Albert Einstein is said to have described compound interest as the most powerful force in the universe. The concept simply involves earning a return not only on your original savings but also on the accumulated interest that you have earned on your past investment of your savings.
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Burton G. Malkiel |
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ad03cd7
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Benjamin Franklin provides us with an actual rather than a hypothetical case. When Franklin died in 1790, he left a gift of $5,000 to each of his two favorite cities, Boston and Philadelphia. He stipulated that the money was to be invested and could be paid out at two specific dates, the first 100 years and the second 200 years after the date of the gift. After 100 years, each city was allowed to withdraw $500,000 for public works projects...
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Burton G. Malkiel |
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4f22f9a
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By buying a share in a "total market" index fund, you acquire an ownership share in all the major businesses in the economy. Index funds eliminate the anxiety and expense of trying to predict which individual stocks, bonds, or mutual funds will beat the market."
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Burton G. Malkiel |
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aa57d06
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This simple investment strategy--indexing--has outperformed all but a handful of the thousands of equity and bond funds that are sold to the public. But you wouldn't know this when Wall Street throws everything but the kitchen sink at you to convince you otherwise. This is the plan we use ourselves for our retirement funds, and this is the plan we urge you to follow, too.
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Burton G. Malkiel |
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0e876ab
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We have believed for many years that investors will be much better off bowing to the wisdom of the market and investing in low-cost, broad-based index funds, which simply buy and hold all the stocks in the market as a whole. As more and more evidence accumulates, we have become more convinced than ever of the effectiveness of index funds. Over 10-year periods, broad stock market index funds have regularly outperformed two-thirds or more of ..
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Burton G. Malkiel |
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fa0a58c
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The average actively managed mutual fund charges about one percentage point of assets each year for managing the portfolio. It is the expenses charged by professional "active" managers that drag their return well below that of the market as a whole. Low-cost index funds charge only one-tenth as much for portfolio management. Index funds do not need to hire highly paid security analysts to travel around the world in a vain attempt to find "u..
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Burton G. Malkiel |
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fb3134a
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dividends,
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Burton G. Malkiel |
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24b0ae4
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Only liars manage always to be out of the market during bad times and in during good times.
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Burton G. Malkiel |
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fa0d650
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To overcome the drag of expenses and taxes, an actively managed fund would have to outperform the market by 4.3 percentage points per year just to break even with index funds.* The odds that you can find an actively managed mutual fund that will perform that much better than an index fund are virtually zero.
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Burton G. Malkiel |
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5d97d12
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What does diversification mean in practice? It means that when you invest in the stock market, you want a broadly diversified portfolio holding hundreds of stocks. For people of modest means, and even quite wealthy people, the way to accomplish that is to buy one or more low-cost equity index mutual funds. The fund pools the money from thousands of investors and buys a portfolio of hundreds of individual common stocks. The mutual fund colle..
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Burton G. Malkiel |
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3615333
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One asset class that belongs in most portfolios is bonds. Bonds are basically IOUs issued by corporations and government units. (The government units might be foreign, state and local, or government-sponsored enterprises such as the Federal National Mortgage Association, popularly known as Fannie Mae.) And just as you should diversify by holding a broadly diversified stock fund, so should you hold a broadly diversified bond fund.
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Burton G. Malkiel |
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9fbd728
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Unlike common stocks, whose dividends and earnings fluctuate with the ups and downs of the company's business, bonds pay a fixed dollar amount of interest. If the U.S. Treasury offers a $1,000 20-year, 5 percent bond, that bond will pay $50 per year until it matures, when the principal will be repaid. Corporate bonds are less safe, but widely diversified bond portfolios have provided reasonably stable interest returns over time.
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Burton G. Malkiel |
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d189136
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So-called "total stock market" funds will include both real estate companies and commodity products. Broad equity diversification can be achieved with one-stop shopping."
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Burton G. Malkiel |
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cef6ee0
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In crowds it is stupidity and not mother-wit that is accumulated," Gustave Le Bon noted in his 1895 classic on crowd psychology."
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Burton G. Malkiel |
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0b759df
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Does achieving extremely broad diversification seem completely out of reach for ordinary investors? Fear not. There are broadly invested, very low-cost funds that can provide one-stop shopping solutions. We will recommend a broadly diversified United States total stock market index fund that includes real estate companies and commodity producers, including gold miners. We
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Burton G. Malkiel |
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60f0cfd
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You should diversify over time. Don't make all your investments at a single time. If
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Burton G. Malkiel |
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0f3d23a
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You can reduce risk by building up your investments slowly with regular, periodic investments over time. Investing regular amounts monthly or quarterly will ensure that you put some of your money to work during favorable periods, when prices are relatively low. Investment advisers call this technique "dollar-cost averaging." With equal dollar investments over time, the investor buys fewer shares when prices are high and more shares when pri..
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Burton G. Malkiel |
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a7e14b8
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Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.
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Burton G. Malkiel |
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0481820
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And you must have both the cash and the confidence to continue making the periodic investments even when the sky is the darkest. No matter how scary the financial news, no matter how difficult it is to see any signs of optimism, you must not interrupt the automatic-pilot nature of the program. Because if you do, you will lose the benefit of buying at least some of your shares after a sharp market decline when they are for sale at low-end pr..
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Burton G. Malkiel |
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6703fe6
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You, far more than the market or the economy, are the most important factor in your long-term investment success.
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Burton G. Malkiel |
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42525fd
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High-quality bonds can moderate the risk of a common stock portfolio by providing offsetting variations to the inevitable ups and downs of the stock market. For
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Burton G. Malkiel |
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b8a35ec
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As in so many human endeavors, the secrets to success are patience, persistence, and minimizing mistakes. In driving, it's having no serious accidents; in tennis, the key is getting the ball back; and in investing, it's indexing--to avoid the expenses and mistakes that do so much harm to so many investors.
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Burton G. Malkiel |
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eaeb99d
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Similarly, the buy-and-hold investor who prudently holds a diversified portfolio of low-cost index funds through thick and thin is the investor most likely to achieve her long-term investment goals.
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Burton G. Malkiel |
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75fe24c
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Investors should avoid any urge to forecast the stock market. Forecasts, even forecasts by recognized "experts," are unlikely to be better than random guesses. "It will fluctuate," declared J. P. Morgan when asked about his expectation for the stock market. He was right. All other market forecasts--usually estimating the overall direction of the stock market--are historically about 50 percent right and 50 percent wrong. You wouldn't bet muc..
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Burton G. Malkiel |
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4dee10e
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persuasively, that
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Burton G. Malkiel |
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050b10b
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A firm's income statement may be likened to a bikini--what it reveals is interesting but what it conceals is vital.
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Burton G. Malkiel |
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e567e37
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You will never be allowed to buy the really good IPOs at the initial offering price. The hot IPOs are snapped up by the big institutional investors or the very best wealthy clients of the underwriting firm.
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Burton G. Malkiel |
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cb3a4f2
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Despite all the evidence to the contrary, suppose an investor still believed that superior investment management really does exist. Two issues remain: First, it is clear that such skill is very rare; and second, there appears to be no effective way to find such skill before it has been demonstrated. As I indicated in chapter 7, the best-performing funds in one period of time are not the best performers in the next period. The top performers..
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Burton G. Malkiel |
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5f3141d
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In one celebrated incident, an analyst who had the chutzpah to recommend that Trump's Taj Mahal bonds be sold because they were unlikely to pay their interest was summarily fired by his firm after threats of legal retaliation from "The Donald" himself. (Later, the bonds did default.)"
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Burton G. Malkiel |
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b155182
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There is nothing so disturbing to one's well-being and judgment as to see a friend get rich.
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Burton G. Malkiel |
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efaf4ab
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legerdemain,
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Burton G. Malkiel |
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bbe27eb
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a blindfolded chimpanzee throwing darts at the stock listings can select a portfolio that performs as well as those managed by the experts.
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Burton G. Malkiel |
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66c7707
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Two behavioral economists, Terrance Odean and Brad Barber, examined the individual accounts at a large discount broker over a substantial period of time. They found that the more individual investors traded, the worse they did. And male investors traded much more than women, with correspondingly poorer results.
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Burton G. Malkiel |
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fd7fa20
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Percentage of Actively Managed Mutual Funds Outperformed by the S&P 500 Index (Periods through June 30, 2012) Sources: Lipper and The Vanguard Group.
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Burton G. Malkiel |
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77cb8e2
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Average Annual Returns of Actively Managed Mutual Funds Compared with S&P 500 20 years, Ending June 30, 2012 Sources: Lipper, Wilshire, and The Vanguard Group. S&P 500 Index Fund 8.34% Average Active Equity Mutual Funda 7.00% Shortfall +1.34%
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Burton G. Malkiel |
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e98ab86
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The harsh truth is that the most important driver in the growth of your assets is how much you save, and saving requires discipline. Without a regular savings program, it doesn't matter if you make 5 percent, 10 percent, or even 15 percent on your investment funds. The single most important thing you can do to achieve financial security is to begin a regular savings program and to start it as early as possible. The only reliable route to a ..
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Burton G. Malkiel |