A RANDOM WALK INTO SOME DECENT INVESTMENT ADVICE

11/18/10

I sent the following note to my students; I thought readers of the Pontificator might also find it both enjoyable and helpful:


BEST INVESTMENT ARTICLE OF THE SEMESTER

11/18/10

Perhaps the best article that you can read on investing this semester can be found on today’s (i.e., Thursday, 11/18’s) Wall Street Journal’s op-ed page (A23).

http://online.wsj.com/article/SB10001424052748703848204575608623469465624.html?mod=ITP_opinion_0


The only problem I have with the article, brilliantly written by Professor Burton Malkiel of Princeton, and of “A Random Walk Down Wall Street” fame, is its title “‘Buy and Hold’ Is Still a Winner.” The article is not at all an argument for buying and holding stocks. Rather, it is an argument for holding index funds and for regularly rebalancing one’s portfolio and is, for you Investments students, a preview of my last lecture for the year. In fact, what Professor Malkiel does not tell you is that if his balanced mix of index funds had been skewed more heavily toward bonds than the 33% he posited, provided the additional bond allocation came from the U.S. stock allocation, the portfolio would have delivered a better performance over the 2000-2009 than the 91.9% (6.7% annualized) it did deliver. In this sense, the article confirms the wisdom of my long seminal 9/3/10 Pontificator piece, YOU PROBABLY DIDN’T HAVE TO BE TOLD THIS AFTER THE LAST FEW YEARS BUT…

at

http://insightfulpontificator.blogspot.com/

Also interesting in today’s Journal is the front page article (“California Bond Woe Bodes Ill For States.”) on the problems facing the municipal bond market. The underlying problem, of course, is that many of our states and municipalities are broke, and it isn’t necessarily because of “the poor economy,” as the politicians who spent us into oblivion like to tell you.

Thanks.