Do you get fearful when the markets drop? According to Professor Burton Malkiel, one way to navigate market volatility is to harness dollar cost averaging.


Mitch Tuchman: Well, okay, so to that point Burt you’ve lived through decades of these kind of markets where there’s a Cathie Wood one year who’s saying whatever on CNBC and only to find that her idea of the “it’s different this time,” these new companies changing the world should be valued differently. I’ve been through enough of them to understand that they go up and they go down and it was crypto during, it was internet stocks, you’ve had more of these than I have. Right now, we’re living through a market that’s down and it’s different this time, of course, because of globalization becoming more nation favored.

And so, as you know, being on the Rebalance Investment Committee, we talk to you guys about the calls we get from the investors who are watching CNBC all the time or every year and don’t have the perspective. How do you, in your book Random Walk, try to help people get that perspective that you’ve had for 50 years watching the folly of the markets and the people who think they can predict things, but they can’t?

Burt Malkiel: Well, first of all, by simply recording the history, as it said, those who have not read history are often cursed by making the same mistakes. So, there’s a lot of material on even going back to the 1700s in Holland when a single tulip bulb went up to a price that was astronomical about the same price as you could buy a noble man’s castle. So, there’s a lot of that in the book so that people get a sense of perspective. But let’s just talk about particularly since we’ve just come off of a year 2022 when the market was down and a lot of people got nervous. For those who are accumulating in their 401k, I point out that what they are doing is so-called dollar cost averaging. As long as they consistently buy, what is happening in a bad year like 2022 is, that they are making some of the best investments of their lifetime.

Because, if you consistently put money in each quarter, nobody can time, markets are going to go up and down. I don’t know what’s going to happen, you don’t know what’s going to happen, nobody does. But by consistently putting money into the 401k, you are assuring yourself that during bad times in the market, you are going to be buying shares. And fortunately, what dollar cost averaging gives you is when markets are down, you’re buying more shares. So, the average cost of the shares in your portfolio will be lower than the average of the prices that existed during the times you were buying because you are buying more when things are down. And I think it’s those kinds of lessons and realizing that in some sense, this volatility that scares the devil out of people is actually for an accumulator helping you out.

Now what it also means is if you are in a situation like I’m in where now from my 401k, actually mine since it was done with an educational institution was a 403b but I’m in the situation where I need a required minimum distributions, for me, it means a different portfolio. It means that I’ve got to be sure that the monies that I’m going to have to take out in 2022, 2023 and 2024 are not fluctuating up and down. I don’t want to do dollar cost averaging on the way out because what’s happening then is I’m selling more of my equities when they’re up. So, I need a much more diversified portfolio and that’s actually one of the things that I love about being part of a company like Rebalance, is that it isn’t proper to have the exact same portfolio.

The portfolio for a 30-year-old starting to accumulate a retirement fund is quite different from the portfolio from a 70-year-old who is required to take minimum distributions. And Rebalance then has different portfolios and different mixes that are appropriate for different people.

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