Burt Malkiel's newest advice on stock and bond investing

Every year in the investing business a load of flashy new books comes out, each penned by a young money manager or market observer looking to make his or her mark.

Some sell well, often in direct relation to the author’s appearances on financial TV shows. Some disappear in short order and end up in discount book bins.

And a few stand the test of time, getting reissued every few years. One of those is being reissued now: A Random Walk Down Wall Street is in its 11th edition and will come out in early January.

The author of Random Walk is Burton Malkiel, the celebrated Princeton professor and a key member of the Investment Committee of my firm, Rebalance IRA. It has been a fascinating time in the markets since Burt’s groundbreaking book first appeared in 1973. Going back over his early predictions is nothing short of financial time travel.

For one, Burt was an early proponent of finding a way for ordinary people to own entire stock indexes. Index funds appeared soon after. He was a strong promoter of passive investing, an approach which has caught fire in the years since.

Burt long has been critical of active management and of the real damage it does to America’s retirement investors. He has taken a lot of heat from Wall Street for his views, yet the decades ultimately have proven him right. Well over $1 trillion today is held in broad market index funds by individuals as well as major institutions, pension funds and endowments — a trend that has accelerated since the 2008 financial crisis.

As Burt writes in his latest edition, someone out there will beat the market, but it’s essentially impossible to guess who. Yet it is possible to figure out which fund is going to give you the best possible return on a consistent, repeatable basis.

“The two variables that do the best job in predicting future performance are expense ratios and turnover,” he writes. “High expenses and high turnover depress returns — especially after-tax returns if the funds are held in taxable accounts.”

That’s why Burt and his fellow members on the Rebalance IRA Investment Committee — his colleague of many years at Vanguard, Charley Ellis, and Jay Vivian, the former managing director of the IBM Retirement Funds — recommend index-style exchange-traded funds for our client portfolios. Broad index ETFs greatly reduce the corrosive effects of expense and turnover, while investing through an IRA solves the tax problem.

Powerful steps

In the book, Malkiel specifically recommends a portfolio approach to holding such funds, preferring low-cost funds in risk-adjusted percentages matched to each individual client’s goals. That’s exactly what we do at Rebalance IRA.

It’s a fabulous book. Along with Elements of Investing — a shorter money basics book Malkiel co-wrote with Ellis — Random Walk is a powerful text to read and study for anyone seeking to take concrete steps toward financial security.

You could grab a bunch of hot new finance titles each year, read through them all and, in the end, not learn anything close to the usefulness of these two books alone. If you’re trying to get a handle on your financial future, I say cut to the chase: Get these two books from your local library or order the newest editions just out.

However you ultimately choose to invest, you’ll be far wiser for the time spent and more certain of your own financial decisions for years to come.

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