Consistency and Time are Your Biggest Assets

Wealthfront, Malkiel and Timeless Investing Advice

A Second Walk through “A Random Walk”

Most finance professionals and money managers have a copy of Burton Malkiel’s, “A Random Walk Down Wall Street: The Time Tested Strategy for Successful Investing.” Published in 1973 and updated every few years, his timeless classic has sold over a million copies. Few investing books achieve this level of success.

So what guidance has Malkiel been dispensing for over 30 years?

First off, Malkiel says we can forget about get-rich-quick schemes. The way to make money with investments is through time and good behavior. Malkiel joins John Bogle (Vanguard co-founder) and Warren Buffett who, among others, recommend index funds for most of Main Street. A habit of investing monthly over a lifetime, a “get rich slow” approach, is the surest path to building wealth.

Malkiel also cautions against individual stock analysis. Amateurs and professionals alike simply find it too hard to make the right spreadsheet assumptions, even if financial theories on valuations were accurate (Malkiel not convinced). Management fees, trading expenses and taxes depress returns such that few active fund managers can consistently out-perform the market to reach break-even, much less provide wealth creation beyond what passive index funds will provide.

Instead, the author is very much in the “buy and hold” camp of stock ownership; “being in stocks during bull markets far outweigh the losses in bear markets.” Further, for those who are considering actively managed mutual funds, after all these years he concludes there is “no way of telling in advance who (the exceptional fund managers) will be.”

Of course, the author’s very first recommendation is to start saving, now. “The most important driver in the growth of your assets is how much you save…the only reliable route to a comfortable retirement is to build up a nest egg slowly and steadily. Yet few people follow this rule.” Building a cash cushion is critical; the author suggests saving 3 months of living expenses. Malkiel also recommends life insurance for anyone who has a family dependent on their income.

Finally, for those at retirement, Malkiel suggests a 4.5% withdrawal rate. A diversified portfolio can produce retirement income while minimizing “longevity risk,” essentially outliving your savings. It’s worth noting others have analyzed market performance and retirement longevity tables, and recommend a lower withdrawal rate as a safer strategy, a withdrawal thumb rule closer to 4%.

Most academics will tell you there is no “free lunch” when it comes to investing; instead, consistency and patience are the surest path to life-changing wealth creation. While Malkiel’s story also includes a discussion of betas, modern portfolio theory (MPT), tax loss harvesting, and a host of other financially oriented topics familiar to MBA students, the book’s popularity rests on its plain language and practical advice from a legend in the financial community. More recently Malkiel became the Chief Investment Officer (CIO) of Wealthfront, one of the many “robo-advisors” that have sprung up in the past few years. Rather than just reading the book, with increasing automation, consumers should find it is easier to save and invest than ever before.

Thanks for reading. Comments and suggestions for other topics welcome.

Below are reviews of popular titles in the financial space:

· John Bogle (the co-Founder of Vanguard) “The Clash of Cultures: Investment vs. Speculationhere.

· Ric Edelman, the founder of Edelman Financial, “The Truth About Money: Everything You Need to Know About Moneyhere.

· Lars Kroijer’s “Money Mavericks: Confessions of a Hedge Fund Managerhere.

· Eric Tyson’s, “Investing for Dummieshere.

Below are a few posts on my experience with money and the financial industry in general:

· “Money Advice for Millennials: How to Save for a (Not So) Distant Future

· “How Bank Fees are Nudging Us to the Right Answer

· “Your 401(k) and the New Rules of Retirement Savings

· “Retirement Savings and Healthcare Costs: A Balancing Act

· “Is the Market Smarter than You?

I’ve also written about nutrition, health, behavior and other (mostly) related topics. On LinkedIn and Medium.

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