Burton Malkiel – The Basic Rules of Investing

The basic rules of investing

Save first
I think there are a number of basic rules that investors have to consider. And I think the first one is, particularly for individual investors, is to save. You know, it doesn’t matter if you make 3% on your investments, 5%, or 10%, if you have nothing to invest. So I think the first rule, and it’s a very important rule, is that one needs to save.

Invest regularly
I think the second lesson I think I would mention is to not put all of your money in at one time. By putting your money in at different times, you avoid the possibility of having put all of your money at a high in the market. No one can time the market. No one should try to time the market. And I think that putting money in regularly over time, particularly for individuals, means that sometimes you’ll put money in at the wrong time, but it also means that you’ll put money in at the right time, in addition.

Diversify investments
Another rule I think that’s so important is to diversify. Don’t put all your eggs in one basket. Don’t have simply equities in your portfolio; have fixed income securities as well. Don’t simply have your equities in one country; invest in the world countries.

Rebalance periodically
And finally, one should rebalance. For example, suppose you decided you were going to be half in equities, half in fixed income. Well what you want to do is, at least once a year, to rebalance the portfolio. If the equities have gone way up and the bonds have gone down, so that you are say 60% in equities, sell some equities and buy some bonds. If the equities are very low because the market has taken a tumble, and the bonds have gone up because monetary authorities around the world have reduced interest rates, then sell some bonds and buy some equities. What I find is, over the last 15 years when we’ve had very volatile markets and very scary markets, by rebalancing you improved your returns by 1 percentage point a year.

Financial advisers: adding value for investors

Keep them on an even keel
I think financial advisors can add value in very important ways. The two most important ways I believe are, first of all to keep people on an even keel; to put people on a steady course, and not have them have their emotions run away with them. The best investment advisors are what we call in the United States, fee only advisors. You don’t want advisors who get paid for selling you a particular high-cost investment product; you want investment advisors who are absolutely independent. And those are the best advisors to have, and they can perform a very important role.

Costs matter
I have studied the performance of actively managed funds all my life. I’ve been very interested in seeing if one could predict what actively managed funds we’re not buy. And what I find is, even the actively managed funds that have done very well, there’s very little persistence from year to year.

Avoid chasing ‘hot’ funds
It’s very difficult; if you try to buy last year’s hot fund, it will normally be this year’s turkey.

Keep costs low
One has to be very modest about what one knows about equity markets, but the only thing about investing that I am absolutely sure about is, that the lower the costs charged by the purveyor of the investment product, the more there will be for the investor. So costs matter a great deal.

High turnover often results in poor performance
The other thing that matters a great deal is portfolio turnover. Investors or professional investors who do a lot of buying and selling, generally don’t improve performance; performance is worse for those funds. Well that brings me to index funds. I think that index funds ought to constitute the core of everyone’s investment portfolio, whether they be individuals or institutions.

Long run outlook
My own long run outlook, and I can’t predict the market in the short run, but the long run outlook is, I think that we should look forward to single-digit returns from diversified portfolios, because interest rates are low, dividend yields are low.

The old rules still apply

The new normal is, in my view, somewhat lower returns, but still returns that will work for individuals. We’re also in a low inflation environment; it’s still the old rules work – still invest, diversify and hold on for the long run.

Tower Hill Associates has adopted many of the ideas expressed in the Ellis and Malkiel Videos in their financial and investment planning processes. If you would like to know more please contact the Principal John Lang on 020 3865 2379

Please click here if you wish to purchase books by Ellis and Malkiel.

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