As some of you may be aware, for the next 10 weeks, every Saturday at 9 AM PT, I will be coming to you live on a new radio show called “Retire With More,” hosted by KKSF’s Talk 910 John Rothmann. The show covers many aspects of retirement investing. Our goal is to help you make sense of the variety of retirement investing options and to make wise choices, regardless of where you are along the savings path.
We’ve got a number of special guests lined up to join us and this week we were very excited to have our very own, Professor Burt Malkiel as our first guest. Professor Malkiel is a member of our Investment Committee here at Rebalance, and he wrote a book that I read when I was in college in the 70s, that millions of others have read as well, called A Random Walk Down Wall Street. It was published 40 years ago and is now in its 11th edition. It’s not 50 Shades of Grey, but it has sold 1.5 million copies!
To quote his book: “A blindfolded chimpanzee throwing darts at The Wall Street Journal can select a portfolio that performs as well as those managed by the experts.” Now what does that mean exactly? Burt Malkiel explained this analogy by diving into the main tenant of his book – “indexing.”
“An index fund is simply a fund that buys and holds all the stocks in the market, and the reason that it does so well is that there are a lot of smart people that are buying and selling to make sure that any information that arises about a stock or the whole market gets reflected in its price. That doesn’t mean the price is always right, in fact I like to say the price is always wrong. But the point is millions of Americans, including very highly paid professionals, are buying and selling, and if they think the price is wrong they’re going to make transactions to change that price. So the price really reflects everything that’s known about a stock. Therefore if you just take the prices that are there and buy and hold, you’re going to do at least as well, if not better than everyone else. In other words, if the prices reflect the information, then a blindfolded monkey throwing darts can select a portfolio as well as the experts.” – Burt Malkiel
Rebalancing works
While indexing remains one of the biggest points to take away from A Random Walk Down Wall Street, there are others and one of them, one of the great lessons, is right there in the name of our company –“rebalance.” Burt believes and has for years, and we have the data that to back it up, that the simple idea of rebalancing works wonders for a portfolio.
“It always reduces the risk of the portfolio and in very volatile markets it tends to increase your portfolio’s return. It can be a very hard concept to grasp sometimes because the financial world continues to tell people that they’re predicting “this” or predicting “that,” which forms the basis of making a change in the portfolio.” – Burt Malkiel
What we at Rebalance recommend, and what Burt recommended 40 years ago and still does today, is very different. Nobody, and I mean nobody can predict what the market is going to do next week, next month, next year. You can get it right once in a while, but to do it consistently over time? I’ve never known anyone who could do it, and in fact neither myself, nor Burt have ever known anyone who knows anyone who could consistently predict the market.
“It’s as if, we’d all like a genie to tell us when the markets too high, and when we should get out. The nearest thing to that genie, is rebalancing. Basically what this does is remove some of the risks of a portfolio, particularly when one asset class gets too popular, and in volatile markets it tends to increase your returns.” – Burt Malkiel
One of the other things that Burt pays a lot of attention to, especially in more recent editions of A Random Walk Down Wall Street, is “behavioral finance.” Burt explained how sometimes in investing we are our own worst enemies.
“As individuals we buy when everybody is optimistic and sell when people are pessimistic. Rebalancing forces you to do just the opposite of what your instincts tell you. In 2008 the stock market was low and bonds were way up. In this instance rebalancing your portfolio, selling your bonds and buying more stocks, would have protected you and in 2008 would have gotten you more into the market at just the right time.” – Burt Malkiel
So why should people read A Random Walk Down Wall Street, now in it’s 11th edition, if they already read it 40 years ago?
“Because it’s an investment guide and the landscape of financial markets is completely different from what it was 40 years ago, when index funds didn’t even exist. Now we have low-cost index funds. We have ETFs. And one of the things that I try to do in each edition is to tell investors what are the instruments that are available now that you should use to build your portfolio.” – Burt Malkiel
So if you’re going to do an investment guide it needs to be tailored to what is available at that moment and this edition that just came out in January 2015 does exactly that.
Retire with more
You might ask yourself, how is what we’re proposing going to ensure that people are going to retire with more?
“When you look at the data, and you look at the returns of the average actively managed fund, and you compare that over time with the returns of an index fund with an expense ratio that’s close to zero, what you find is that the difference in your return is almost perfectly predicted by the difference in cost. So the average active fund you pay 1% a year for versus the index fund you pay essentially zero for, well, that 1% ends up in your pocket rather than in the pocket of the purveyor of the investment service. But in fact it’s even worse than that, because when you then use your trusted broker as an investment advisor, what happens is he’s likely to add another layer of fees, investment advisory fees.” – Burt Malkiel
One of the main reasons that Burt got involved with us here at Rebalance is that we will act as your investment advisors, and fashion a diversified portfolio and rebalance it over time for you, and we will do this at extremely low expense ratio. The one thing you can be absolute sure of is the lower the fee you pay to the purveyor of the service, the more there’s going to be for you. And let me tell you 1-2 % a year may sound like very little, but that compounds over time and it can be the difference between a nice retirement that gives you the resources to do what you want, and not having the retirement that you deserve.
Make sure you tune in live next week and join me, John Rothmann, and special guest, long time Wall Street Journal columnist Jon Clements, as we dive into his latest book Jonathan Clements Money Guide 2015 to answer your most pressing financial questions.
