Burton Malkiel Says Buy and Hold is Alive and Well, and it Works

Prof. Burton Gordon Malkiel. Photo by J.D. Levine/Yale (photo courtesy of Princeton University)

Burton G. Malkiel, the Princeton professor who brought Efficient Market Theory to the mass market in his classic A Random Walk Down Wall Street has taken up the defense of buy and hold investing, and the idea of diversification more broadly.

Ever since the trauma of 2008 when so many global asset classes moved down in tandem,  there’s been ample discussion of the merits of diversified portfolio building. Many assets classes have continued to be highly correlated.

None of it’s convinced Malkiel. In a strongly worded defense on the Wall Street Journal’s opinion page, adapted from his introduction to the upcoming 10th edition of Random Walk, he remains as convinced as ever that the average investor should own a diversified portfolio made up of cost-effective index funds and contribute to it regularly and rebalance periodically to take advantage of the benefits of dollar cost averaging. (In short: if you’re buying regularly, you’ll buy when prices are low and when they’re high, bringing your average cost somewhere in the middle.It’s an important discipline for retail investors who many studies show too often buy at the high.)

The timeless investment maxims of the past remain valid. Indeed, their benefits may be even greater today than ever before.

To hush the naysayers, Malkiel provides a chart of the 10 year performance of $100,000 split between 5 Vanguard funds as follows  (the links take you to Yahoo comparisons of each fund to the US stock fund, VTSMX):

33% Fixed Income      Vanguard Total Bond Market Index VBMFX

27% US Stock      Vanguard Index Trust Total Stock Market  VTSMX

14% Developed Foreign Markets      Vanguard Developed Markets Index VDMIX

14% Emerging Markets     Vanguard Emerging Markets Stock VEIEX

12% Real Estate Investment Trust      Vanguard REIT Index  VGSIX

That shows a growth of almost $92,000 over the period. Malkiel writes:

The diversified portfolio, annually rebalanced, produced a satisfactory return even during one of the worst decades investors have ever experienced. And if the investor also used dollar-cost averaging to add small amounts to the portfolio consistently over time, the results would have been even better.

In the comments on the piece, one criticism raised was that Malkiel had cherry picked his time frame, “mov(ing) the goal post” to “show you a great return.” That the last 10 years would have been negative.

Using a backtesting tool Folio Investing offers on unfunded “watch” portfolios I tested that out and also found that the Malkiel portfolio won handily over that time frame, rising almost 70% during the “lost decade” of 2000-2010, compared to a 2.73% decline for the stock fund alone.

Obviously his tilt toward emerging markets helped, but the most crucial was the bond stake, a standard form of diversification found in even the simplest portfolios.

(Editor’s note on Correction: the original version of this piece said Malkiel’s portfolio held 4 Vanguard funds, which is incorrect. It holds five. Also the Wall Street Journal chart tracks 10 years of performance, not 15, as described in the original version of this post. The corrected sentence: To hush the naysayers, Malkiel provides a chart of the 10-year performance of $100,000 split between 5 Vanguard funds as follows.)

3 thoughts on “Burton Malkiel Says Buy and Hold is Alive and Well, and it Works

  1. Pingback: Tweets that mention Burton Malkiel Says Buy and Hold is Alive and Well, and it Works « Portfolioist.com -- Topsy.com

  2. Jon J Prager

    Your presentation reflected the use of FIVE Vanguard funds–not 4–because the composite includes the Vanguard Total U.S. equity fund as well as being compared to that same fund.

  3. Nanette Byrnes Post author

    Absolutely right Jon. Thanks for the heads up — I’ve corrected that in text, and noted it in a correction. The charts and other were all accurate and no other changes were required.
    Appreciate your close read!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s