Tag Archives: A Random Walk Down Wall Street

Long Live Diversification!

I get tired of all of the articles saying that the old standards of buy and hold and diversification are dead. Every time the market takes a dive or things get volatile, I hear the same refrain:

Buy and hold is dead.
Diversification is an easy way to lose.
Diversification is for idiots.

What I want to know is: Where’s the evidence? Continue reading

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. Continue reading

Arends Case for Moderate Market Timing

Wall Street Journal columnist Brett Arends recently penned another piece on the dangers of blind “buy and hold” investing.

Citing a study by Spanish academic Javier Estrada, Arends makes an argument similar to a recent post on The Big Picture that took great interest in the upside of avoiding the market’s worst days.

The study by Estrada, a finance professor at the IESE Business School at the University of Navarra, seems exhaustive, covering, Arends writes, “nearly a century’s worth of day-to-day moves on Wall Street and 14 other stock markets around the world, from England to Japan to Australia.”

Over an investing period of about 40 years, he calculated, missing the 10 best days would have cost you about half your capital gains. But successfully avoiding the 10 worst days would have had an even bigger positive impact on your portfolio. Someone who avoided the 10 biggest slumps would have ended up with two and a half times the capital gains of someone who simply stayed in all the time.

Arends doesn’t come out in favor of trying to hop in and out of the markets day-to-day but he does argue that these gyrations give added value to dividend-bearing stocks which offer a steady, predictable portion of their total return. Continue reading