Thursday, November 18, 2010

Investment Strategy

In today's WSJ, Burton Malkiel rolls out some timeless investment advise (just before the release of the 10th edition of his book). As I list his book as one of my top five, I won't begrudge him the publicity.

Malkiel is professor of economics at Princeton and is one of many who advise investors to buy and hold. Market timing doesn't have a good track record.  Malkiel points out that missing out on the best 30 days of the market (because you did not time the market perfectly) can be the difference between profit and loss over a 14 year period.

Malkiel also makes a plug for low-cost investment. The fees paid for managed investment eat into returns, and few managed investments beat the market consistently for long.  Buffett is the hero in this category. Most investors should stick with index funds (of foreign and domestic stocks and bonds) from low-fee financial institutions like Vanguard.

'Buy and Hold is Still a Winner' by Burton Malkiel (need WSJ subscription)

A similar  2007 article from the Motley Fool

'Timing the Market' by The Motley Fool 1-23-2007

To summarize mainstream advice:
1. invest constant amount regularly (don't time market)
2. invest primarily in low-fee index funds
      for example 25% global stock fund, 35% domestic stock fund 40% bond fund
      rule of thumb - If investing for retirement, the percentage in bond funds should equal your age.
3. periodically adjust your portfolio to maintain desired allocation
4. save a lot
    If you are fully funding your own retirement at 65, saving 15-20% from the time you start working    would be ideal.
5. be smart about tax implications - max out your 401k
    

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