Day 181: Back to Investing Basics

In re-reading “A Random Walk Down Wall Street,” I am reminded of the basics of how to succeed as a long-term, buy-and-hold index fund investor. These basics could be summarized as follows:

  • save a good portion of your income (actually, as much as you can)
  • with that savings, buy low-cost index funds
  • hold for the long-term (your wealth will grow!)

It’s not a flashy formula, but it has worked for millions of people. Let’s take each item one at a time:

Save a good portion of your income.

Like much of the financial literature, Malkiel makes the all-too-important point that if you don’t save, you don’t have anything to invest:

Without a regular savings program, it doesn’t matter if you make 5 percent, 10 percent, or even 15 percent on your investment funds. The single most important thing you can do to achieve financial security is to begin a regular savings program, and to start it as early as possible.


On a personal note, I recognize how much I think about investing strategies and forget about this elemental truth. Shall I try this fund? Or shall I try that fund? How much international should I have? Should I buy distressed sector funds? One friend of mind once put it to me bluntly, “The most important factor in your portfolio is your savings rate, not the funds you buy.” Malkiel’s words are a good reminder.

Buy low-cost index funds

Throughout “A Random Walk,” Malkiel argues about the recklessness of trying to out-smart the market. Chapter after chapter adds ammunition to the book’s central thesis: no one can reliably and consistently do better than the market over time. Malkiel quotes Jack Bogle, who says of market timing,

In 30 years in this business, I do not know anybody who has done it successfully and consistently, nor anybody who knows anybody who has done it successfully and consistently. Indeed, my impression is that trying to do market timing is likely, not only not to add value to your investment program, but to be counterproductive.


Instead, Malkiel espouses the gospel of the index fund. Since the stock market is expected, over time, to do quite well, and since we humans are not equipped with the magical powers of foresight to be able to anticipate what it will do with any skill, we should instead just buy the whole market!

This line of reasoning essentially gave birth to the index fund when Malkiel first published “A Random Walk” in the 1970s. Thank you, Burton Malkiel.

One very important caveat about owning index funds: Malkiel, like other financial writers, stresses the importance of proper asset allocation. When you pick the component funds in your portfolio, it is important to consider how much risk you can actually tolerate. There can be no reward without risk. But how much risk to take? Malkiel tells a very instructive story on this:

J.P. Morgan once had a friend who was so worried about his stock holdings that he could not sleep at night. The friend asked, “What should I do about my socks?” Morgan replied, “Sell down to the sleeping point.” He wasn’t kidding. Every investor must decide the trade-off he or she is willing to make… High investment rewards can be achieved only at the cost of substantial risk-taking.

p. 318

Hold for the Long Term

The premise of long-term investing is just that… invest long-term! One doesn’t achieve financial security, let alone wealth, instantly through index funds. That’s not the point. It’s a gradual process, requiring patience and consistency and discipline. As Malkiel writes,

The secret of getting rich slowly (but surely) is the miracle of compound interest.* Albert Einstein described compound interest as the “greatest mathematical discovery of all time.” It may sound complicated, but it simply involves earning a return not only on your original investment but also on the accumulated interest that you reinvest.

p. 304

*It is quite possible that Malkiel’s words inspired Tony Robbins to take a similar tact in his book “Money: Master the Game,” which delivered this same message to me in a profound way.

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