The Best Advice for Investors: 12 Powerful Rules

This article is an excerpt from the Shortform book guide to "A Random Walk Down Wall Street" by Burton G. Malkiel. Shortform has the world's best summaries and analyses of books you should be reading.

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What is the best advice for investors? What are Burton Malkiel’s 12 rules for successful investments?

From maximizing your savings to avoiding unnecessary taxes and diversifying your portfolio, Burton Malkiel offers the best advice for investors in his book A Random Walk Down Wall Street. Knowing his helpful rules will help you make the most out of your investments. 

Find the best advice for investors below. 

The Best Advice for Investors 

In his book A Random Walk Down Wall Street, economist Burton Malkiel reveals the best advice for investors. 

His advice is practical: What investments boast the best returns? How should I save for retirement? How can I anticipate future movements in the market? The balance of the book is devoted to actionable advice for investors, novice and experienced alike.

Before exploring specific investment vehicles and strategies, however, it’s vital to have some basic financial principles under your belt.

Valuable for novices and experienced investors alike, Burton Malkiel’s best advice for investors is essential to realizing returns.

Here’s a look at the best advice for investors:

Rule 1) Start Saving Sooner Rather Than Later

In investing, there is truly no such thing as getting rich quick. The best way to realize returns is to begin investing as soon as possible and keep investing steadily, whether through the automatic reinvestment of dividends or regular contributions to a tax-advantaged retirement plan. 

One simple way to increase your savings, if your employer offers a retirement plan, is to increase your voluntary contributions to the plan on a regular timetable, for example annually.

Rule 2) Back Yourself Up With Cash and Insurance

Rainy days happen, and even the most successful investor needs liquid assets that can be called upon in a pinch (or the financial protection of insurance).


In terms of cash reserves, if you have decent health and disability insurance, three months’ worth of living expenses is a good benchmark. And for large future expenses—for example, a son or daughter’s college tuition—certificates of deposit with a maturity date shortly before matriculation are your best bet.


As for insurance, home, auto, health, and disability are musts. As is life insurance, if you’re the primary breadwinner for a family with dependents. 

The two primary types of life insurance are high-premium products that combine the insurance with an investment account and low-premium term products that only offer death benefits. 

Although the high-premium products have advantages—primarily tax-free contributions—the commissions and fees can be prohibitive. Thus Malkiel favors buying low-premium term insurance and investing the difference between the high-premium product and the low-premium product in a tax-deferred retirement plan.

(The same advice applies to variable-annuity products, which typically tack on an insurance feature to an investment product like a mutual fund. These products often entail steep commissions and fees—unnecessary expenses for the typical investor. Only extremely high-wealth individuals who’ve maxed out all other tax-deferred alternatives should consider annuities.)

Ideally, the term insurance product will be renewable without the need for a doctor’s visit and feature an “A” rating from A.M. Best (don’t buy anything with a rating lower than “A”). And you should shop around for the best product on your own rather than consulting an insurance agent—the agent’s commission will be tacked onto your premium payment.

Rule 3) Set Up Your Cash to Keep Pace With Inflation

Keeping your cash in a low-interest savings account can be a losing proposition when inflation outpaces the interest you’re earning

Malkiel believes money-market mutual funds are the best product in general for cash reserves. Make sure to choose a low-expense option like those offered by Vanguard or Fidelity. There are also tax-exempt money-market funds that are ideal for high-income investors.

If you know the date of a sizable future expenditure, certificates of deposit (or “CDs”) are your best choice

Additional products include internet banks, which can offer higher interest rates because of low overhead, and U.S. Treasury bills, which can offer decent (and tax-free returns). 

Rule 4) Sidestep the Tax Collector

There is no good reason you should pay taxes on investment earnings for retirement or expenses like college tuition

First, take advantage of individual retirement accounts (IRAs). Earnings on IRA holdings aren’t taxed, and, by the time you actually withdraw the funds from the IRA, you’re likely to be in a lower tax bracket than you are currently.

There are also Roth IRAs. The key difference between a traditional IRA and Roth IRA concerns tax advantages: With traditional IRAs, contributions are tax deductible, but you’ll pay taxes when you eventually withdraw your funds; with Roth IRAs, you pay taxes upfront, but withdrawals (including earnings) are tax-free.

Which IRA is best depends on your personal financial situation. Investors with low taxes now might opt for a Roth IRA. Investors with high taxes now might go with a traditional IRA.

If you have access to a retirement plan like a 401(k) or 403(b), which are tax-free, Malkiel’s advice is to max them out wherever possible. And if you want to save for a child or grandchild’s college tuition, tax-advantaged “529” accounts are the way to go

Rule 5) Know Yourself

One way to align your goals with the products available is to determine your tolerance for risk. Those who are nearing retirement (or who just want to sleep well at night) should opt for “low” and “moderate” risk assets like broad market index funds and high-quality corporate bonds. Younger (or thrill-seeking) investors might opt for high-risk assets like small-cap stocks and/or equities in developing nations.

Rule 6) Invest in Real Estate

People who rent their domiciles miss out on the tax breaks, earnings potential, and personal gratification of owning a home. For example, under the US Tax Code as of 2018, mortgage debt interest up to $750,000 and property taxes up to $10,000 are tax deductible. Capital gains on real estate up to $500,000 are also tax-free. Although housing bubbles have happened—see the account of 2008 in Chapter 4—owning a home has proven to be a reliable means for families to hedge against inflation and realize returns.

For those investors without the means or desire to buy a home, real estate investment trusts (or REITs) provide a nice alternative. REITs consist of real estate assets—apartment buildings, offices, and the like—packaged into securities that can be traded like common stock. REITs offer competitive dividends and returns; and, since real estate prices are only moderately correlated with stock prices, they are an important part of a fully diversified portfolio.

Some REIT mutual funds that Malkiel recommends are Fidelity Real Estate Index Fund (FRXIX) and Vanguard Real Estate Fund (VGSLX). Some ETFs include Fidelity (FREL) and Vanguard again (VNQ), plus Schwab (SCHH) and iShares (USRT).

Rule 7) Buy Bonds Wisely

Bonds are an essential component of a well-diversified portfolio. There are a number of bond options in addition to the traditional, interest-earning bond, including zero-coupon bonds (or “zeroes”), which sell at a discount and simply pay out their face value at maturity, and tax-exempt bonds, which comprise state or municipal debt that earns interest tax-free. 

If you’re planning to buy bonds directly—rather than gaining exposure through a mutual fund—then your best bets are new issues. Newer bonds generally offer better yields than established bonds, but only buy bonds rated A or above by Moody’s or S&P.

Investors interested in exposure to a wide range of bonds can opt for bond mutual funds from companies like Fidelity and Vanguard. Popular bond substitutes include Treasury inflation-protected securities (TIPS), whose face value rises to keep pace with inflation, and high-dividend stocks.

Rule 8) Tread Carefully in Gold, Collectibles, and Commodities

Assets like gold, fine art, baseball cards, and commodities futures are extremely fickle and don’t pay interest or dividends. Unless you have ample resources in other instruments, assets like these should only occupy a modest part of your portfolio.

Take gold for example. At the beginning of the 1980s, an ounce sold for over $800. By the early 2000s, it sold for $200. As of 2018, it sold for $1,200. Simply put, it’s too volatile to be a large part of your investments, but a modest position (say, 5% of your total portfolio) can be worthwhile in a well-diversified portfolio.

Hedge, private-equity, and venture-capital funds also aren’t a wise choice for the average retail investor. These investments entail considerable commissions and fees, and the portfolio managers take a considerable chunk of the funds’ profits. 

Rule 9) Limit Costs Wherever You Can

With the advent of commission-free brokerage services—from companies like Fidelity, Robinhood, and Charles Schwab—stock trading has become accessible to even the humblest investor.

That said, there are still high-expense products that investors need to be aware of and avoid

One such product is a “wrap account.” Offered by various brokerages, these accounts are actively managed by a professional manager who picks an array of assets for your portfolio. Fees for these accounts can run you up to 3% per year, which makes outpacing the market almost impossible. Steer clear.

You should also be wary of mutual funds and ETFs with high expense ratios. (An expense ratio is the percentage of the fund’s assets that the managers of the fund keep for fees and expenses.) There are ample low-cost alternatives—for example, passively managed index funds offered by companies like Vanguard—that boast competitive returns for minimal fees. (The expense ratio for Vanguard’s flagship S&P 500 fund is 0.04%.

Rule 10) Diversify!

The key to consistent and positive returns over the long run is (a) diversification among asset classes (stocks, bonds, REITs, and so on.) and (b) diversification within asset classes (negatively correlated common stocks, a mix of corporate bonds and TIPS, etc.).

Rule 11) Don’t Follow the Crowd

Studies in behavioral finance have shown that word of mouth is a frequent driver of stock purchases. When some new investment is the talk of the town, it’s natural to want to take part. But resist the urge: Stocks or funds that are hot one quarter are almost invariably losers the next. It’s generally better to stick with “value” stocks—securities issued by tried-and-true companies with steady revenues—than gamble on “growth” stocks with high risk.

Rule 12) Don’t Overtrade

When investors trade to realize short-term gains, they tend to incur high transaction costs and taxes. One study of 66,000 households found that the households that traded the most earned an 11.4% return on their investments—while the market returned 17.9%.

If you have to trade, trade losers. The tax benefits of incurring a loss are likely better than the gains of selling a winner.

Exercise: Review the Best Investment Advice

Explore Malkiel’s best advice for investors:

  • Why is investing in real estate so important? If you don’t already own your home, how might you go about investing in real estate?
  • Why might it be better to contribute to your 401(k) than open up a brokerage account on your own?
  • How would you rate your risk tolerance—high, low, or moderate? Review the table in Principle #5 and write down the assets you think would be best for you. (You can compare these with Malkiel’s suggested allocations in Chapter 14.)
  • If you already own a portfolio, review your holdings. Are you adequately diversified? How might you increase your diversification in light of Malkiel’s recommendations? (If you aren’t already investing, how might you invest to ensure you’re adequately diversified?)
The Best Advice for Investors: 12 Powerful Rules

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Elizabeth Shaw

Elizabeth graduated from Newcastle University with a degree in English Literature. Growing up, she enjoyed reading fairy tales, Beatrix Potter stories, and The Wind in the Willows. As of today, her all-time favorite book is Wuthering Heights, with Jane Eyre as a close second. Elizabeth has branched out to non-fiction since graduating and particularly enjoys books relating to mindfulness, self-improvement, history, and philosophy.

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