{"id":46793,"date":"2021-08-29T05:33:00","date_gmt":"2021-08-29T09:33:00","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=46793"},"modified":"2021-09-02T18:54:34","modified_gmt":"2021-09-02T22:54:34","slug":"best-investment-strategy","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/best-investment-strategy\/","title":{"rendered":"The Best Investment Strategy: Expert Advice"},"content":{"rendered":"\n

What is the best investment strategy<\/a>, according to economist Burton Malkiel? Why are index funds likely your best bet?<\/p>\n\n\n\n

In A Random Walk Down Wall Street<\/a><\/em>, economist Burton Malkiel reveals his best investment strategy. If you only take one thing away from the book it should be this: Investors are better off putting their money in a passively managed index fund\u2014a total market<\/em> index fund, to be precise\u2014than trading stocks themselves or investing in an actively managed mutual fund.<\/p>\n\n\n\n

Find out more about Burton Malkiel’s best investment strategy below. <\/p>\n\n\n\n\n\n\n\n

What Is the Best Investment Strategy?<\/h2>\n\n\n\n

In A Random Walk Down Wall Street, Burton Malkiel details the best investment strategy for long-term success. <\/p>\n\n\n\n

This economic classic is an accessible guide to financial markets for the individual investor<\/strong>. Written by Burton Malkiel, an economist (Ph.D., Princeton) with years of practical experience on Wall Street, the book covers everything from buying life insurance to pricing commodities to understanding credit default swaps<\/a>. But, for the most part, Malkiel\u2019s focus is on common stocks<\/strong>\u2014shares in individual firms\u2014and the stock market.<\/p>\n\n\n\n

Although Malkiel offers a wealth of information that investors can use to make individual investments on their own, he repeatedly emphasizes the advantages of index investing<\/strong>. According to Malkiel, the best investment strategy is to put your money in a passively managed index fund (specifically a total market index fund). This is better than trading stocks themselves or investing in an actively managed mutual fund.<\/p>\n\n\n\n

For example, an investor who put $10,000 into an S&P 500 Index Fund in 1969 would have had a $1,092,489 portfolio in April 2018 (assuming all dividends were reinvested). An investor who put the same amount of money into an actively managed fund would\u2019ve only had $817,741.<\/p>\n\n\n\n

Ideal for the prospective investor who wants to take advantage of stock-market returns but isn\u2019t interested in specifics, the autopilot strategy consists of purchasing broad index mutual funds or exchange-traded funds (ETFs) <\/strong>rather than individual stocks or industries.<\/p>\n\n\n\n

(Some of the tax differences between traditional mutual funds and ETFs are described below, but the general rule of thumb is: If you have a large lump sum <\/strong>that you want to invest in index funds<\/a>, ETFs are generally the most advantageous choice<\/strong>. If you\u2019re going to be purchasing index fund shares in smaller amounts over a longer period of time<\/strong>, traditional mutual funds<\/strong> are your best bet.) <\/p>\n\n\n\n

The autopilot strategy is Malkiel\u2019s preferred method of investing. No matter how knowledgeable or engaged the investor, Malkiel advises building the core of a portfolio around index funds<\/strong> and only making active bets with excess cash<\/strong>.<\/p>\n\n\n\n

The rationale behind the autopilot strategy is simple: Long-run returns of the S&P 500 Stock Index, which represents almost three-quarters of the value of the entire stock market, typically beat returns on portfolios<\/strong> designed by the most seasoned investment professionals. In short, if you were to invest in a mutual fund that holds a weighted representation of the stocks in the S&P 500, you would do better on average<\/strong> than trying to pick winners yourself or entrusting your money to an investment advisor.<\/p>\n\n\n\n

Not only are returns better with broad market index funds, fees and expenses tend to be, too<\/strong>. Because index funds are passively managed\u2014that is, they adjust their holdings more or less automatically on the basis of market values\u2014they tend to have extremely low expense ratios (.0005% or less for some). And because index funds only trade to rebalance their weights, they incur low trading costs as well<\/strong>.<\/p>\n\n\n\n

While the S&P 500 index funds are generally the most popular type of index fund\u2014and they will outperform actively managed funds on average\u2014Malkiel actually recommends that investors choose a total market index fund<\/strong> over an S&P 500 fund. This is because the S&P 500 index excludes smaller stocks<\/strong> that, historically and on average, have outperformed larger ones<\/strong>. Try to find a fund indexed to the Russell 3000, the Wilshire Total Market Index, the CRSP Index, or the MSCI US Broad Market Index. <\/p>\n\n\n\n

Of course, as Modern Portfolio Theory<\/a> teaches (see Chapter 8), diversification is the key to a successful portfolio. But one need not abandon index funds to diversify: There are funds that track REIT, corporate bonds, international capital, and emerging market indices<\/strong>.<\/p>\n\n\n\n

A Sample Index-Fund Portfolio<\/strong><\/h3>\n\n\n\n

Here are some specific funds you might consider in each of the primary asset classes (cash, bonds and bond substitutes, REITs, and stocks). Consult the age-dependent allocations in the previous chapter to determine how much of each asset you should hold. <\/p>\n\n\n\n