What is the best advice for investors? What are Burton Malkiel’s 12 rules for successful investments?<\/p>\n\n\n\n
From maximizing<\/a> your savings to avoiding unnecessary taxes and diversifying your portfolio<\/a>, Burton Malkiel offers the best advice for investors in his book A Random Walk Down Wall Street<\/a><\/em>. Knowing his helpful rules will help you make the most out of your investments. <\/p>\n\n\n\n Find the best advice for investors below. <\/p>\n\n\n\n\n\n\n\n In his book A Random Walk Down Wall Street<\/em>, economist Burton Malkiel reveals the best advice for investors. <\/p>\n\n\n\n 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<\/strong>, novice and experienced alike.<\/p>\n\n\n\n Before exploring specific investment vehicles and strategies, however, it\u2019s vital to have some basic financial principles under your belt.<\/p>\n\n\n\n Valuable for novices and experienced investors alike, Burton Malkiel\u2019s best advice for investors is essential to realizing returns.<\/p>\n\n\n\n Here\u2019s a look at the best advice for investors:<\/p>\n\n\n\n In investing, there is truly no such thing as getting rich quick<\/strong>. The best way to realize returns is to begin investing as soon as possible and keep investing steadily<\/strong>, whether through the automatic reinvestment of dividends or regular contributions to a tax-advantaged retirement plan. <\/p>\n\n\n\n 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.<\/p>\n\n\n\n Rainy days happen, and even the most successful investor needs liquid assets that can be called upon in a pinch<\/strong> (or the financial protection of insurance).<\/p>\n\n\n\n In terms of cash reserves, if you have decent health and disability insurance<\/a>, three months\u2019 worth of living expenses<\/strong> is a good benchmark. And for large future expenses\u2014for example, a son or daughter\u2019s college tuition\u2014certificates of deposit<\/strong> with a maturity date shortly before matriculation are your best bet.<\/p>\n\n\n\n As for insurance, home, auto, health, and disability are musts. As is life insurance<\/strong>, if you\u2019re the primary breadwinner for a family with dependents. <\/p>\n\n\n\n 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. <\/p>\n\n\n\n Although the high-premium products have advantages\u2014primarily tax-free contributions\u2014the commissions and fees can be prohibitive. Thus Malkiel favors buying low-premium term insurance<\/strong> and investing the difference between the high-premium product and the low-premium product in a tax-deferred retirement<\/a> plan.<\/p>\n\n\n\n (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<\/strong>\u2014unnecessary expenses for the typical investor. Only extremely high-wealth individuals who\u2019ve maxed out all other tax-deferred alternatives should consider annuities.)<\/p>\n\n\n\n Ideally, the term insurance product will be renewable without the need for a doctor\u2019s visit and feature an \u201cA\u201d rating from A.M. Best<\/strong> (don\u2019t buy anything with a rating lower than \u201cA\u201d). And you should shop around for the best product on your own<\/strong> rather than consulting an insurance agent\u2014the agent\u2019s commission will be tacked onto your premium payment.<\/p>\n\n\n\n Keeping your cash in a low-interest savings account can be a losing proposition<\/strong> when inflation outpaces the interest you\u2019re earning<\/strong>. <\/p>\n\n\n\n Malkiel believes money-market mutual funds are the best product in general for cash reserves<\/strong>. Make sure to choose a low-expense option like those offered by Vanguard or Fidelity. There are also tax-exempt money-market funds<\/strong> that are ideal for high-income investors.<\/p>\n\n\n\n If you know the date of a sizable future expenditure, certificates of deposit (or \u201cCDs\u201d) are your best choice<\/strong>. <\/p>\n\n\n\n Additional products include internet banks<\/strong>, which can offer higher interest rates because of low overhead, and U.S. Treasury bills<\/strong>, which can offer decent (and tax-free returns). <\/p>\n\n\n\n There is no good reason you should pay taxes on investment earnings for retirement or expenses like college tuition<\/strong>. <\/p>\n\n\n\n First, take advantage of individual retirement accounts (IRAs)<\/strong>. Earnings on IRA holdings aren\u2019t taxed, and, by the time you actually withdraw the funds from the IRA, you\u2019re likely to be in a lower tax bracket than you are currently.<\/p>\n\n\n\n There are also Roth IRAs<\/strong>. The key difference between a traditional IRA and Roth IRA concerns tax advantages: With traditional IRAs, contributions are tax deductible, but you\u2019ll pay taxes when you eventually withdraw your funds; with Roth IRAs, you pay taxes upfront, but withdrawals (including earnings) are tax-free<\/strong>.<\/p>\n\n\n\n Which IRA is best depends on your personal financial situation<\/strong>. Investors with low taxes now might opt for a Roth IRA. Investors with high taxes now might go with a traditional IRA.<\/p>\n\n\n\n If you have access to a retirement plan like a 401(k) or 403(b)<\/strong>, which are tax-free, Malkiel\u2019s advice is to max them out wherever possible<\/strong>. And if you want to save for a child or grandchild\u2019s college tuition, tax-advantaged \u201c529\u201d accounts are the way to go<\/strong>. <\/p>\n\n\n\n One way to align your goals<\/a> with the products available is to determine your tolerance for risk<\/strong>. Those who are nearing retirement (or who just want to sleep well at night) should opt for \u201clow\u201d and \u201cmoderate\u201d risk assets<\/strong> 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.<\/p>\n\n\n\n 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\u2014see the account of 2008 in Chapter 4\u2014owning a home has proven to be a reliable means for families to hedge against inflation and realize returns<\/strong>.<\/p>\n\n\n\n For those investors without the means or desire to buy a home, real estate investment trusts (or REITs) provide a nice alternative<\/strong>. REITs consist of real estate assets\u2014apartment buildings, offices, and the like\u2014packaged 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.<\/p>\n\n\n\n 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).<\/p>\n\n\n\n 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 \u201czeroes\u201d), 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. <\/p>\n\n\n\n If you\u2019re planning to buy bonds directly\u2014rather than gaining exposure through a mutual fund\u2014then your best bets are new issues<\/strong>. Newer bonds generally offer better yields than established bonds, but only buy bonds rated A or above<\/strong> by Moody\u2019s or S&P.<\/p>\n\n\n\n Investors interested in exposure to a wide range of bonds can opt for bond mutual funds <\/strong>from companies like Fidelity and Vanguard. Popular bond substitutes include Treasury inflation-protected securities (TIPS)<\/strong>, whose face value rises to keep pace with inflation, and high-dividend stocks<\/strong>.<\/p>\n\n\n\n Assets like gold, fine art, baseball cards, and commodities futures are extremely fickle and don\u2019t pay interest or dividends. Unless you have ample resources in other instruments, assets like these should only occupy a modest part of your portfolio<\/strong>.<\/p>\n\n\n\n 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\u2019s too volatile to be a large part of your investments<\/strong>, but a modest position (say, 5% of your total portfolio) can be worthwhile in a well-diversified portfolio.<\/p>\n\n\n\n Hedge, private-equity, and venture-capital funds also aren\u2019t a wise choice for the average retail investor<\/strong>. These investments entail considerable commissions and fees, and the portfolio managers take a considerable chunk of the funds\u2019 profits. <\/p>\n\n\n\n With the advent of commission-free brokerage services\u2014from companies like Fidelity, Robinhood, and Charles Schwab\u2014stock trading has become accessible to even the humblest investor<\/strong>.<\/p>\n\n\n\n That said, there are still high-expense products that investors need to be aware of and avoid<\/strong>. <\/p>\n\n\n\n One such product is a \u201cwrap account.\u201d 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<\/strong>. Steer clear.<\/p>\n\n\n\n You should also be wary of mutual funds and ETFs with high expense ratios<\/strong>. (An expense ratio is the percentage of the fund\u2019s assets that the managers of the fund keep for fees and expenses.) There are ample low-cost alternatives\u2014for example, passively managed index funds offered by companies like Vanguard\u2014that boast competitive returns for minimal fees. (The expense ratio for Vanguard\u2019s flagship S&P 500 fund is 0.04%.<\/p>\n\n\n\n The key to consistent and positive returns over the long run is (a) diversification <\/strong>among<\/em><\/strong> asset classes<\/strong> (stocks, bonds, REITs, and so on.) and (b) diversification <\/strong>within<\/em><\/strong> asset classes<\/strong> (negatively correlated common stocks, a mix of corporate bonds and TIPS, etc.).<\/p>\n\n\n\n Studies in behavioral finance<\/a> have shown that word of mouth<\/a> is a frequent driver of stock purchases<\/strong>. When some new investment is the talk of the town, it\u2019s natural to want to take part. But resist the urge<\/strong>: Stocks or funds that are hot one quarter are almost invariably losers the next. It\u2019s generally better to stick with \u201cvalue\u201d stocks<\/strong>\u2014securities issued by tried-and-true companies with steady revenues\u2014than gamble on \u201cgrowth\u201d stocks with high risk.<\/p>\n\n\n\n When investors trade to realize short-term gains, they tend to incur high transaction costs and taxes<\/strong>. One study of 66,000 households found that the households that traded the most earned an 11.4% return on their investments\u2014while the market returned 17.9%<\/strong>.<\/p>\n\n\n\n If you have to trade, trade losers. <\/strong>The tax benefits of incurring a loss are likely better than the gains of selling a winner.<\/p>\n\n\n\n Explore Malkiel\u2019s best advice for investors:<\/p>\n\n\n\nThe Best Advice for Investors <\/strong><\/h2>\n\n\n\n
Rule 1) Start Saving Sooner Rather Than Later<\/strong><\/h3>\n\n\n\n
Rule 2) Back Yourself Up With Cash and Insurance<\/strong><\/h3>\n\n\n\n
Cash<\/strong><\/h4>\n\n\n\n
Insurance<\/strong><\/h4>\n\n\n\n
Rule 3) Set Up Your Cash to Keep Pace With Inflation<\/strong><\/h3>\n\n\n\n
Rule 4) Sidestep the Tax Collector<\/strong><\/h3>\n\n\n\n
Rule 5) Know Yourself<\/strong><\/h3>\n\n\n\n
Rule 6) Invest in Real Estate<\/strong><\/h3>\n\n\n\n
Rule 7) Buy Bonds Wisely<\/strong><\/h3>\n\n\n\n
Rule 8) Tread Carefully in Gold, Collectibles, and Commodities<\/strong><\/h3>\n\n\n\n
Rule 9) Limit Costs Wherever You Can<\/strong><\/h3>\n\n\n\n
Rule 10) Diversify!<\/strong><\/h3>\n\n\n\n
Rule 11) Don\u2019t Follow the Crowd<\/strong><\/h3>\n\n\n\n
Rule 12) Don\u2019t Overtrade<\/strong><\/h3>\n\n\n\n
Exercise: Review the Best Investment Advice<\/strong><\/h3>\n\n\n\n