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B. Malkiel: Buy and Hold Still Works
Old 11-18-2010, 06:40 PM   #1
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B. Malkiel: Buy and Hold Still Works

The 10th edition of A Random Walk Down Wall Street comes out next month, and Burton Malkiel has an article in today's WSJ defending buy-and-hold investing (across a diversified asset allocation) against a new generation of believers in market timing/active management. From the article:
Quote:
In the wake of the recent financial crisis, many investors believe that the traditional methods of portfolio management don't work anymore. They think that "buying and holding" is outdated, and that success depends on skillful timing. Diversification no longer works, they argue, because all asset classes move up and down together, especially when stock markets fall. In other words, diversification fails us just when we need it most. . .

I don't agree with any of these arguments. The timeless investment maxims of the past remain valid. Indeed, their benefits may be even greater today than ever before.


. . . Buy and hold investors in the U.S. stock market made an average annual return of 8% during the 15 years from 1995 through 2009. But if they had missed the 30 best days in the market over that period, their return would have been negative. Market strategists called for a sharp market decline in late August 2010 as technical indicators were uniformly bearish. The market responded with its best September in decades.
[Discussion of DCA and rebalancing]
For example, suppose an investor was most comfortable choosing an initial allocation of 60% equities, 40% bonds. From 1996 through 1999, annually rebalancing such a portfolio improved its return by 1 and 1/3 percentage points per year versus a strategy of making no changes. Diversification has not lost its effectiveness. Over the past several years, when stocks went down, bonds went up, preserving the value of the portfolio. And while stock markets around the world have tended to rise and fall together, there were huge differences in regional returns. . . Even though portfolios in the U.S. market actually lost money in the first decade of the 21st century, emerging-market stocks enjoyed returns of more than 10% per year. Every portfolio should have substantial holdings in the fast-growing emerging economies of the world.
Low-cost passive (index-fund) investing remains an excellent strategy for at least the core of every portfolio. Even if markets may not always be efficiently priced, index funds must produce above-average returns after costs. All the stocks in the market must be held by someone. Therefore, if one active portfolio manager is holding the better-performing stocks, then some other active manager must be holding those with below-average returns.



. . . .

The evidence is clear. Low-cost index funds regularly outperform two-thirds of actively managed funds, and the one-third of actively managed funds that outperform changes from period to period. Even the very few professional investors who have beaten the market over long periods of time—Berkshire Hathaway's Warren Buffett and Yale University's David Swensen, for instance—are quick to advise that investors are likely to be much better off with simple low-cost index funds than with expensive actively managed funds.
The chart nearby illustrates how someone who invested $100,000 at the start of 2000 and, following my advice, used index funds, stayed the course and rebalanced once a year, would have seen that investment grow to $191,859 by the end of 2009. At the same time, someone buying only U.S. stocks would have seen that same investment decline to $93,717.
The recommended index-fund portfolios contain bonds, U.S. stocks, foreign stocks (including those from emerging markets) and real-estate securities. The diversified portfolio, annually rebalanced, produced a satisfactory return even during one of the worst decades investors have ever experienced. . . .

If you ignore the pundits who say that old maxims don't work and you follow the time-tested techniques espoused here, you are likely to do just fine, even during the toughest of times.
I was lucky to happen on a copy of A Random Walk about 25 years ago. It probably saved me from making a lot of mistakes. IMO, even those who are die-hard market timers and stock pickers would be well advised to give it a read. It's a book that's likely to come up an any active/passive investing debate, and it's good to know the "other side's" arguments if possible.
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Old 11-18-2010, 06:55 PM   #2
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I too have a warm spot in my heart for Malkiel's "A Random Walk". It was the first investing book I read when I decided to try and understand this whole investing thing several years ago. I had made a few mistakes up to then, fortunately none too costly. Long live Buy, Hold and Rebalance!

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Old 11-18-2010, 07:03 PM   #3
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Malkiel's "Random Walk" is a must read for all investors. The descriptions of all past bubbles alone make the book worthwhile.

Last year, I checked out from the library the latest edition (2007?) because my own copy was an older edition, just to see if Malkiel made any mention of the then on-going housing bubble. I was disappointed that I could not find any warning of the impending bubble burst. Is it really true that no one could call a bubble until it already broke, including the market sages?

The "Vanguard Mix" performance shown in the OP is indeed impressive. If that portfolio mix was recommended in the last edition, I must have missed it, because I skimmed through the book. Any one here has been following that recipe?

PS. By the way, the "Buy and Hold" is a misnomer. It is really "Buy and Rebalance". Now, when we start talking about how and when to rebalance, oh boy!
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Old 11-18-2010, 08:03 PM   #4
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Originally Posted by NW-Bound View Post
... to see if Malkiel made any mention of the then on-going housing bubble. I was disappointed that I could not find any warning of the impending bubble burst. Is it really true that no one could call a bubble until it already broke, including the market sages?

...

PS. By the way, the "Buy and Hold" is a misnomer. It is really "Buy and Rebalance".
I think you answered your own question (though I read it long ago and forget a lot)... I don't think he is expecting to call the bubbles, let the re-balancing take care of that.

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]The 10th edition of A Random Walk Down Wall Street comes out next month, and Burton Malkiel has an article in today's WSJ defending buy-and-hold investing...
Quote:
The chart nearby illustrates how someone who invested $100,000 at the start of 2000 and, following my advice, used index funds, stayed the course and rebalanced once a year, would have seen that investment grow to $191,859 by the end of 2009. At the same time, someone buying only U.S. stocks would have seen that same investment decline to $93,717.

Hmmm, definitely time to re-read him. I keep some allocated to international, but not emerging markets specifically. I'm guessing that a lot of that success was having a fair number of segments to re-balance in/out to/from.

Thanks for posting that, I would have missed it.


-ERD50
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Old 11-20-2010, 07:33 AM   #5
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Good article, thanks.

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Diversification no longer works, they argue, because all asset classes move up and down together, especially when stock markets fall.
It's telling that one of the chief arguments against buy and hold is grounded in a deep misunderstanding of what diversification is supposed to do. Anyone who claims that diversification failed in 2008 obviously didn't have 100% of their portfolio in Lehman stock.
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Old 11-20-2010, 09:37 AM   #6
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Reading A Random Walk was the turning point for me. A good part of everything I have, including FIRE, I owe to that book.
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Old 11-20-2010, 09:43 AM   #7
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I was assigned to read A Random Walk in college - fortuituous. It's still in my top 10 investment books on my shelf and it's the second oldest (Graham's The Intelligent Investor is the oldest keeper).
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Old 11-20-2010, 11:37 AM   #8
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Good article, thanks.

It's telling that one of the chief arguments against buy and hold is grounded in a deep misunderstanding of what diversification is supposed to do. Anyone who claims that diversification failed in 2008 obviously didn't have 100% of their portfolio in Lehman stock.
Or a chunk of govt short/int term bond funds...

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Old 11-20-2010, 03:37 PM   #9
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All this talk about Random Walk is making me all warm and fuzzy. I guess I need to drag it out once again and enjoy the beauty of the book. I need to read it once again; I might have missed something the first two times.
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Old 11-20-2010, 03:41 PM   #10
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PS. By the way, the "Buy and Hold" is a misnomer.
But...doesn't B&H include rebalancing?
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Old 11-20-2010, 09:41 PM   #11
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But...doesn't B&H include rebalancing?
Ah, we have visited this subject many times before.

My position is that "hold" is hold and "rebalance" means selling and buying something else, which means "not holding".

I usually try to stay true to the meaning of the words and be precise, just like the mathematician in the following story.

Its funny joke Thursday!
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Old 11-22-2010, 12:22 PM   #12
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I belive in it. My strategy in regular times is to buy and hold. In irregular times is to buy and hold on for dear life
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Rebalancing
Old 11-23-2010, 09:14 AM   #13
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Rebalancing

Let's all say it together "Annual rebalancing our portfolio IS NOT market timing"
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Old 11-23-2010, 02:56 PM   #14
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Let's all say it together "Annual rebalancing our portfolio IS NOT market timing"
It's recalibrating for the market, not market timing
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Old 11-23-2010, 06:04 PM   #15
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I dunno about market t*m*ng thing. Who brought that up? I thought those words should be avoided in polite company.

Let's just say that rebalancing is an attempt to "buy low and sell high". And "buy low sell high" is charity work as the late Sir Templeton explained it.

In an interview, he said that his job was to help other investors, and to damp out market movements. When people wanted to sell, he bought from them. And when they clamored to buy, he sold to them. In 2000 during the dotcom mania, he went to extra length to help people by selling them what he did not even have. He sold short! He "sold high" first, and then never did have to "buy low" as these dotcoms went bankrupt. He made $80M for himself, but it was not about the money as he already had plenty. A nice gentleman.
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Old 11-23-2010, 07:27 PM   #16
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My position is that "hold" is hold and "rebalance" means selling and buying something else, which means "not holding".
What if we just say we are "holding" our Asset Allocation?

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Old 11-23-2010, 07:29 PM   #17
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Yeah, I like that.

I like "charity work" like Templeton's even more, if I could be so selfless.

PS. Well, on a second thought, even if you do no rebalancing, your AA will slowly come back as the market recovers. So, what is your excuse for all that selling and buying then?
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Old 11-23-2010, 07:39 PM   #18
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PS. Well, on a second thought, even if you do no rebalancing, your AA will slowly come back as the market recovers.
Only if all of your individual investments return the exact same amount over time.
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Old 11-23-2010, 07:42 PM   #19
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PS. Well, on a second thought, even if you do no rebalancing, your AA will slowly come back as the market recovers. So, what is your excuse for all that selling and buying then?
It wouldn't be 'holding' the AA then, it would be watching it slip by. And it sure isn't that much selling for most people, though I do want to get this edition and see just how much selling was done.

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Old 11-23-2010, 07:46 PM   #20
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It wouldn't be 'holding' the AA then, it would be watching it slip by. And it sure isn't that much selling for most people, though I do want to get this edition and see just how much selling was done.

-ERD50
Eh? Then, my next question is how "tight" should one hold her AA? Rebalance everyday? Or intraday?
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