Authors: Burton G. Malkiel and Charles D. Ellis
Date Published: 2013
The Elements of Investing – Author Background
Burton Gordon Malkiel was born on 28 August, 1932. He is an American economist and writer, most famous for his classic finance book A Random Walk Down Wall Street (first published 1973, and now in its 12th edition as of 2019). He is a leading proponent of the efficient-market hypothesis, which contends that prices of publicly traded assets reflect all publicly available information, although he has also pointed out that some markets are evidently inefficient, exhibiting signs of non-random walk.
Malkiel is a professor of economics at Princeton University, and is a two-time chairman of the economics department there. He also spent 28 years as a director of the Vanguard Group.
Malkiel in general supports buying and holding index funds as the most effective portfolio-management strategy but does think it is viable to actively manage “around the edges” of such a portfolio.
Charles D. Ellis, born on 22 October 1937, is a consultant to large public and private institutional investors. He was for three decades managing partner of Greenwich Associates, the international business strategy consulting firm.
He serves as Chair of Whitehead Institute, was a director of Vanguard, chair of Yale’s investment committee and trustee of the university and is a trustee and chairs the finance committee at the Robert Wood Johnson Foundation. He has taught the advance investment courses at both Harvard Business School and Yale School of Management, and is the author of 14 books, including the bestselling ‘Winning the Loser’s Game’.
The Elements of Investing: It All Starts with Saving
“It doesn’t matter whether you make a return of 2 percent, 5 percent, or even 10 percent on your investments if you have nothing to invest”.
The Elements of Investing: I – Save
- Save. Th e amount of capital you start with is not nearly as important as organizing your life to save regularly and to start as early as possible.
- Never, never, never take on credit card debt
- The secret of getting rich slowly, but surely, is the miracle of compound interest
- Refer to the “Rule of 72” – For example, a 10 percent rate of return will double your money in 7.2 years, it will double your money again in the next 7.2 years. In less than 15 years (14.4 years to be exact), you ’ll have four times your money — and sixteen times your money in 28.8 years
- You can accumulate much more money by starting earlier and taking greater advantage of the miracle of compounding
- Th ink in terms of opportunity cost. Th ink of every dollar you spend as the amount it could grow into by the time you retire
- Own your own home
- It ’ s never too late to downsize your current lifestyle and start saving
- If you have not refinanced your home, do so now
- Even if you failed to save enough on a regular schedule earlier in your life — the first fundamental rule for achieving financial security – it ’ s never too late to start.
The Elements of Investing: II – Index
- Here, we present a remarkably simple plan for investing that uses low – cost index funds as your primary investment vehicles. Index funds simply buy and hold the stocks (or bonds) in all or part of the market
- This simple investment strategy — indexing – has outperformed all but a handful of the thousands of equity and bond funds that are sold to the public
- We have believed for many years that investors will be much better off bowing to the wisdom of the market and investing in low – cost, broad – based index funds, which simply buy and hold all the stocks in the market as a whole
- A major advantage of indexing is that index funds are tax efficient
- We believe you should buy only those domestic common – stock funds that charge one – fifth of 1 percent or less annually as management expenses
- We do advise you to keep your serious retirement money in index funds. Index the core of your portfolio and then, if you must, make individual bets around the edges.
The Elements of Investing: III – Diversify
- Broad diversification is essential
- Protect yourself: Every investor should always diversify
- For people of modest means, and even quite wealthy people, the way to accomplish that is to buy one or more low – cost equity index mutual funds
- Diversify across securities, across asset classes, across markets — and across time
- Don’t make all your investments at a single time. You can reduce risk by building up your investments slowly with regular, periodic investments over time – adopt “dollar-cost averaging”
- Rebalance your portfolio periodically – It involves not letting the asset proportions in your portfolio stray too far from the ideal mix you have chosen as best for you
- Rebalancing will not always increase returns. But it will always reduce the riskiness of the portfolio and it will always ensure that your actual allocation stays consistent with the right allocation for your needs and temperament.
The Elements of Investing: IV – Avoid Blunders
- As in so many human endeavors, the secrets to success are patience, persistence, and minimizing mistakes
- So, as an investor, what should you do about forecasts — forecasts of the stock market, forecasts of interest rates, forecasts of the economy? Answer: Nothing. You can save time, anxiety, and money by ignoring all market forecasts
- One of the most important lessons you can learn about investing is to avoid following the herd and getting caught up in market – based overconfidence or discouragement
- There is one investment truism that, if followed, can dependably increase your investment returns: Minimize your investment costs.
The Elements of Investing: V – Keep It Simple
- In the words of Albert Einstein, the greatest scientist of the twentieth century, had one overriding maxim: “Everything should be made as simple as possible — but no simpler”. We agree
- Review of basic rules:
- Save early and regularly
- Use the help of your employer and ‘Uncle Sam’ to supercharge your savings – take advantage of your employer’s 401(k) or 403(b) retirement security plan (or similar in your country)
- Set aside a cash reserve – at least six months of living expenses
- Make sure you are covered by insurance – this might include house, home contents, car, life etc.
- Diversification reduces anxiety
- Avoid all credit card debt — period
- Ignore the short-term sound and fury of Mr. Market
- Use low – cost index funds
- Focus on major investment categories. Avoid “exotics” like venture capital, private equity, and hedge funds
- Know thyself and match your investing to who you are and where you are in life
- Our asset allocation guidelines …. show you might wisely change your asset mix according to your age and your age – related tolerance for market risks
- We recommend a substantial allocation to bonds for investors in retirement because bonds provide a relatively steady source of income for living expenses
- Investing in a Total World Stock Index Fund is a convenient way to obtain the broadest diversification in a single fund …. like one – stop shopping.
The Elements of Investing: VI – Timeless Lessons for Troubled Times
- Dollar-cost averaging is one of the long-term investor’s four best friends
- Diversification is the time-honored way to reduce investment risk
- Disciplined rebalancing is another of the long-term investor’s best friends
- Use index funds for most, if not all, of your portfolio of financial assets
- Investors should consider two reasonable strategies. The first is to look for bonds with moderate credit risk, but with higher yields than U.S. Treasuries. Th e second is to consider substituting a portfolio of dividend-paying blue-chip stocks for a high-quality bond portfolio
- The long-term winners will be those who control the one thing they can control—their investment costs—and have the fortitude to tolerate short-term volatility and stay the course in following a sensible long run investment program
- Long-term investors will achieve the best results by capitalizing on the four best friends of the serious long-term investor:
- Dollar-cost averaging
The Elements of Investing: A Super Simple Summary: KISS Investing
- The steps to a comfortable, care – free retirement are really simple, but they require discipline and emotional fortitude:
- Save regularly and start early
- Use company – and government – sponsored retirement plans to supercharge your savings and minimize your taxes
- Diversify broadly over different securities with low – cost “total market” index funds and different asset types.
- Rebalance annually to the asset mix that is right for you.
- Stay the course and ignore market fluctuations; they are likely to lead to serious and costly investing mistakes. Focus on the long term.
The Elements of Investing: Closing thoughts
I enjoyed reading this book. The more I delve into investing, the more you realise how easy it is to get bogged down on trying to find the ultimate investment vehicle. There are so many alternatives and counter arguments. So, keeping it simple is a wise approach, particularly when it comes to the bulk of your investment portfolio and even more importantly, when you are close to or at retirement age. If you want to play with some specific investments, then allocate a small percentage to that endeavor.
So, in light of the underlying theme of this book, I agree with these authors, that you cannot go too far wrong if you adopt the following:
- Save regularly
- Diversify investments
- Rebalance perhaps on a yearly basis
- Use dollar-cost averaging
- Adopt time in the market rather than trying to time the market
- Use indexing, particularly focusing in on low-cost funds which demonstrate good returns over a reasonable timeframe, say 5-10 years.
If you enjoyed this book review, you will enjoy my review of the “The Lazy Persons Guide to Investing“.
Read, learn, enjoy, be persistent and most importantly, take action!