Malkiel on Diversification: Buy and Hold Is Still a Winner

by: Brad Case

Burton Malkiel -- professor of economics at Princeton, author of A Random Walk Down Wall Street, and perhaps the most intelligent person in the world regarding investments -- published an article in the Wall Street Journal reminding investors that nothing is more important than putting together a well-diversified portfolio, rebalancing it appropriately, and letting it grow through good times and bad. The 10th edition of his classic book will be published on January 10, and without even having seen it yet I'm ready to recommend it enthusiastically to every investor.

Malkiel's two most forceful points are the importance of diversification ("Diversification has not lost its effectiveness") and the importance of reducing fees and expenses ("The one investment principle about which I am absolutely sure is that the less I pay to the purveyor of an investment service, the more there will be for me"). He quotes Jack Bogle of Vanguard Group: "In the investment fund business, you get what you don't pay for."

Perhaps most important, Malkiel shows how well his diversified model portfolio performed even during the last decade, when the stock market was losing money. In earlier versions of A Random Walk, he set out several model portfolios for investors in different circumstances; it's not clear whether the one illustrated in his WSJ article is one of the model portfolios from the new edition or if it's sort of an amalgam of several models. Anyway, here it is, and I think it's a good one for lots of investors:

  • 33% fixed income (VBMFX)
  • 27% U.S. stock (VTSMX)
  • 14% developed foreign markets (VDMIX)
  • 14% emerging markets (VEIEX)
  • 12% publicly traded REIT (VGSIX)

As Malkiel sums it up:

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. And if the investor also used dollar-cost averaging to add small amounts to the portfolio consistently over time, the results would have been even better.

I think that's great advice, and I can't wait to get my hands on the latest edition of his book. I'd love to hear what others think of his diversified model portfolio.

Disclosure: Author is long Vanguard REIT Index Fund and ING Real Estate Fund.

Disclaimer: The opinions expressed in this post are my own and do not necessarily reflect those of the National Association of Real Estate Investment Trusts ((NAREIT)). Neither I nor NAREIT are acting as an investment advisor, investment fiduciary, broker, dealer or other market participant, nor is any offer or solicitation to buy or sell any security investment being made. This information is solely educational in nature and not intended to serve as the primary basis for any investment decision.