GLOBAL - Investors should not play the markets, according to Burton Malkiel, author of the book entitled ‘A random walk down Wall Street' and Chemical Bank chairman's professor of economics at Princeton University.
Speaking at a breakfast meeting hosted by Vanguard Investments UK on indexing, Malkiel presented a series of lessons the audience could learn from and his strongest message being: "Do not try to time the market because it's one of the most dangerous things to do. If you do you will invariably get it wrong."
He argued that when trying to time the market investors "have to be right twice - when you get out of the market and when you get back in - and nobody knows how to do that".
"And as they tend to buy at the high and sell at the low, investor returns are lower compared to buy and hold [strategies]," he continued.
Malkiel instead advised that investors should stay the course and to continue putting their money into index funds, while ignoring the calls of doom and gloom, as he claimed they would lose all of the advantages earned if they stopped investing.
Among his other advice presented, Malkiel argued investors, such as pension funds, should use dollar or other currency cost-averaging, as well as rebalance yearly in order to reduce volatility.
While he admitted that diversification did not work well last year, as there are few places to hide during worldwide recession, diversification is still number four of his lessons as he continued: "While de-coupling generally did not work in 2008, safe bonds - such as US treasury bonds - and gold still went up".
For his fifth lesson, Malkiel argued costs matter. "The more money you pay to the provider of the investment service the less there will be for you," he explained.
Malkiel compared the search for actively-managed funds that beat the market to ‘looking for a needle in a haystack' and argued investors were better off buying the haystack, or an index fund in this instance.
His lessons are based on the assumption that markets are reasonably efficient although Malkiel admitted some active managers were needed to make them efficient. "Even if they are not, indexing is an optimal strategy," he added.
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