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Random Walk Guide to Investing:
Ten Rules For Financial Success
Burton G. Malkiel
The Random Walk Guide
Ten Rules for Financial Success,
by Burton G. Malkiel.
Malkiel is Professor of
Economics at Princeton University who wrote the million-copy seller: A
Random Walk Down Wall Street. In that book, he made a strong case that
it's nearly impossible to beat the market consistently and that those who
try will almost always fail. In this book, he foregoes all intellectually
heady argumentation and potentially distracting documentation to answer
In the light of all my
research on how the markets work, how can we get the best return for our
investments over time and still be able to sleep at night, no matter how
the market's behave?
The result is a remarkably
simple, clear and often entertaining guide to investing. Here are some of
his main points:
Understand Three Basics
You don't need to hire a financial advisor. (Chapter 1)
Investing is easy, once you
understand that the "experts" who manage funds and give advice
don't really know any more about the short- or long-term prospects for a
stock or fund any more than you do. You don't have to watch
financial television or read financial magazines.
chimpanzee throwing darts at the stock pages can select individual
stocks as well as the experts." (p. 7)
Understand and use four categories of investments. (Chapter
is money deposited at little or no risk that you can get your hands
on quickly if you need it. This includes bank checking accounts and
savings accounts, short-term CD's, three month Treasury Bills and
money market funds.
are IOU's from the government, government agencies and corporations.
Basically, they need money and you're lending it to them at
called "equity securities" stocks are little pieces of
companies. If you own stock in IBM, you're a part owner of IBM.
rent to somebody else when you could pay yourself with mortgage
payments? If you own you're own home, you're already invested in
real estate. Don't invest more in real estate until you've got
lots of money diversified into cash, stocks and bonds. When you
decide to invest more into real estate, do it through an inexpensive
"Real Estate Investment Trust" (REIT).
Understand the relationship between risk and return.
have averaged annual return of over 10 percent over time, but can go
down radically in any given year of even a few years in a row. High
quality, long-term bonds have averaged 6 percent at much less risk.
Short-term bonds have even less risk, but also have less
These Proven Ten Rules to Get Rich Slowly
saving. Now is MUCH better than later.
money. Employ compound interest over time and you'll reap LOTS of
money. Compound interest works its magic best over time. So start
Benjamin Franklin put it, compounding means that "the money that
money makes, makes money."
"The Rule of 72" to figure how long it will take your money
to double at any given rate of interest. Let's imagine that your
parents invested $1000 for you in a total stock market index fund the
day you were born. (Not Malkiel's illustration.) They never added
another cent to it. It averaged 10 percent interest. How long would it
take to double? Divide 10 by 72 to discover that it will double every
7.2 years. That's cool, but not dramatic. In 7.2 years, you made an
extra thousand dollars. But look what happens in 70 years, when it
doubles 9.72 times (70 ÷ 7.2). Round that number off to 10. Now
double that $1000 10 times to discover that at 70 years, you'd have
well over $1,000,000!
single most important thing you can do to achieve financial security is
to begin a regular savings program and to start it as early as
yourself first. Have it deducted from your paycheck an put in a
retirement plan before you ever see it. Two benefits: first, you
can't spend it. Second, you don't have to pay taxes on it.
a "Save More Tomorrow Plan." Commit in advance to give
a certain portion of any future pay increases to your retirement
where your money is going. Track your expenses for a few
ways to cut back. You'd be amazed how a little savings here and
there can add up.
you must buy, look for the best deals.
off your credit card every month.
desiring something passionately, one should inquire into the happiness
of the man who possesses it." (La Rochefoucauld)
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Guide to Investing: Ten Rules for Financial Success, by Burton G.
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