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The Random Walk Guide to Investing:
Ten Rules For Financial Success
Burton G. Malkiel

The Random Walk Guide to Investing: 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 the question:

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:

I. Understand Three Basics

1. 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. 

"A blindfolded chimpanzee throwing darts at the stock pages can select individual stocks as well as the experts." (p. 7)

2. Understand and use four categories of investments. (Chapter 2)


"Cash" 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. 


These are IOU's from the government, government agencies and corporations. Basically, they need money and you're lending it to them at interest.  

Common Stocks

Also called "equity securities" stocks are little pieces of companies. If you own stock in IBM, you're a part owner of IBM.

Real Estate 

Why pay 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).

3. Understand the relationship between risk and return.

Stocks 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 returns. 

II. Follow These Proven Ten Rules to Get Rich Slowly

1. Start saving. Now is MUCH better than later.   

Time is money. Employ compound interest over time and you'll reap LOTS of money. Compound interest works its magic best over time. So start now. 

As Benjamin Franklin put it, compounding means that "the money that money makes, makes money."

Use "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! 

2. Save Regularly

"The 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 possible."

Some of Malkiel's Tips:

  • Pay 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. 

  • Start a "Save More Tomorrow Plan." Commit in advance to give a certain portion of any future pay increases to your retirement plan. 

  • Discover where your money is going. Track your expenses for a few months. 

  • Determine ways to cut back. You'd be amazed how a little savings here and there can add up. 

  • When you must buy, look for the best deals.

  • Pay off your credit card every month. 

"Before desiring something passionately, one should inquire into the happiness of the man who possesses it." (La Rochefoucauld)








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