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Investing in index funds has been lauded by Professor Burton Malkeel as he emphasizes the long-standing conviction that investors are better off buying and holding index funds instead of actively managed funds. The evidence, spanning over years and supported by academic research, continually shows the effectiveness of this strategy. Professor Malkeel emphasizes that even in a market primarily indexed, there remains the presence of active managers to ensure market efficiency and avoid potential collusion concerns, offering a balanced perspective on market dynamics and investment strategies.
Professor Malkeel underlines the critical role of saving as the foundation of investing, highlighting how even small regular contributions can lead to significant wealth accumulation over time. He stresses the necessity of aligning investment strategies with individual objectives and time horizons. By considering savings habits and defining clear investment goals, individuals can execute more tailored investment approaches that are suited to their unique financial circumstances and aspirations.
Expressing concern over potential future inflationary trends, Professor Malkeel advocates for homeownership as an effective hedge against rising housing costs and inflation. He forecasts a scenario where a home investment could serve as a valuable asset in an inflationary economy. Despite noting market expectations on inflation, his proactive stance on real estate ownership as a reliable inflation hedging strategy sheds light on the importance of asset diversification and long-term financial planning.
On the topic of market participation, Professor Malkeel addresses the potential influence and voting power implications of dominant index fund providers on corporate governance. He acknowledges the market's reliance on a balance between active and passive investing for efficient functioning. Moreover, he advocates for ensuring ultimate shareholders have a voice in voting decisions to uphold equitable corporate governance practices amidst increasing indexing trends.
Reflecting on his life's work, Professor Malkeel defines success as making a difference and impact through various endeavors. From teaching and policymaking to corporate leadership, his key metrics revolve around intellectual stimulation, influence, and a range of experiences. By nurturing personal, professional, and intellectual growth, Professor Malkeel exemplifies a holistic approach to success centered around lifelong learning, diverse contributions, and meaningful engagement with broader society.
Understanding market efficiency is an important part of investment decision-making. It can help investors to identify the most appropriate investment strategies and develop realistic expectations for their returns. In this episode of the Rational Reminder Podcast, we sit down with Professor Burton Malkiel, the renowned economist, and author of the classic investing book A Random Walk Down Wall Street. Professor Malkiel is a distinguished figure in the world of economics and academia. He holds the prestigious title of Chemical Bank Chairman's Professor of Economics Emeritus and Senior Economist at Princeton, where he has made significant contributions to the field over the years. In our conversation, we discuss Professor Malkiel’s views on the stock market, the efficient market hypothesis, how behavioural finance relates to investing, and why index funds should be at the core of every portfolio. Throughout the episode, Professor Malkiel shares his insights on a wide range of topics related to personal finance and investing, including the benefits of index funds, the dangers of active stock picking, the impact of fees and taxes on investment returns, factor investing, and expensive asset classes. He also discusses research on socially responsible investing and how investors can incorporate ethical considerations into their portfolios without sacrificing performance. In this episode, listeners will gain a better understanding of the vital principles of investing and how to apply them to achieve their financial goals. Whether you're a novice investor or an experienced pro, this episode offers valuable insights and advice from one of the most respected economists in the field, Professor Malkiel.
Key Points From This Episode:
Professor Malkiel explains the efficient market hypothesis and what the term “efficient market” means. (0:03:42)
What the media tends to get wrong about the concept of market efficiency and the mathematical theory behind a random walk market. (0:07:04)
We discuss investing in index funds rather than actively managed strategies. (0:09:44)
How his book, Random Walk, was received by professionals and academics in the industry
(0:13:08)
Hear about the inspiration behind the concept covered in his book, and how his investment advice has changed over the last 50 years. (0:19:18)
Why index funds have become widely accepted, and the difference between investing and speculating. (0:23:38)
He unpacks why past market bubbles are vital for managers to understand and shares some wise words for those who want to participate in market speculation investing. (0:28:21)
How the existence and persistence of bubbles throughout history relate to markets being efficient. (0:32:10)
Find out how the multiple, non-diversifiable risks in today’s financial markets impact the advice in his book, and learn about factor investing. (0:35:42)
He shares advice and insights for people looking to invest in cheaper funds and his perspective on trending investment strategies. (0:37:55)
Learn how the general findings from behavioural finance influence his advice on investing in index funds. (0:41:33)
We explore the value of risk parity strategies and the problem with backtests, and he shares his view on expensive asset classes. (0:44:09)
What impact super-low bond yields had on the return of bonds, and whether you should focus on the value or yield. (0:54:16)
The importance of saving as opposed to an optimal investment strategy to investor outcomes.
(0:57:56)
Insights into investing according to your desired outcomes and whether Professor Malkiel thinks it is better to rent or own a home. (1:03:55)
We discuss inflation and possible future trends and the role of financial planners and investment advisors. (1:10:29)
Hear his concerns regarding the growth of index fund assets. (1:14:52)
Details about his book writing journey and his definition of success. (1:18:46)
Links From Today’s Episode:
Burt Malkiel — https://jrc.princeton.edu/people/burton-g-malkiel Wealthfront — https://www.wealthfront.com/ Theravance Biopharma — https://www.theravance.com/ Genmab A/S — https://www.genmab.com/
Rebalance IRA — https://www.rebalance360.com/
A Random Walk Down Wall Street: The Best Investment Guide That Money Can Buy — https://amzn.to/3BgepQz
Princeton University — https://www.princeton.edu/ The Yale School of Management — https://som.yale.edu/ Vanguard — https://investor.vanguard.com/corporate-portal/ Trillions — https://www.amazon.com/Trillions-Renegades-Invented-Changed-Finance/dp/ 0593087682 S&P Dow Jones Indices — https://www.spglobal.com/spdji/en/ S&P Dow Jones Indices SPIVA — https://www.spglobal.com/spdji/en/research-insights/spiva/ Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder- podcast/id1426530582. Rational Reminder Website — https://rationalreminder.ca/ Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/ Rational Reminder on YouTube — https://www.youtube.com/channel/ Rational Reminder Email — info@rationalreminder.ca Benjamin Felix — https://www.pwlcapital.com/author/benjamin-felix/ Benjamin on Twitter — https://twitter.com/benjaminwfelix Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/ Cameron Passmore — https://www.pwlcapital.com/profile/cameron-passmore/ Cameron on Twitter — https://twitter.com/CameronPassmore Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/
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