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5.0 out of 5 stars wow, i never thought i'd enjoy reading about money!, January 18, 2011
This review is from: A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Ninth Edition) (Paperback)
this review is for those who spend their days on the important things in life and look upon money and wall street with neglect, bordering on disdain. this review is for the teachers, scientists, soldiers, police officers, artists, musicians, philosophers, poets and all others young at heart and in pursuit of the noble life. burton malkiel's "a random walk down wall street" might be the single most important book you should read.

you might not lust for the big money and that's perfectly fine. i know how you feel. that shuffling of money around on wall street has always seemed to me like an illusory structure built on top of the genuine labor being performed underneath. however, you should learn about what's really going on and possibly even put your own money into the market too after reading malkiel's book. the real picture is even more disturbing, yet offers a hopeful path you can follow to change the way things are. (and no, comrade, there will be no violence involved.)

first, there are a lot of intimidating words in the world of finance and this is a seemingly daunting obstacle that makes people reluctant to even get started with investing. the truth is, those words are actually pretty trivial! "asset allocation, discounted value, basis points, distributions, dollar cost averaging, derivatives, covered calls, protective puts, reits, etfs, bonds, dividends, capital gains, unrealized gains, net asset value, stock valuations, buying on margin, technical analysis, foundational analysis," and so on and so forth. these concepts are all easy to understand. every subject has its jargon, but i've never encountered before a subject where so many words said so little. take for example, "dollar cost averaging." when you want to invest some money, you can do it in one lump sum, or you can spread that money out over time, say investing a small portion each month. spreading your money out like this is what "dollar cost averaging" means. good lord. i'm almost convinced the professionals need this jargon to make it all seem complicated when it's not. trust me, it doesn't take very long to get comfortable with the core vocabulary.

now, let's get to the heart of the matter. learning the jargon and having success in the market are separate issues. even those who are educated with a finance degree and an m.b.a. can't consistently beat the market. but it's worse. chances are, you would actually make more money from the stock market if you *don't* hire these professionals to do the investing for you! the absolutely braindead approach to investing is to pick every stock and then win or lose based on the average of the stock market. malkiel's book is a popular exposition of academic research which shows that over 80% of the actively managed mutual funds can't beat this passive braindead approach after factoring in fees! and among the small minority of actively managed mutual funds that do beat this passive approach in one short time period, most of them can't consistently do so for the long haul, say at the end of 20 or 30 years. to clarify, you might indeed make money hiring someone to pick your stocks for you, but the main point is you would make even more money if you mindlessly picked everything. i repeat: by mindlessly investing in everything, you have a roughly 80% chance in the long run of beating the professionals after factoring in their fees. sheer absurdity. more people should realize just how worthless most of the money-handlers really are.

when malkiel first published "a random walk down wall street" in 1973, there was no easy way of buying every stock on the market. that would involve a huge expenditure that would be prohibitively expensive for most people. in 1974, john "jack" bogle founded the vanguard group (vanguard.com) and in 1975, vanguard offered the first index funds to the public. these passive index funds track the market in the braindead approach described above (or some similar technique). the vanguard group essentially buys up everything and then chops up the whole shebang into smaller pieces so the average person can afford a little bit of every slice without having to buy the whole pie first. the vanguard group is owned by the clients, instead of working to fatten those on top. as such, the overhead and expense ratios are the lowest in the industry and opens up greater opportunities for the average person to have a fair shot at a comfortable retirement.

all varieties of passive index funds are available. you may wish to track the s&p 500, you may wish to track all the companies with publicly traded stocks in the entire united states, or even across the globe. the market can be volatile and go up and down dramatically, but the stock market also has a long term upward bias. things improve in the long run. if you are willing to consistently buy and hold a diversified set of index funds covering the whole world, then you are essentially making a bet that the world's economy as a whole won't collapse in 30 years or so when you're thinking about retirement. i happen to be pessimistic and i don't gamble, but this seems like a reasonable bet to take. additionally, as you get older you should slowly shift more of your money into less risky bonds, tips and cds. doing so protects yourself against the possibility of horrible stock market returns near the end of your life.

those who prefer to spend their days on the important things in life should also note the nicest bonus to the index funds approach: you don't have to think about money all the time, you don't have to worry about every market fluctuation! you can actually live life pursuing what really interests you and still make money from your investments in the end, provided you have patience and vision. you are growing your money slowly, instead of getting sucked into get rich quick schemes. and you didn't even have to major in finance. life is beautiful.

note that if you do invest in index funds, then you will be putting money into the market throughout the year instead of all at once. it is common for critics of index funds to cite numbers indicating that your money won't grow at all over some periods, depending on when you put that money into the market. this is true only if you're talking about investing one lump sum at that bad moment in time. that's not what you would do in practice if you comprehend what malkiel wrote. in particular, malkiel suggests using dollar cost averaging to your advantage, but to also be mindful of any transaction fees. no-load index funds (meaning no sales commissions are charged) are ideal. malkiel also suggests rebalancing your portfolio from time to time to maximize returns. this is a hidden way of buying low and selling high and is important to achieving a nice nest egg. buy, hold, rebalance. rinse and repeat for 30 years. anybody can do this.

suffice it to say, there are details you'll have to work out, but if you're determined to save up for your future, then you're halfway there. pick up malkiel's book and learn more. "the bogleheads' guide to investing" by larimore, lindauer and leboeuf is also an excellent book that's closer to a "how to" guide than malkiel's book. i also found rick ferri's "all about asset allocation" very helpful in coming up with my asset allocation. lastly, bogleheads.org is a website where you can find a lot of free useful information and advice from others on this path, including retired millionaires who made their fortunes through indexing.
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