60 Seconds March 2011: Burton Malkiel

60 Seconds March 2011: Burton Malkiel

Burton Malkiel, Princeton University professor and author, “A Random Walk Down Wall Street”

Registered Rep.: In the just-released tenth edition of your book, you stress low-cost products like mutual funds and a buy-and-hold strategy. That philosophy must drive some financial advisors crazy.

Burton Malkiel: You really need to interpret that. I've become frankly more appreciative of what a financial advisor can do. For me, it's keeping people from beating themselves. Keeping people on an even keel. It's easier said than done.

What financial advisors can't do, they cannot pick the best mutual funds, they cannot pick the best stocks. But boy, it is really important to emphasize diversification. To emphasize, if you're dollar cost averaging, don't stop during a period like 2008, when people come in and say, “Listen, I've lost money on every investment I made. It just keeps going down. I can't stand it anymore.” If you stop at the bottom when the sky is falling, then you lose all the advantages of it.

RR: Don't the wealthy need more active management because of their complex financial situations?

BM: I am very skeptical about the idea that, if you're high net worth, you therefore should get into all these exotic things like commodity funds and hedge funds, which basically don't beat the market. Do some of these people need a lot of good tax advice and estate planning advice? Sure.

RR: Where should China fit in a portfolio?

BM: People definitely ought to have more in emerging markets. China's the fastest growing economy in the world. It's going to be the fastest growing economy over the next decade, and probably for decades. And most people have zero in China.

RR: It's not a country known for its transparency.

BM: No question it's risky. I would say the index funds of H- and N-shares, any Chinese company that trades in Hong Kong, reports by international financial reporting standards. The companies that listed in New York, like Baidu, report under GAAP.

RR: Your thoughts on alternatives?

BM: There's no doubt in my mind that private equity investors who accept illiquidity can make higher rates of return. You get paid for bearing illiquidity. But I think the individual investor is going to get the dregs of these sorts of things, and the individual investor should stay away.

For the complete interview, go to registeredrep.com/malkiel.

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