Investment rules, such as diversification and dollar cost averaging, should not be cast aside and labelled out-of-date in periods of share market volatility, an economics professor has said.
Princeton University professor of economics Burton Malkiel told a briefing yesterday the notion that traditional investment rules are no longer applicable is incorrect.
“I think that if the old rules are anything, [they are] more relevant than ever,” Malkiel, author of A Random Walk Down Wall Street, said.
“One of the rules I hear all of the time when I travel to investment conferences in the United States and abroad is the idea of buy and hold, I hear that that’s dead and I think that’s absolutely wrong. I don’t think buy and hold is dead.”
He said if any investor was able to consistently time the market, it would be “a wonderful thing”.
“But there is no genie who tells us that this is the time to buy, and this is the time to sell. I’m absolutely convinced that you can’t do it,” he said.
“It’s not that you randomly make mistakes but it’s just that you do this on the basis of emotion; you’re likely to do it wrong.”
Malkiel said that from studies he has undertaken, investing based on emotion has also been experienced by institutional investors.
“I’ve done studies on pension funds. Pension funds have had their smallest holdings of cash at the top of the market and their biggest holdings of cash at the bottom of the market,” he said.
He said if investors are unable to time the market, dollar cost averaging is an option, as is indexing portions of a portfolio.
“I’m not telling you to index everything. I don’t even index everything myself although most of my portfolio, and all of my serious money, is in indexed,” he said.
“There is a lot of evidence that indexing works and at the very least it ought to be some part of a portfolio for individual and institutional investors.”
