Finance legend Burton Malkiel, author of A Random Walk Down Wall Street, has a new op-ed in the Wall Street Journal.”I believe that investors who pull their money out of the stock market today to invest in bonds are making a huge mistake,” he writes.
Malkiel acknowledges the low returns, outflow of funds, and immense amount of uncertainty and volatility caused by computer errors, including most recently the Knight Capital debacle.
Nevertheless, the pioneer of the efficient market hypothesis thinks stock market investors should stay put:
Should individual investors have reason to abandon the stock market because of the increased volatility rapid-fire trading can cause? Not at all. Investors saving for retirement have no reason to fear day-to-day or week-to-week volatility. The correct response is not to “do something” but rather to “just stand there.” Evidence continues to accumulate that the long-term investor who simply buys and holds low-cost broad-based index funds and (indexed) ETFs does not achieve mediocre returns but well-above-average returns. During 2011, index-fund investors outperformed over 80% of actively managed equity funds. The same results have continued in the first half of 2012.
He also argues that stocks look particularly attractive relative to Treasury bonds.
Admittedly, Malkiel thinks that returns for stocks won’t be as high as most people think. But he believes that’s actually an argument to buy more stocks.
“The only hope—both for individuals and for institutions running retirement portfolios—is to increase, not decrease, the share of the portfolio devoted to equities,” he writes.
Read Malkiel’s op-ed at WSJ.com.