2582: The Random Walk Guide to Investing: Ten Rules for Financial Success by J.D. Roth of Get Rich Slowly

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[00:01:47] The Random Walk Guide to Investing, 10 Rules for Financial Success, by J.D. Roth of getrichslowly.org.

[00:01:56] And I'm Dr. Neil Malek. Hey there and welcome to another bonus Sunday episode where I share an

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[00:02:17] this. And with that, here's Diana with the post and commentary as we optimize your life.

[00:02:27] The Random Walk Guide to Investing, 10 Rules for Financial Success, by J.D. Roth of getrichslowly.org.

[00:02:37] In 1973, Burton Malkiel published A Random Walk Down Wall Street, in which he argued that a

[00:02:44] blindfolded monkey could pick stocks as well as a professional investor. Though I bought a copy of

[00:02:50] Random Walk for $3.99 at the local Goodwill last year, I haven't read it. It looks dense.

[00:02:58] I know it's written for the layman, but it seems rather academic. In 2003, Malkiel published The

[00:03:05] Random Walk Guide to Investing, quote, a book of less than 200 pages in length that boils down

[00:03:12] the time-tested advice from Random Walk into an investment guide that is completely accessible for

[00:03:19] a reader who knows nothing about the securities markets and who hates numbers, end quote. Several

[00:03:26] patient getrichslowly readers have been recommending this book for the past year.

[00:03:31] When I stayed home sick yesterday, I finally found time to read it. I'm impressed. Malkiel has produced

[00:03:38] an easy to read, straightforward investment guide that I'm happy to recommend to anyone.

[00:03:44] His philosophy matches my own. Quote, the advice in this book is both simple and realistic. There

[00:03:52] is no magic potion in the investment world because the truth is that one doesn't exist.

[00:03:57] There is no quick road to riches. And if someone promises you a path to overnight riches,

[00:04:04] cover your ears and close your pocketbook. If an investment idea seems too good to be true,

[00:04:10] it is too good to be true. What I offer are 10 simple time-tested rules that can build wealth

[00:04:17] and provide retirement security. Think of the rules as the proven way to get rich slowly, end quote.

[00:04:25] Malkiel's rules are familiar. We've discussed most of them here before. Number one, start saving now,

[00:04:33] not later. Don't worry about whether the market is high or low, just begin investing. Trust in time

[00:04:41] rather than timing, Malkiel writes. Quote, the secret to getting rich slowly but surely is the

[00:04:48] miracle of compound interest, end quote. Number two, keep a steady course. The most important

[00:04:56] driver in the growth of your assets is how much you save and saving requires discipline,

[00:05:01] writes Malkiel. To develop discipline, the author recommends that you learn to pay yourself first,

[00:05:08] invest before anything else, even paying bills, implement a budget, change spending habits,

[00:05:14] and pay off debt. Number three, don't be caught empty-handed. Malkiel recommends that readers

[00:05:21] open an emergency fund. He doesn't specify how much should be set aside, but he does cover a

[00:05:27] variety of places to put the cash, money market accounts, certificates of deposit, and online

[00:05:33] savings accounts. He also recommends purchasing term life insurance. Number four, stiff the tax

[00:05:41] collector. Make the most of tax advantage savings. Open an IRA, contribute to your company's retirement

[00:05:49] plan, take advantage of tax-free savings for your child's education, buy your home rather than rent.

[00:05:56] All of these things help to reduce the bite that taxes take out of your money.

[00:06:01] And number five, match your asset mix to your investment personality. Based on your risk

[00:06:08] tolerance and your investment horizon, choose the best mix of cash, bonds, stocks, and real estate.

[00:06:15] Malkiel encourages investors to buy each of these through mutual funds. Number six, never forget

[00:06:22] that diversity reduces adversity. Don't just buy stocks, buy stocks, bonds, and other investment

[00:06:30] classes. Within each category, diversify further. And don't just buy one stock, buy mutual funds of

[00:06:38] many stocks. Malkiel makes his case with the stark example of a 58-year-old Enron employee who had a

[00:06:46] $2.5 million 401k of Enron stock. When Enron went bust, the employee not only lost her job,

[00:06:55] but her retirement savings vanished completely. Finally, the author recommends diversification

[00:07:01] over time, making investments at regular intervals using dollar cost averaging.

[00:07:08] Number seven, pay yourself, not the piper. Interest and fees are drags on your wealth.

[00:07:14] Quote, paying off credit card debt is the best investment you will ever make, end quote. Avoid

[00:07:20] expensive mutual funds. Quote, the only factor reliably linked to future mutual fund performance

[00:07:27] is the expense ratio charged by the fund, end quote. In fact, the author advises that costs

[00:07:33] matter for all financial products. Number eight, bow to the wisdom of the market.

[00:07:41] No one can time the market, Malkiel says. It's too unpredictable. Professional money managers

[00:07:47] can't beat the market. Financial magazines can't beat the market. Nobody can beat the market on a

[00:07:53] regular basis. The best way to earn consistent gains is to invest in broad-based index funds.

[00:08:00] It's boring, but it works. Number nine, back proven winners.

[00:08:07] After Malkiel has preached the virtues of index funds, presumably converting the reader to his

[00:08:12] religion, he spends a chapter suggesting possible index funds and asset allocations.

[00:08:19] And number 10, don't be your worst enemy. Malkiel concludes by admonishing readers to stay the

[00:08:26] course, warning them against faulty thinking. He discusses the sort of money mistakes I've

[00:08:32] mentioned before, overconfidence, herd behavior, loss aversion, and the sunk cost fallacy.

[00:08:39] Ultimately, Malkiel's advice can be stated in a few short sentences. Eliminate debt,

[00:08:45] establish an emergency fund, begin making regular investments to a diversified portfolio of index

[00:08:51] funds. Be patient. But the simplicity of his message does not detract from its value.

[00:08:58] The Random Walk Guide to Investing is an excellent book because it sticks to the basics.

[00:09:03] It's short, it's written in plain English, there's no jargon, it's easy to understand,

[00:09:08] concepts are simplified so the average person can grasp them, and it's filled with great advice.

[00:09:14] This book refers often to other books to bolster its arguments and includes quotes from financial

[00:09:20] professionals like John Bogle and Warren Buffett. Though the advice might seem elementary,

[00:09:26] it's advice that works. If you want to invest but don't know where to start,

[00:09:30] pick up The Random Walk Guide to Investing at your local library. You just listen to the post

[00:09:39] titled The Random Walk Guide to Investing – 10 Rules for Financial Success by J.D. Roth of

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[00:10:58] Some tried and true financial advice in today's article. While I've never heard of this book,

[00:11:03] I appreciate J.D.'s summary and will certainly be adding it to my long list of books to read at some

[00:11:09] point. Of course, I'm glad to see that low-fee total market index funds are recommended here.

[00:11:15] They aren't sexy, but they work, my friends. Now, I don't think there's anything particularly

[00:11:21] wrong with stock picking. In fact, I've heard of investing clubs where members pick stocks together

[00:11:26] and share the burden of studying the various companies they're considering investing in.

[00:11:31] As someone who reads and talks about money every day, it might surprise you that I'm not interested

[00:11:37] in reading earnings reports and SEC filings all day long to inform my stock picking. I just don't

[00:11:43] want to work that hard when it comes to investing. I prefer a simple strategy of set it and forget it,

[00:11:50] buy and hold. It may be possible to do very well with individual stock picking,

[00:11:55] but it would require a high interest level and time to study various company movements.

[00:12:01] If you're like me and want to learn a simple way to invest, my favorite book on the topic is called

[00:12:07] The Simple Path to Wealth by J.L. Collins. That should do it for another edition of Optimal Finance

[00:12:13] Daily. I'll be back tomorrow as usual, so I'll see you there on the Wednesday show

[00:12:18] where your optimal life awaits.