Book Summary: A Random Walk Down Wall Street

A Random Walk Down Wall Street by Burton G. Malkiel — Edition 12

Save early, but never too late

You should have regular savings, so you have the basis for investment and benefit from the power of compounding. The book mentioned “4 percent solution”, meaning to spend no more than 4 percent of the total value of your income annually. To be more accurate, you should take inflation into consideration. You can then calculate the amount you need for years of retirement and that would be your saving and investment target.

Know your risk tolerance level & diversify

Whatever portfolio of investment you choose, it is important to know your sleeping point. If the current portfolio keeps you awake at night, you should decrease the amount of the risky ones.

Avoid irrational market behaviors

The book introduce the 4 irrational market behaviors in behavioral finance that every investor can easily fall into.

Choose sustainable growth

It doesn’t matter how fast your stocks will grow, but how long the return can sustain. Corporations have lifecycles as well. There is evidence that the returns are higher with companies of lower price-book ratios and smaller sizes.

Have Index as core of your portfolio

Index provided investors with an average annual rate of return of around 10% annually over the past 90 years and none of the technical scheme analysis has realized that return. Therefore, the author advocates stock-market indexes as the core of an investor portfolio. It is very rare for an individual to beat the market.

Hold for long-term

The author strongly stand that individuals, including fund managers, can’t beat the market. He provided the fund performances over the years to prove that. Active trading is also not worth it, after including tax and transaction fees. An investor better buys and hold.

Rebalance annually

Rebalancing helps investors diverse the risk and make sure that the portfolio reflects your risk tolerance you chose. Again, try to sell the ones in losses for tax benefits.

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