Investing consistently over the long term is a better plan for doing well out of the sharemarket than guessing when to buy and sell.
YOU wouldn't be blamed, or even completely incorrect, if you thought rich investors were rich because they have investment smarts. That is, they know exactly what companies to buy and when.
That's why many of us hand investment decisions over to a fund manager that picks stocks for a living. Or a stockbroker. Or a financial adviser.
Some wealthy investors are wealthy because they do make smart investment decisions - Warren Buffett springs to mind - but it turns out if we do try to time the market - that is, buy at the point where it's going to be cheapest to sell when it rises to its peak - more often than not we're going to be wrong.
That's the opinion of Burton G. Malkiel - the author of the famous investment book A Random Walk Down Wall Street. It was first published in 1973 and is now in its 10th edition.
In it Malkiel advocates a buy-and-hold strategy and says that will make you more money over the long term than trying to time the market.
"If anyone was able to correctly time the market that would be a wonderful thing but there is no genie that tells us this is the time to buy and this is the time to sell," he says.
Malkiel says that if he knew Buffett's Berkshire Hathaway was going to do so well 20 years ago he would have thrown away his preferences for index funds - which he believes are the best tool for a buy-and-hold strategy - but the problem is none of us will ever know who the next Buffett will be.
He disputes suggestions that the advent of the global financial crisis and increased sharemarket volatility means his strategy doesn't work any more.
"A lot of people say markets have been very volatile," he says. "So many people say the old rules don't work any more ... I think the old rules are more relevant than ever."
Although he never discloses his wealth, Malkiel is a well-off individual thanks to his strategy - and the sale of thousands of his books probably helps as well. But what can the rest of us do with our investments to avoid the hubris of a market boom and the panic of a market crash?
Dollar-cost averaging is a good start. This is the idea of spreading out your investments over a period of time. If you bought $1000 worth of share X three months ago at $1 a share and the price rises to $1.50, when you buy another $1000 worth today you'll be better off than if you bought all of them today. Instead of paying $1.50 for every share your cost is averaged to $1.20 for the period.
The accompanying table shows you how this works for investing in an index fund (a selection of all the stocks in an index such as the ASX/S&P 200) and would work just as well for an exchange-traded fund (ETF). Treat your dollar-cost averaging as a long-term savings plan. Ignore the ups and downs and don't stop doing it if you get scared by market falls.
Another simple strategy is rebalancing. If you set out with the idea of having 60 per cent in equities and the rest in cash or fixed income, then at the beginning of each year you need to make sure the value of your equities hasn't risen or fallen to change those allocations. If it has, you need to fix it.
Malkiel doesn't have all his assets invested in the one basket. He takes bets around the edges but believes if the majority of his money is in indexed funds then he can afford to do so.
He cites a portfolio recently established for a new grandson as an example. It has 85 per cent in a global ETF and the remainder in allocations to Brazil and China. Malkiel feels those countries are not sufficiently represented in that index relative to their importance in the global economy.
"Investing is fun," he says. And it's even more fun when you're not betting the house on the short-term whims of the market.
Follow this writer @Money_PennyP and @smartinvestr
Frequently Asked Questions about this Article…
Why is investing consistently over the long term better than trying to time the market?
The article explains that consistent long-term investing, or a buy-and-hold approach, usually outperforms attempts to time highs and lows. Burton G. Malkiel—author of A Random Walk Down Wall Street—says there’s no reliable “genie” that tells you the perfect time to buy or sell, so spreading your investments over time and sticking with index funds tends to be a simpler, more effective plan for everyday investors.
What is dollar-cost averaging and how can it help my investment returns?
Dollar-cost averaging means spreading purchases over time instead of investing a lump sum all at once. The article gives a simple example: if you bought $1,000 of a share at $1 and another $1,000 when the price rose to $1.50, your average cost would be $1.20 per share. Using this approach for index funds or ETFs helps smooth out price swings and is best treated as a long-term savings plan—ignore short-term ups and downs and don’t stop if markets fall.
Why do experts recommend index funds and ETFs as part of a buy-and-hold strategy?
According to the article, Malkiel believes index funds are the best tool for a buy-and-hold strategy because they provide broad market exposure without needing to pick individual winners. ETFs work the same way for everyday investors who want a low-cost, diversified core holding to ride out market volatility.
How does rebalancing work and when should I rebalance my portfolio?
Rebalancing means restoring your target asset allocation if market moves cause it to drift. The article suggests setting a target (for example, 60% equities and 40% cash or fixed income) and checking at the start of each year. If the equity portion has risen or fallen away from your target, buy or sell as needed to bring the allocation back in line.
Does increased market volatility or the global financial crisis mean buy-and-hold no longer works?
No. The article notes that Malkiel disputes the idea that higher volatility or past crises have made buy-and-hold obsolete. He says the old rules remain relevant—consistent investing and broad diversification still make sense despite market ups and downs.
Do I need a fund manager, stockbroker or financial adviser to succeed with these strategies?
The piece points out many people hand decisions to professionals, but it also highlights that everyday investors can use simple tools—index funds or ETFs, dollar-cost averaging and annual rebalancing—to build a solid long-term plan. Malkiel himself keeps most assets in indexed funds and only takes small bets around the edges.
How can I get global exposure while using index funds or ETFs?
The article gives an example of a portfolio for a new grandson with 85% in a global ETF as the core holding and the remainder allocated to Brazil and China. That shows a practical approach: use a global ETF for broad exposure and add small country-specific allocations if you think certain markets are underrepresented.
What are simple, practical tips from the article to avoid the pitfalls of market timing?
Keep investing consistently over the long term, use dollar-cost averaging to spread purchases, hold diversified index funds or ETFs as your core, rebalance annually to maintain your target allocation, and avoid panicking or stopping contributions when markets fall. These steps reduce the risk of mis-timing the market and align with the buy-and-hold view promoted in the article.
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