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Malkiel_Presentation - The Random Walk Guide to Investing...

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The Random Walk Guide to Investing
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The Random Walk Guide to Investing “Everything should be made as simple as possible”—Albert Einstein The rules for achieving financial security through savings and investment are extraordinarily simple. The challenge is not in knowing the financial world inside and out. The challenge is in the self-sacrifice of savings versus spending, and the discipline of sticking with a plan for the long-term.
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Basic point #1: Fire your investment adviser It is not hard to learn enough about investing to be able to do it yourself If you can do it yourself, why pay someone to do it for you? Malcolm Forbes: The way to get rich from investment advice is to sell it—not to take it. If brokers/advisers really knew what was going on in the market, they would be investing for themselves and not giving this info to the public. The mere fact that they are selling this info is a sure sign that it isn’t very valuable.
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Basic point #2: Focus on four investment categories The four: cash, bonds, stocks, real estate Cash investments: any “money market” investment Bonds: provide stability for a portfolio (lower std.dev.), can be used to “immunize” a future liability like college tuition payments; particularly useful for retirees. Avg. annual returns of 5-6%. Stock: Avg. annual returns of 8-9%, higher risk Real estate: Owning a home, REITs
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Basic point #2: Focus on four investment categories The stock market is usually quite efficient, but history shows some key failings. The dot.com bubble was the most recent example. From late 1998 to March of 2000, the NASDAQ went from 1,800 to over 5,100. From 3/00-9/02, it went down to 1,400. Over $7 trillion in market value was lost. From “F’d Companies”: Pets.com: “I’m out of dog food and my cat’s box needs new littler. I know what I’ll do: I’ll order Dog Chow and Fresh Step online from a sock puppet and then I’ll watch the dog starve and the cat (crap) all over the house while I wait for it to be delivered!” Furniture.com: after spending $2.5MM on the domain name, they found out that UPS wouldn’t ship such bulky items. “There were many times when we would get an order for a $200 end table and spend $300 to ship it.”
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Basic point #2: What lessons should we learn All excessively exuberant markets succumb to the laws of gravity. The difficulty lies in staying the course while your friends are raking in (temporary) easy money. By diversifying over many types of stocks and over several asset classes, you avoid such mistakes and ensure the preservation and growth of your capital.
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Basic point #2: Real estate Owning your own home offers significant tax advantages and the opportunity to profit from rising home prices. You should never pay rent to others when
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This note was uploaded on 02/20/2009 for the course H ADM 225 taught by Professor Jwellman during the Fall '07 term at Cornell.

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Malkiel_Presentation - The Random Walk Guide to Investing...

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