# A Random Walk Down Wall Street ## Metadata * Author: [Burton G. Malkiel](https://www.amazon.comundefined) * ASIN: B004KKXMZQ * ISBN: 0393027937 * Reference: https://www.amazon.com/dp/B004KKXMZQ * [Kindle link](kindle://book?action=open&asin=B004KKXMZQ) ## Highlights “In crowds it is stupidity and not mother-wit that is accumulated,” Gustave Le Bon noted in his 1895 classic on crowd psychology. — location: [642](kindle://book?action=open&asin=B004KKXMZQ&location=642) ^ref-9773 --- Charles Mackay, who chronicled these events in his book Extraordinary Popular Delusions and the Madness of Crowds, — location: [659](kindle://book?action=open&asin=B004KKXMZQ&location=659) ^ref-48354 --- Was it dangerous that stock prices were five times the value of assets? Not at all. The book values did not reflect the dramatic appreciation of the land owned by Japanese companies. — location: [1229](kindle://book?action=open&asin=B004KKXMZQ&location=1229) ^ref-13767 --- My advice is to buy renewable term insurance; you can keep renewing your policy without the need for a physical examination. So-called decreasing term insurance, renewable for progressively lower amounts, should suit many families best, because as time passes — location: [4348](kindle://book?action=open&asin=B004KKXMZQ&location=4348) ^ref-26342 --- www.term4sale.com. — location: [4355](kindle://book?action=open&asin=B004KKXMZQ&location=4355) ^ref-24261 --- Money-market mutual funds often provide investors the best instrument for parking their cash reserves. They combine safety, relatively generous yields, and the ability to write large checks against your fund balance, generally in amounts of at least $250. — location: [4377](kindle://book?action=open&asin=B004KKXMZQ&location=4377) ^ref-19872 --- www.bankrate.com — location: [4393](kindle://book?action=open&asin=B004KKXMZQ&location=4393) ^ref-23886 --- T-bills offer an advantage over money-market funds and bank CDs in that their income is exempt from state and local taxes. In — location: [4405](kindle://book?action=open&asin=B004KKXMZQ&location=4405) ^ref-2457 --- If you find yourself lucky enough to be in the highest federal tax bracket, you will find tax-exempt money-market funds to be the best vehicle for your reserve funds. — location: [4407](kindle://book?action=open&asin=B004KKXMZQ&location=4407) ^ref-1308 --- If you moonlight from your regular job, you can establish a Keogh for the income you earn on the side. The money paid into a Keogh is deductible from taxable income, and the earnings are not taxed until they are withdrawn. The — location: [4475](kindle://book?action=open&asin=B004KKXMZQ&location=4475) ^ref-49451 --- interest payments on your mortgage and property taxes—are deductible; — location: [4591](kindle://book?action=open&asin=B004KKXMZQ&location=4591) ^ref-57176 --- Zero-Coupon Bonds Can Generate Large Future Returns — location: [4623](kindle://book?action=open&asin=B004KKXMZQ&location=4623) ^ref-43680 --- During 2010, good-quality long-term corporate bonds were yielding about 6 percent, and tax-exempt issues of comparable quality yielded 4½ percent. Suppose your tax bracket (the rate at which your last dollar of income is taxed) is about 36 percent, including both federal and state taxes. The following table shows that the after-tax income is $66 higher on the tax-exempt security, which is clearly the better investment for a person in your tax bracket. Even if you are in a lower tax bracket, tax-exempts may still pay, depending on the exact yields available in the market when you make your purchase. — location: [4650](kindle://book?action=open&asin=B004KKXMZQ&location=4650) ^ref-9172 --- There is one nasty “heads I win, tails you lose” feature of bonds. If interest rates go up, the price of your bonds will go down. But if interest rates go down, the issuer can often “call” the bonds away from you (repay the debt early) and then issue new bonds at lower rates. — location: [4668](kindle://book?action=open&asin=B004KKXMZQ&location=4668) ^ref-19117 --- consult the list in the Address Book. If you have substantial funds to invest in tax-exempts ($25,000 or more), however, I see little reason for you to make your tax-exempt purchases through a fund and pay the management fees involved. — location: [4671](kindle://book?action=open&asin=B004KKXMZQ&location=4671) ^ref-50606 --- There are also funds that confine their purchases to the bonds of a single state so that you can avoid both state and federal income taxes. — location: [4675](kindle://book?action=open&asin=B004KKXMZQ&location=4675) ^ref-1240 --- At the start of April 2000, at the height of the Internet bubble, the dividend yield for the S&P 500 had fallen to 1.2 percent. — location: [4814](kindle://book?action=open&asin=B004KKXMZQ&location=4814) ^ref-53478 --- (Price-earnings multiples were above 30.) — location: [4815](kindle://book?action=open&asin=B004KKXMZQ&location=4815) ^ref-18854 --- In the ninth edition of this book, I presented the case of Carl P., a forty-three-year-old foreman at a General Motors production plant in Pontiac, Michigan, who made over $70,000 per year. His wife, Joan, had a $12,500 annual income from selling Avon products. The Ps had four children, ages six to fifteen. Carl and Joan wanted all the children to attend college. They realized that private colleges were probably beyond their means but hoped that an education within the excellent Michigan state university system would be feasible. Fortunately, Carl had been saving regularly through the GM payroll savings plan but had chosen the option of purchasing GM stock under the plan. He had accumulated GM stock worth $219,000. He had no other assets but did have substantial equity in a modest house with only a small mortgage remaining to be paid off. I suggested that Carl and Joan had a highly problematic portfolio. Both their income and their investments were tied up in GM. A negative development that caused a sharp loss in GM’s common stock could ruin both the value of the portfolio and Carl’s livelihood. Indeed, the story ended badly. General Motors declared bankruptcy in 2009. Carl lost his job as well as his investment portfolio. And this is not an — location: [5271](kindle://book?action=open&asin=B004KKXMZQ&location=5271) ^ref-65176 --- Never take on the same risks in your portfolio that attach to your major source of income. — location: [5281](kindle://book?action=open&asin=B004KKXMZQ&location=5281) ^ref-10586 --- In the Talmud, Rabbi Isaac said that one should always divide one’s wealth into three parts: a third in land, a third in merchandise (business), and a third ready at hand (in liquid form). Such — location: [5322](kindle://book?action=open&asin=B004KKXMZQ&location=5322) ^ref-51516 --- bracket and live in a high-tax state such as New York and your bonds are held outside of your retirement plan, I recommend that you use tax-exempt money funds and bond funds tailored to your state so that they are exempt from both federal and state taxes. — location: [5347](kindle://book?action=open&asin=B004KKXMZQ&location=5347) ^ref-44908 --- So what should smart investors do? Here are my rules: At least partial annuitization usually does make sense. It is the only no-risk way of ensuring that you will not outlive your income. Reputable companies, such as Vanguard, offer annuities with low costs and no sales commissions. In order to make sensible decisions on annuities, you should do some comparison shopping on the Internet at http://www.valic.com. You will find considerable variation in rates from different providers. — location: [5429](kindle://book?action=open&asin=B004KKXMZQ&location=5429) ^ref-8798 --- Under the 4 percent rule, you would need $450,000 of savings to produce an income in retirement of $1,500 per month or $18,000 per year. — location: [5440](kindle://book?action=open&asin=B004KKXMZQ&location=5440) ^ref-47326 --- believe that if an investor is to buy only one U.S. index fund, the best general U.S. index to emulate is one of the broader indexes such as the Russell 3000, the Wilshire 5000 Total Market Index, or the MSCI U.S. Broad Market Index—not the S&P 500. — location: [5574](kindle://book?action=open&asin=B004KKXMZQ&location=5574) ^ref-36133 --- The Wilshire 5000 Index contains all publicly traded U.S. common stocks. The Russell 3000 and MSCI Index contain all but the smallest (and much less liquid) stocks in the market. — location: [5584](kindle://book?action=open&asin=B004KKXMZQ&location=5584) ^ref-42066 --- the Morgan Stanley Capital International (MSCI) index of European, Australasian, and Far Eastern (EAFE) securities, and the MSCI emerging-markets index. In addition, there are index funds holding real estate investment trusts (REITs). — location: [5591](kindle://book?action=open&asin=B004KKXMZQ&location=5591) ^ref-58636 --- One of the biggest mistakes that investors make is to fail to obtain sufficient international diversification. The United States represents only slightly more than 40 percent of the world economy. To be sure, a U.S. Total Stock Market fund does provide some global diversification because many of the multinational U.S. companies such as General Electric and Coca-Cola do a great deal of their business abroad. — location: [5595](kindle://book?action=open&asin=B004KKXMZQ&location=5595) ^ref-32309 --- China, for example, is still considered an emerging market. But it is now the second-largest economy in the world and is expected by the International Monetary Fund to continue to be the fastest-growing large economy in the world. Hence, — location: [5598](kindle://book?action=open&asin=B004KKXMZQ&location=5598) ^ref-48144 --- A SPECIFIC INDEX-FUND PORTFOLIO FOR AGING BABY BOOMERS Cash (5%)* Fidelity Money Market Fund (FORXX), or Vanguard Prime Money Market Fund (VMMXX) Bonds (27½%)† Vanguard Total Bond Market Index Fund (VBMFX) — location: [5608](kindle://book?action=open&asin=B004KKXMZQ&location=5608) ^ref-13009 --- Vanguard REIT Index Fund (VGSIX) Stocks (55%) U.S. Stocks (27%)   Fidelity Spartan (FSTMX), T. Rowe Price (POMIX), or Vanguard (VTSMX) Total Stock Market Index Fund   Developed International Markets (14%)   Fidelity Spartan (VSIIX), or Vanguard (VDMIX) International Index Fund   Emerging — location: [5613](kindle://book?action=open&asin=B004KKXMZQ&location=5613) ^ref-21618 --- I suggest that you avoid the temptation to buy or sell ETFs at any hour of the day and to buy such funds on margin. I — location: [5646](kindle://book?action=open&asin=B004KKXMZQ&location=5646) ^ref-39212 --- Total U.S. Stock Market     Vanguard Total Stock Market VTI 0.07% iShares Russell 3000 IWV 0.20% Developed Markets (EAFE)     Vanguard Europe Pacific VEA 0.15% iShares MSCI EAFE EFA 0.35% Emerging Markets     Vanguard Emerging Markets VWO 0.27% — location: [5653](kindle://book?action=open&asin=B004KKXMZQ&location=5653) ^ref-26086 --- iShares MSCI Emerging Markets EEM 0.72% Total World Ex-U.S.     Vanguard FTSE All World (EX U.S.) VEU 0.25% SPDR MSCI ACWI (EX U.S.) CWI 0.34% Total World Including U.S.     Vanguard Total World VT 0.30% iShares MSCI ACWI ACWI 0.35% Total Bond Market U.S.     Vanguard Total Bond Market BND 0.12% iShares Barclays Aggregate AGG 0.20% — location: [5664](kindle://book?action=open&asin=B004KKXMZQ&location=5664) ^ref-60211 --- Vanguard Tax-Managed Fund: — location: [5678](kindle://book?action=open&asin=B004KKXMZQ&location=5678) ^ref-25039 --- Vanguard has two additional tax-managed funds. One, the Capital Appreciation Portfolio, is identical to the income and growth (S&P 500) portfolio except that the index used is the Russell 1000 Index, which includes many smaller companies with lower dividend yields. — location: [5685](kindle://book?action=open&asin=B004KKXMZQ&location=5685) ^ref-32855 --- third portfolio, the Balanced Portfolio, is composed of roughly equal parts of the capital-appreciation (Russell 1000 Index) portfolio and a group of intermediate-term tax-exempt bonds. These low-cost index-oriented funds should prove very advantageous for wealthy individuals with long-term investment horizons where the stocks are held outside of a tax-advantaged retirement plan. — location: [5687](kindle://book?action=open&asin=B004KKXMZQ&location=5687) ^ref-38626 --- Rule 1: Confine stock purchases to companies that appear able to sustain above-average earnings growth for at least five years. — location: [5714](kindle://book?action=open&asin=B004KKXMZQ&location=5714) ^ref-9224 --- Rule 2: Never pay more for a stock than can reasonably be justified by a firm foundation of value. — location: [5718](kindle://book?action=open&asin=B004KKXMZQ&location=5718) ^ref-36940 --- Rule 3: It helps to buy stocks with the kinds of stories of anticipated growth on which — location: [5731](kindle://book?action=open&asin=B004KKXMZQ&location=5731) ^ref-28897 --- Rule 4: Trade as little as possible. — location: [5740](kindle://book?action=open&asin=B004KKXMZQ&location=5740) ^ref-38343 --- Even if you use index funds for all your investments, you might choose to alter the weights of various portfolio components in an attempt to enhance returns. One adjustment that I make in my own indexed portfolio is to overweight China relative to its weight in the world index benchmark. I do so because I believe that China gets too low a weight relative to its economic importance. Certain peculiarities about China’s stock markets lead to China’s being underweighted both in emerging-market index funds and in total world indexes. — location: [5763](kindle://book?action=open&asin=B004KKXMZQ&location=5763) ^ref-34685 --- China gets only about 2 percent of the weight in the world indexes, whereas, adjusted for purchasing-power parity, China’s GDP is about 13 percent of the world’s GDP and is growing rapidly. — location: [5772](kindle://book?action=open&asin=B004KKXMZQ&location=5772) ^ref-46574 --- YAO (an index fund representing all Chinese companies available to international investors), HAO (a small-capitalization index fund that contains more entrepreneurial companies and ones with less government ownership), and TAO (a Chinese real estate fund). — location: [5776](kindle://book?action=open&asin=B004KKXMZQ&location=5776) ^ref-28207 --- The Egyptian pharaoh had summoned Joseph to interpret a dream in which seven fat cows and seven plump ears of corn were succeeded by seven gaunt cows and seven thin, blighted ears of corn. Joseph said the dream meant that seven years of famine would follow seven years of great plenty. He also proposed a solution: Essentially, Egypt should initiate futures contracts to buy food products during the seven-year period of oversupply to avoid famine during the period of undersupply that would follow. Although the Egyptians did not open the first Nile Board of Trade, clearly the idea of futures contracting was born. — location: [5987](kindle://book?action=open&asin=B004KKXMZQ&location=5987) ^ref-43373 --- boldest futures manipulation of the twentieth century was Bunker and Herbert Hunt’s attempt to corner the silver market. Together with their co-conspirators, the brothers at one time controlled over $17 billion worth of silver, in the process engineering a price rise from about $6 an ounce at the start of 1979 to a high of over $50 an ounce on one trading day in January 1980. — location: [6007](kindle://book?action=open&asin=B004KKXMZQ&location=6007) ^ref-52155 --- author Stephen Fay — location: [6014](kindle://book?action=open&asin=B004KKXMZQ&location=6014) ^ref-24081 --- share from the holding and option-writing strategy, — location: [6370](kindle://book?action=open&asin=B004KKXMZQ&location=6370) ^ref-52316 --- option premiums fluctuate reasonably closely around the values suggested by the Black-Scholes model. — location: [6440](kindle://book?action=open&asin=B004KKXMZQ&location=6440) ^ref-53828 --- Black-Scholes as well as the binomial model. — location: [6476](kindle://book?action=open&asin=B004KKXMZQ&location=6476) ^ref-59154 ---