The Random Walk Guide to Investing: Ten rules for financial success

In 1973, Burton Malkiel published A Random Walk Down Wall Street, in which he argued that a blindfolded monkey could pick stocks as well as a professional investor. Though I bought a copy of Random Walk for $3.99 at the local Goodwill last year, I haven’t read it. It looks dense. I know it’s written for the layman, but it still seems rather academic.

In 2003, Malkiel published The Random Walk Guide to Investing, “a book of less than 200 pages in length that boils down the time-tested advice from Random Walk into an investment guide that [is] completely accessible for a reader who knows nothing about the securities markets and who hates numbers.”

Several patient GRS-readers have been recommending this book for the past year. When I stayed home sick yesterday, I finally found time to read it. I’m impressed. Malkiel has produced an easy-to-read straightforward investment guide that I’m happy to recommend to anyone. His philosophy matches my own:

The advice in this book is both simple and realistic. There is no magic potion in the investment world because the truth is that one doesn’t exist. There is no quick road to riches. And if someone promises you a path to overnight riches, cover your ears and close your pocketbook. If an investment idea seems too good to be true, it is too good to be true. What I offer are ten simple, time-tested rules that can build wealth and provide retirement security. Think of the rules as the proven way to get rich slowly.

Burton Malkiel’s 10 rules for financial success

Malkiel’s rules are familiar. We’ve discussed most of them here before:

1. Start saving now, not later

Don’t worry about whether the market is high or low — just begin investing. “Trust in time rather than timing,” Malkiel writes. “The secret to getting rich slowly (but surely) is the miracle of compound interest.”

2. Keep a steady course

“The most important driver in the growth of your assets is how much you save,” writs Malkiel, “and saving requires discipline.” To develop discipline, the author recommends that you learn to pay yourself first (invest before anything else, even paying bills), implement a budget, change spending habits, and pay off debt.

3. Don’t be caught empty-handed

Malkiel recommends that readers open an emergency fund. He doesn’t specify how much should be set aside, but he does cover a variety of places to put the cash: money market accounts, certificates of deposit, and online savings accounts. He also recommends purchasing term life insurance.

4. Stiff the tax collector

Make the most of tax-advantaged savings: Open an Individual Retirement Account, contribute to your company’s retirement plan, take advantage of tax-free savings for your child’s education, buy your home rather than rent. All of these things help to reduce the bite that taxes take out of your money.

5. Match your asset mix to your investment personality

Based on your risk tolerance and your investment horizon, choose the best mix of cash, bonds, stocks, and real estate. (Malkiel encourages investors to buy each of these through mutual funds.)


6. Never forget that diversity reduces adversity

Don’t just buy stocks — buy stocks, bonds, and other investments classes. Within each category, diversify further. And don’t just buy one stock — buy mutual funds of many stocks. (Malkiel makes his case with the stark example of a 58-year-old Enron employee who had a $2.5 million 401k — of Enron stock. When Enron went bust, the employee not only lost her job, but her retirement savings vanished completely.) Finally, the author recommends “diversification over time” — making investments at regular intervals using dollar-cost averaging.

7. Pay yourself, not the piper

Interest and fees are drags on your wealth. “Paying off credit card debt is the best investment you will ever make.” Avoid expensive mutual funds. “The only factor reliably linked to future mutual fund performance is the expense ratio charged by the fund.” In fact, the author advises that costs matter for all financial products.

8. Bow to the wisdom of the market

“No one can time the market,” Malkiel says. It’s too unpredictable. Professional money managers can’t beat the market, financial magazines can’t beat the market — nobody can beat the market on a regular basis. The best way to earn consistent gains is to invest in broad-based index funds. It’s boring, but it works.

9. Back proven winners

After Malkiel has preached the virtues of index funds, presumably converting the reader to his religion, he spends a chapter suggesting possible index funds and asset allocations.

10.Don’t be your own worst enemy

Malkiel concludes by admonishing readers to stay the course, warning them against faulty thinking. He discusses the sort of money mistakes I’ve mentioned before: overconfidence, herd behavior, loss aversion, and the sunk-cost fallacy.

Ultimately, Malkiel’s advice can be stated in a few short sentences: Eliminate debt. Establish an emergency fund. Begin making regular investments to a diversified portfolio of index funds. Be patient. But the simplicity of his message does not detract from its value. The Random Walk Guide to Investing is an excellent book because it sticks to the basics:

  • It’s short.
  • It’s written in plain English — there’s no jargon.
  • It’s easy to understand — concepts are simplified so the average person can grasp them.
  • It’s filled with great advice.

This book refers often to other books to bolster its arguments, and includes quotes from financial professionals like John Bogle and Warren Buffett. Though the advice may seem elementary, it’s advice that works. If you want to invest but don’t know where to start, pick up The Random Walk Guide to Investing at your local library.

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There are 16 comments to "The Random Walk Guide to Investing: Ten rules for financial success".

  1. Eden says 18 December 2007 at 06:03

    Interesting. I’ll have to check that one out. I am reading A Random Walk Down Wall Street right now. I find it mostly interesting, though often dull. Definitely not for beginners or someone who doesn’t plan to manage their own investments.

  2. Traciatim says 18 December 2007 at 06:23

    I couldn’t seem to find one, but do you know if there is a Canadian version of this book that doesn’t go in to IRA’s and 401K’s? Since we have RRSPs and lots of different tax rules I find it hard to find good simple investing books.

  3. Dividends4Life says 18 December 2007 at 06:56

    It sounds like a good book. I love good common sense lists – we have to sometimes be reminded of the basics. Thanks for sharing the summary.

    Best Wishes,

  4. Money Blue Book says 18 December 2007 at 07:31

    A lot can be said for #10 and the need to avoid emotional investing. Invest for the long haul and let time and compound interest take its course. A long haul in my opinion is more than 5 years at least.

  5. Josh says 18 December 2007 at 07:38

    I can see how “A Random Walk Down Wall Street” could be a bit technical for new investors. I thought the advice in the book was sound, but the reasoning wasn’t compelling.

    This may have been due to an attempt to keep the book accessible to the general public, but – with a background in economics/statistics and an interest in markets – I was disappointed he didn’t mention many arguments that confound the efficient markets hypothesis (e.g. value investing always beats the market over long (3-5+ years) horizons.

    As I said, no one will be disappointed by following the advice in the book; but I was disappointed by the answers to ‘why’ the advice should be followed.


  6. Brigitte says 18 December 2007 at 07:54

    Your comment in Stiff the Taxman about buying versus renting… I’ll admit I do not do my own taxes, but my mom (who does them, for some very good reasons, one of which being I’m still listed as her dependent) pointed out to me a couple years ago that by some tax law, I was getting more taxes back by renting than she was by owning her home and paying a mortgage, by taking my rent payments as a deduction of some kind. I wish I knew the details, but folks should make sure to check into that availability in their state.

  7. Ryan says 18 December 2007 at 08:06

    Josh, but simply because one asset class has better returns than another doesn’t contradict an efficient market. Efficient markets are all about bringing returns appropriate to systematic risk. I’m sure that’s a point you understand, but I thought I’d mention it.


  8. Josh says 18 December 2007 at 08:21

    Ryan, that’s a good point but it’s uncertain that it is the cause of value over-performance. You’re getting into the ‘why’ question I had hoped the book would address in more detail. 😉

  9. brian says 18 December 2007 at 08:43

    This is undoubtedly good advice overall, but a small niggling contradiction:
    #2 says “invest before anything else, even paying bills” while #7 says “Paying off credit card debt is the best investment you will ever make.”

    I would definitely agree with paying off credit card bills first, but this highlights the problem with investment rules that have “never” or “always” in them.

  10. FourPillars says 18 December 2007 at 08:44

    If you liked Random Walk Down Wall Street (the book that JD didn’t read) then a slightly more academic but better read is Four Pillars of Investing by William Bernstein.

    Both of those books mainly focus on the relative efficiency of the markets and how nobody can outperform the market so the best way to invest is through low cost index funds and ETFs.

    Traciatim – I don’t think there is a Canadian equivalent but the original RWDWS and 4 Pillars books are generic enough that anyone can enjoy them.

  11. mapgirl says 18 December 2007 at 11:04

    I’ve been wanting to do my own review of this book for a while. I love it. I read it in college on the advice of my cousin (a Wharton student) and I guess it’s always been part of my subconscious. I haven’t re-read it in years, but I will never forget that it’s the first place I read about the ‘Castles in the Air’ theory and that technical chart people are stupid.

    Thanks JD! I hope you are feeling better!

  12. Brad Nolden says 18 December 2007 at 12:09

    I found this blog through Ryan Holiday and have enjoyed the recent articles.

    The advice in this book is essentially what I learned in four years of studying finance at a decent school. If it were more technical, it very well could be our curriculum.

    Professors especially love to remind us how unlikely it is that any of us could ever outperform a passive index fund. Probably trying to keep us from delusions of turning into the next Buffet.

    All the best

  13. says 18 December 2007 at 20:30

    A blindfolded monkey, huh? Do you think the blindfold actually makes a difference? That is, would a non-blindfolded monkey fare any better? Probably not. So why bother with the blindfold?

    When it comes to professional money managers, on the other hand, there’s actually evidence that some of them *might* do better with a blindfold than without one. That’s right… A non-trivial fraction of investment managers actually do substantially worse than random. Or at least that’s the argument presented in The Four Pillars of Investing (an excellent book, by the way).

  14. Jennionthefarm says 20 December 2007 at 11:47

    I’ll add this to my list- I’ve read a number of your recommended titles, including The Millionaire Next Door, The Wealthy Barber, The Automatic Millionaire, and The Only Investment Guide You’ll Ever Need. I’m currently reading The Bogleheads’ Guide to Investing. The only books I haven’t really read, just skimmed briefly, are the Suze Orman titles. She just doesn’t float my boat, I guess. Very self-helpy and Oprahlike. Interestingly, many of your recommended books were checked out the first time I went to the library, which makes sense because that’s a great way to be frugal!

    I’m finding that my knowledge in this area has rapidly outpaced my ability to do anything with it. We have some credit card debt that will be paid off in a year or so and are working on creating emergency savings. I have an 403(b) that I’m switching to a Vanguard IRA and a Roth IRA and plan to contribute more to those and have my husband set up a SEP 401(K) once we actually have money to put in it.

    I’ve learned lots from your blog- thanks for sharing your knowledge and experiences with us!

  15. Financialgal says 25 December 2007 at 08:48

    Thank you for the review of Burton Malkiel’s book. I didn’t realize that he had written a follow-up to his “Random Walk Down Wall Street.” I had read his first book in college, and I agree, it was a bit dense and somewhat technical. Even though these two books are 30 years apart, it demonstrates that the fundamentals of investing don’t change, even through tech bubbles and subprime meltdowns.

  16. typome says 02 February 2008 at 22:42

    Thanks for posting this book! I just read a copy from the library, and I enjoyed it. I particularly liked the asset allocation and how to divide my IRA funds. I really didn’t know what funds did what, so it definitely helped.

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