Malkiel: Ignore China At Your Own Peril

September 18, 2013

The indexing legend sees huge opportunity in China and wishes Fed Chairman Bernanke would stay on for another term.


Burton Malkiel, the author of the seminal book on indexing, “A Random Walk Down Wall Street,” is more convinced than ever of the simple truth that a properly diversified portfolio of cheap index funds like ETFs gives investors the best possible chance to succeed. His involvement as a chief investment officer at ultra-cheap advisory firms like Wealthfront and Rebalance IRA signal that investors can now reap the benefits of cheaper financial advice as well.

The Princeton economics professor and advisor to China-focused index firm AlphaShares also told IndexUniverse Managing Editor Olly Ludwig he thinks the Federal Reserve under Ben Bernanke has done a fine job of steering the economy out of the financial crisis, and he reminded investors that the pullback in Chinese asset prices has created an upside opportunity the likes of which hasn’t been seen in years. What are your latest thoughts about the world of indexing?

Malkiel: Broad-based indexing has become more and more accepted in the financial community. It certainly was thought of as nutty at the very beginning. But it’s become more and more accepted because in fact, in period after period, low-cost, passively managed portfolios seem to consistently beat the typical active manager.

Every three or four years, when I do a new edition of my “Random Walk” book, I always look and say, “OK, how did it work in the last period?” And the general finding is that one-third of active managers generally beat the index in any particular period. And there’s very little, if any, consistency in that the one-third that win in one period aren’t the same one-third that win in the next period.

Secondly, the innovation of the exchange-traded fund has, I think, been very important, because the flows into the ETFs have been very, very large, so it’s all part of the reduction in fees.

And one of the reasons that indexing works is that it is low cost and has low fees. And with the advent of the ETFs and an enormous amount of competition, fees have been coming down—both for mutual funds and for ETFs—and I think that this has opened up the world of indexing to more and more people. Does any of the product development in ETFs bother you?

Malkiel: What I don’t like—and here I’m probably absolutely in the same camp as Jack Bogle—is the exotic products, which, for example, give you three times the upside of the S&P. These are products that are simply designed for speculation, not for investing. I don’t also believe that anyone can really time the market

So those are not things I like. And they don’t even do what they’re supposed to do. In other words, they’ll do it for one day, but you don’t buy that, put it away and, “Gee, the S&P was up 10 percent, was I up 30 percent?” It doesn’t work Let’s talk about the economy for a moment. How do you rate the Bernanke Fed?

Malkiel: I really believe that Ben has done a superb job. People often ask me, “Who is your choice to be the next Fed chairman?” and I usually answer that by saying, “Frankly, if it were my choice, and I were in the shoes of President Obama, I’d get down on my knees and beg Ben to continue.” I’m a big Bernanke supporter.

Given what was happening on the fiscal front, I think it was the Federal Reserve that deserves the lion’s share of the credit for having basically saved us from what could have been a Great Depression.



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