Malkiel. the Efficient-Market Hypothesis and the Financial Crisis 102611
Burton G. Malkiel Chemical Bank Chairman’s Professor of Economics Princeton University
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Transcript of Burton G. Malkiel Chemical Bank Chairman’s Professor of Economics Princeton University
Burton G. MalkielChemical Bank Chairman’s
Professor of EconomicsPrinceton University
“Investing in a Restrained Market”
University of PennsylvaniaJanuary 17, 2006
Exhibit 1
Exhibit 2
January, 2006
Exhibit 3
Exhibit 4
Exhibit 5
Exhibit 6
So Does Rebalancing
Exhibit 7
Exhibit 8
Asset Allocation for Person in Mid-Fifties
Suggested Asset Allocation Retirement Portfolio
Exhibit 9
Exhibit 10
BOW TO THE WISDOM OF THE MARKET
• Markets are reasonably efficient
• Index Funds Outperform
• Past is not prologue
The Case for Indexing continues to be strong
The Case for Active Management continues to be weak
Percent of Large Capitalization Equity Funds Outperformedby Index Ending December 31, 2004.
1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs
S&P vs. Large Cap Equity 74% 76% 63% 86% 90%Funds
Exhibit 11
Exhibit 12
Index Funds tend to outperform by Over Two Percentage PointsComparison of Returns-Average Equity Fund vs. Indexes
10 Yrs 20 Yrs to 12/31/04 to 12/31/04
S&P 500 Index 12.00% 12.78%
Average Equity Fund* 9.30% 10.54%
S&P 500 Advantage 2.70 2.48(percentage points)
Source: Lipper, Wilshire, & the Vanguard Group.*Consists of ALL Lipper equity categories.
Exhibit 13
FundName
12/31/199612/31/1999AnnTotal Return
12/31/199912/31/2002AnnTotal Return
99 – 02 Rank(851 total funds)
1 Rydex: OTC Fund; Inv 65.82 -37.07 841
2 RS Inv: Emerg Growth 62.46 -31.17 832
3 Morg Stan Cap Oppty; B 59.47 -40.72 845
4 Janus Olympus Fund 58.49 -27.42 791
5 Janus Twenty 54.79 -28.63 801
6 Managers: Capital Apprec 53.28 -28.20 798
7 Janus Mercury 51.51 -27.24 790
8 Fidelity Aggr Growth 51.46 -39.09 843
9 Van Wagoner: Emrg Growth 50.05 -51.66 851
10 WM: Growth; A 49.67 -27.88 793
11 Janus Venture 49.56 -29.70 819
12 Van Kampen Emerg Growth;A 49.34 -26.38 785
13 Fidelity New Millennium 49.22 -14.90 500
14 PBHG: Sel Equity;PBHG 49.14 -33.45 837
15 Janus Enterprise 48.71 -33.11 836
16 TCW Galileo:SC Growth;Instl 45.95 -39.32 844
17 Morg Stan Inst: MC Growth;l 45.42 -23.28 735
18 Morg Stan Spec Growth;B 45.34 -41.46 846
19 IDEX: Jan Growth;T 44.96 -28.70 802
20 ING: SmCp Opptys;B 44.06 -30.64 826
Average – Top 20 51.44 -32.00
S&P 500 27.56 -14.55
Exhibit 14Getting Burned by Hot Funds
Exhibit 15
Exhibit 16
Percentage of Actively Managed BondFunds Outperformed by Benchmark
10 Years Ended 12/31/04
Short-term
Intermediate-term
Long-term
Gov’t. Corp. GNMA High-Yield
98% 100% 90% 83%
90 99
75 83
Source: Lipper Inc. and Morningstar, Inc.
Exhibit 17
How to Buy Bonds
Taxable vs. Tax Exempt
Mutual Funds
NJ/PA Money Market Fund
NJ/PA (insured) Long-Term Bond Fund
Buy Bonds Directly
Only buy insured new issues
Yields today about 4½%
for insured bonds (AAA)
Exhibit 18
DON’T BE YOUR OWNWORST ENEMY
AVOID STUPID INVESTOR TRICKS
• Overconfidence
• Herding
• Loss Aversion
• A couple of other common errors
- Hot tip Investing
- New Issue Investing
Exhibit 19
Retirement Strategies
Buy Annuities Pro: Surest way to guarantee you won’tOutlive your money
Con: Expensive, inflexible, and inconsistentWith a bequest motive.
Do it Yourself
1. Determine the takeout rate Assume Portfolio half equities (7 ½ % return) and half bonds (5% return). Average return 6 ¼ % Minus Inflation Adjustment 2 % Takeout rate 4 ¼ %
2. Rebalance– Take money out of best performing asset class