Magazine article Black Enterprise

Resist the Urge to Time the Market

Magazine article Black Enterprise

Resist the Urge to Time the Market

Article excerpt

LATELY I HAVE BEEN THINKING A LOT ABOUT PRINCETON Professor Burton Malkiel's A Random Walk Down Wall Street (W.W. Norton; $18.95). As you may have heard, investors have swung heavily toward passive investing and away from active investing over the last few years. A Random Walk is rightly considered the Old Testament of index funds, so it seems that people have been paying attention to this great book lately. On the other hand, it seems to me that investors have been missing the critical point: that the stock market defies prediction.

Passive investing has become much more popular lately. From 2000 to 2006, actively managed U.S. stock mutual funds saw inflows of $404 billion, an average of $57 billion annually, according to Morningstar. Over that period, passively managed funds had inflows of $132 billion, an average of $19 billion per year. Back then, both types of funds had net inflows annually, with active funds garnering three times what index funds did. From 2007 to 2014, things changed radically. Active funds lost $65 billion annually for a total of $524 billion in outflows; passive funds gained $34 billion annually, totaling $275 billion. Passive funds were in inflows every year, while active funds had just one year of positive flows. And active funds had about twice the flows--but in reverse--that passive funds did.

So people seem to be paying attention to professor Malkiel's counsel to buy index funds. On the other hand, they simultaneously seem to be missing his key point right in the title of the book--that the stock market follows a random walk. He writes:

"A random walk is one in which future steps or directions cannot be predicted on the basis of past history. When the term is applied to the stock market, it means that short-run changes in stock prices are unpredictable."

Trying to use recent market returns to guide your investments is a poor plan. …

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