1/25/2005

The Random Walk Guide To Investing

I just finished a great book called The Random Walk Guide to Investing: Ten Rules for Financial Success by Burton G. Malkiel. I highly recommend this book for anyone who has a retirement account, such as a 401k or IRA. It lays out a simple plan using easy to understand rules on how to allocate and invest your retirement funds.

I am personally going to use this investment guide to manage Aliciana’s 401k. This book convinced us to start funding her 401k as soon as possible and to continue funding it over her entire career. Everyone should fund their 401k or IRA as much as possible… the tax benefits are amazing! The true magic of his plan is to simply start saving a little money out of every paycheck as early in your life as possible, save a ton on your taxes, and let compounded interest turn it into a large sum by the time you retire.

This book gives a very convincing analysis which supports its claim that for long term investing you are better off buying “Total Market Index Funds” and similar types of funds for bonds and REITs. These types of funds won’t make you rich overnight but over 20 years they will provide a very good annual return, at least 10% APR for the stock fund.

So, I recommend reading this book for anyone who has to manage their retirement funds. If you are paying a financial planner to do it for you, chances are that you would be better off firing him and managing your funds yourself. The author gives plenty of real world data to back up this claim.

As for how I am going to manage our own retirement funds, based on this book’s advice, it is quite simple. I am going to allocate 80% of our 401k funds in the Vanguard Total Stock Market Index, 10% in the Vangaurd Total Bond Market Index Fund, and 10% in the Vanguard REIT Index Fund. As we age, I am going to slowly allocate more money into the bond and REIT funds, so that by the time we are 55 I should have 40% in the stock fund, 30% in the bond fund and 30% in the REIT fund. It really is that simple, no financial planner needed, all you need is this book.