Though Malkiel is a bit perplexed at the market's recent wild behavior, the Princeton economist isn't suggesting you pull your savings out of professionally managed mutual funds and entrust them to a monkey.
However, he still believes keeping investing simple: Buy and hold low-cost index funds that track broad segments of the market.
Many in the investment industry would advise against that, especially in a volatile market. Rely instead on professional fund managers to deftly move into the right stocks at the right time, the thinking goes.
With a new book out, Malkiel will have none of it.
"If you had perfect foresight, buy and hold should be dead," the 77-year-old says. "But we don't have perfect foresight."
In "The Elements of Investing," Malkiel and co-author Charles Ellis revisit some of the same advice Malkiel offered in "Random Walk," now an investing classic. More than 1 million copies have been sold with translations into more than 10 languages.
But how many of us are willing to plow through the nearly 500 pages in Random Walk's ninth edition?
"Elements" should prove more palatable, thanks to disciplined writing by Malkiel and Ellis, an institutional investing consultant and author whose investment titles include "Winning the Loser's Game."
"What Charles and I asked ourselves was, 'Can we put down for people what they really need to know, and can we do it in 100 pages?'" Malkiel says.
They didn't quite make it, coming in at 126 pages, not counting extras like the appendix and index. Still, those pages are an economical 5-by-7 inches, and a swift reader can knock it off in a couple hours.
In an interview, Malkiel discusses the book and the implications of 2008's stock market meltdown and 2009's rally:
Q: You're 77, and "Random Walk" continues to sell after 36 years. Why a new book?
A: This is geared for a broader audience. We really see this as for the person who is not an economics major in college, or a finance major at a business school.
Q: Aside from the shorter length, how is the advice in the new book different from the tips in "Random Walk"?
A: What we've tried to do is use the KISS principle much more — Keep It Simple, Sweetheart. In "Random Walk," there was advice on what to do about taxes, when do you use municipal bonds, etc. With "Elements of Investing," our idea is to completely do away with the complexities of investing, and to recommend a very simple, easy-to-use program.
For most people, this will be all they need. And it may be even overly simple. But we believe it's very good advice for 95 percent of investors.
Q: This year, investors have been putting far more money into bond mutual funds than into stock funds, even though the market has rallied. How do you explain this?
A: If the market keeps going up, you'll start to see those flows go into stocks, because people will then forget the bad times and the bear market. And if I were going to try to time the market, I would use that as a contrary indicator that it's time to sell.
This is for me the great lesson of behavioral finance — namely, that there is herd behavior. When everybody is talking about how much money they have been making in the market, and how this Internet stock doubled and then redoubled, that is when people move in the market. That is irrational.
Q: What's your take on the spike in gold prices, which hit a record of more than $1,200 an ounce a few weeks ago?
A: People see the price going up, and the money flows into gold funds.
But I think a well-diversified stock portfolio is what you ought to have. Remember: When you own stocks, you own ownership interests in real things, real factories, people who are performing real services. And stocks have been a good long-term inflation hedge, and I think they will be in the future.
Does that mean you do zero gold? If you own one of these broad index funds which Charley Ellis and I recommend, you'll have a position in a U.S. company called Freeport McMoRan Copper & Gold. So you'll get some exposure to gold through that holding. I would do it that way, rather than rush in and buy gold at $1,200 an ounce.
Q: How have you been tweaking your own portfolio lately?
A: I pretty much have broad-scale index funds. But I have always believed that you index the core of your portfolio. Then, if you want to take some bets around the edges, fine. And one of the bets I have been taking is a good position in China.
The reason you want to buy stocks is because you have ownership interests in companies that will grow with the economy. China is the fastest-growing economy in the world. I think it's going to continue to be the fastest-growing economy. I think soon it will be bigger than Japan. And it wouldn't surprise me in 20 years that it will be a bigger economy than even the United States.
So I am a big bull on China, and I invest in China through low-expense exchange-traded funds.