July 7, 2009
Malkiel recited the results of numerous studies showing that investors, on average, underperform the funds in which they invest, because they tend to sell at the bottom and buy at the top. “I am absolutely convinced financial advisors can play a critical role in addressing this,” he said.
Telling someone you can’t beat the market is like telling a six-year old that Santa Claus doesn’t exist. Malkiel said it is okay for investors to allocate a portion of their funds to active management, but only after the core funds have been safely invested in index funds.
Malkiel actively manages a portion of his funds, specifically in China, which he said is the “fastest growing place in the world,” with companies that have reasonable P/E multiples in line with the rest of the world.
He invests in closed-end funds when they are priced at a discount of at least 20% to their net asset value, such as was recently the case with the Templeton Dragon Fund. He also owns HAO, an ETF that tracks an index of small Chinese companies. HAO is offered by Alpha Shares, where Malkiel serves as Chief Investment Officer.
As for gold, Malkiel said it works as a hedge against Armageddon and recommended keeping a “sliver” of your portfolio in commodities. Three months ago he bought Freeport McMoRan Copper & Gold (NYSE: FCX), which gives him exposure to both copper and gold. China will lead the world out of the recession, and its natural resource needs make Freeport a very good way to play this scenario, Malkiel explained.
Malkiel did not say when he expects the economy to recover, but he forecast higher interest rates. He ruled out the possibility of hyperinflation – “we have learned enough” to prevent that scenario – but said the monetary authorities will have trouble draining liquidity from the system. Unemployment will remain high and political pressures will prevent Democrats from taking measures to restrain federal spending, which will be the primary force pushing interest rates up.
Although the economy looks “frighteningly like the 1929-1932 period,” Malkiel said, another Great Depression is off the table – at least that is what the stock market is saying. “How strong the recovery will be remains to be seen,” he cautioned.
Returning to the message that he has preached for the last four decades, Malkiel concluded by warning advisors that “anything you find that will make money will eventually self-destruct. There are too many smart people looking for those opportunities.”
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