Indexing pioneer and best-selling author of “A Random Walk down Wall Street”, Professor Burton G Malkiel recently visited Australia to present to a group of retail investors. In this presentation extract, hear Dr Malkiel talk about his Random Walk Theory and why he believes indexing is the most successful investment strategy.
Why use indexing?
One economics professor had an answer to that question. When Princeton Professor Burton G. Malkiel wrote A Random Walk Down Wall Street in 1973, he explained in plain English why it's so difficult to outperform market averages, which are unburdened by investment management costs. Simply tracking an index's performance, he said, offered a superior long-term strategy.
A Random Walk, which went on to become a mainstay in personal finance publishing, proved to be prescient. By simply buying and holding the stocks listed in the Standard & Poor's 500 Index, the new Vanguard fund automatically maintained a diversified portfolio with low turnover, which in turn minimised costs and capital gains distributions. The numbers added up to sustainable advantages over higher-cost, actively managed funds.
Still, indexing continued to be largely ignored. "After all, index funds aren't very profitable for companies offering them," Professor Malkiel said in a recent interview, "and the financial community likes to sell profitable products. But it turned out to be a great deal for investors."
The Vanguard 500 Index Fund is now the largest index fund and second largest mutual fund in the US, with assets totalling nearly $108 billion. Altogether more than $1 trillion, or nearly 12 per cent of U.S. mutual fund assets, is invested in index funds that track broad and narrow benchmarks in virtually every market worldwide (as of March 31, 2006. Source: Lipper Inc.).
The revolution continues in Australia
After arriving in Australia in 1996, Vanguard has spread the word on indexing as a long-term investment strategy to institutional and personal investors alike. As at 30 September 2006, Vanguard's Australian office manages almost A$40 billion on behalf of its investors. In Australia, the size of the indexing market now exceeds A$120 billion or 10 per cent of the total investment management market.
The first of Vanguard's Australian index funds will celebrate their 10th birthday in June next year. Our philosophy of delivering low-cost, high-value products that stand the test of time remains unchanged from 10 years ago.
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