[Burton Malkiel: Don’t Give Up on the Stock Market]

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
McQ
Posts: 522
Joined: Fri Jun 18, 2021 12:21 am
Location: California

[Burton Malkiel: Don’t Give Up on the Stock Market]

Post by McQ »

[Title was "Has Burton Malkiel gone off the reservation?" --admin LadyGeek]

Bogleheads will recognize Malkiel as the author of the book A Random Walk Down Wall Street, as a long time member of the Vanguard Board of Directors, as a sometime mentor of John Bogle, and in general, as one of the good guys.

But today’s column in the WSJ raises some uncomfortable questions for Boglehead orthodoxy. Here is a 300 word excerpt: https://www.wsj.com/articles/dont-give- ... 4#cxrecs_s
…[time to ask] whether standard advice to investors, such as relying on equities to produce generous long-run returns, needs to be modified.

… it isn’t time to give up on equities. Long-term investors saving to build a retirement nest egg need to invest in a portfolio heavily weighted with common stocks. Stocks, representing the ownership of real assets, have been an effective inflation hedge for more than a century…

Regular savers can realize the advantages of dollar-cost averaging … Periodic investments of equal dollar amounts ensure that holdings aren’t purchased at temporarily inflated prices and that some shares will be bought after a sharp decline. Because you buy more shares when prices are low, your average price per share will be lower than the average price…

[Consider:] From January 1968 through the start of 1979, the U.S. economy suffered from stagflation and volatile stock markets. The 11 years ended with a zero gain in the major averages. The 13 years from January 2000, the height of the dot-com bubble, were just as bad …[nonetheless] dollar-cost averagers earned … 5.2% a year during the stagflation period and 5.7% in the post-bubble period… [exceeding inflation].

… [But] for retirees who need to sell some of their investments to meet living expenses, dollar-cost averaging of their sales isn’t the optimal strategy. Periodic sales would involve liquidating more of their shares just when prices were low. The appropriate approach is to hold a broadly diversified portfolio, including limited-duration fixed-income instruments that can be liquidated without loss to fund consumption.

[Equities] … should be tilted toward stocks that pay high dividends. A stock like IBM pays a dividend of 5%, so living expenses can be financed without the need to sell shares… “dividend growth stocks” are the appropriate equity vehicle to provide both liquidity and inflation protection for those living off retirement savings.
The italicized portion, I believe, corresponds to the Boglehead way. But the bolded portion runs counter to what I have read in posts here at Bogleheads. It seems to deny the wisdom of “total return on a total market fund, that’s all she wrote.”

Of course, just because Malkiel is a Princeton faculty member with a resume as long as your arm doesn’t give him a pass. What say you, Bogleheads?
They that read the footnotes, they shall be saved; but they that pass over the appendices, they shall wander forever.
curmudgeon
Posts: 2416
Joined: Thu Jun 20, 2013 11:00 pm

Re: [Burton Malkiel: Don’t Give Up on the Stock Market]

Post by curmudgeon »

I have felt that Malkiel has been somewhat "captured" by the industry. Not terribly surprising given that he makes a living from it, but I thought that even later editions of the classic Random Walk had a drift back towards stock picking. Maybe it's more towards the "Nifty Fifty", or a Wellington/Wellesley mindset.

I'm not exactly a 3-fund purist myself, but I haven't been especially convinced by his later work either.
Northern Flicker
Posts: 11397
Joined: Fri Apr 10, 2015 12:29 am

Re: [Burton Malkiel: Don’t Give Up on the Stock Market]

Post by Northern Flicker »

McQ wrote: Thu Sep 22, 2022 12:22 am ...
Equities… should be tilted toward stocks that pay high dividends. A stock like IBM pays a dividend of 5%, so living expenses can be financed without the need to sell shares… “dividend growth stocks” are the appropriate equity vehicle to provide both liquidity and inflation protection for those living off retirement savings.

The italicized portion, I believe, corresponds to the Boglehead way. But the bolded portion runs counter to what I have read in posts here at Bogleheads. It seems to deny the wisdom of “total return on a total market fund, that’s all she wrote.”

Of course, just because Malkiel is a Princeton faculty member with a resume as long as your arm doesn’t give him a pass. What say you, Bogleheads?
Here is a transcript of an interview from June 2011 where Malkiel claims that Americans need to own more Chinese equities because of the high growth prospects in China.

https://www.etf.com/sections/features/9 ... china.html

Comparison of the performance of VTI (total US stocks) and MCHI (fund tracking the diversified market of Chinese equity available to US investors at the time) since then:

https://www.portfoliovisualizer.com/bac ... ion2_2=100
Last edited by Northern Flicker on Thu Sep 22, 2022 2:40 pm, edited 1 time in total.
My postings represent my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
User avatar
whodidntante
Posts: 11335
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: [Burton Malkiel: Don’t Give Up on the Stock Market]

Post by whodidntante »

Perhaps his recommendations have taken a random walk.
User avatar
Billy C
Posts: 108
Joined: Sat Apr 02, 2022 4:05 pm

Re: [Burton Malkiel: Don’t Give Up on the Stock Market]

Post by Billy C »

Malkiel appears to believe that dividends matter, particularly for retired investors who don’t want to sell shares during a down market.

I agree with him. Jack Bogle was also a big fan of dividends.

Malkiel’s point about dollar cost averaging (such as reinvesting dividends) during a volatile sideways market leading to positive results is an important one.
“When there are multiple solutions to a problem, choose the simplest one.” ― John C. Bogle
TheDoctor91
Posts: 151
Joined: Thu Feb 25, 2021 12:43 pm

Re: [Burton Malkiel: Don’t Give Up on the Stock Market]

Post by TheDoctor91 »

There’s lots of evidence that dividend investing isn’t ideal. You will probably outperform on a risk adjusted basis with a dividend etf, but you could also target value for even better results with historical backing.

I have a hard time seeing how a 60/40 even DCAd in to diversified across the world would do poorly over 10-20 year periods.
User avatar
asset_chaos
Posts: 2268
Joined: Tue Feb 27, 2007 6:13 pm
Location: Melbourne

Re: [Burton Malkiel: Don’t Give Up on the Stock Market]

Post by asset_chaos »

I don't think Malkiel has ever been a 3-fund kind of investor with this public advice. Early editions of his Random Walk book had a chapter about investing in closed end funds with narrowing discounts, which he said he did personally. That call was reportedly correct and correctly timed, and he made a bunch of money. He dropped that chapter from later editions of Random Walk, saying the anomaly was no longer there to exploit. At least since the circa 2010 book Elements of Investing that he co-authored, he's been advocating to replace near zero interest rate bonds with dividend stocks for retirees that need income. About the same time he started to bang on about investing in China. Maybe now that bonds will once again throw off meaningful amounts of income, he'll change his advice again. Who knows.

My point is that the bolded lines in the OP are not new from Malkiel and that I don't believe he's never held himself out to be purely a total market index fund advocate. So no, he hasn't gone off the reservation; he was never on the reservation the OP wants to assign him to.

With that said, I still think Malkiel is one of the good guys in investing who has advocated for index funds and who did build the case early that active management is inferior. That he's not ever been a pure index fund person doesn't bother me because I'm happy to evaluate people's ideas and take from all the parts what work for me.
Regards, | | Guy
User avatar
typical.investor
Posts: 3773
Joined: Mon Jun 11, 2018 3:17 am

Re: Has Burton Malkiel gone astray?

Post by typical.investor »

In a free country, why should anyone be confined to a reservation in the first place? The origin of that term, while clearly not what you meant, is hateful.

As for tilting toward dividend stocks and spending from dividends to avoid selling shares at a low, perhaps it might serve as a psychological crunch to those risk adverse. I'd like to see more data before concluding it's useful in terms of safe withdrawals though.

I mean you know, Malkiel not giving financial advice up the standards of what we expect at Bogleheads to me is quite different than a Native American driving a pickup to work some place where there is more economic opportunity - but both are off the reservation I guess.
JBTX
Posts: 9680
Joined: Wed Jul 26, 2017 12:46 pm

Re: [Burton Malkiel: Don’t Give Up on the Stock Market]

Post by JBTX »

I think there could be something to Dividend growth stocks. It is true that getting a dividend is just another form of liquidation and in itself isn’t special, but dividend growth stocks are often strong stable companies, and the commitment to provide an increasing dividend over time may lead to more responsible stewardship of the company. For those that can’t withstand a massive hit to their portfolio they may be a better choice.
Leesbro63
Posts: 8455
Joined: Mon Nov 08, 2010 4:36 pm

Burton Malkiel

Post by Leesbro63 »

Dividends are one of those "in theory vs in reality" thing. In theory, you don't really want dividends, because it makes more sense to control taxable events and liquidity needs by selling small amounts of long term capital gain stock. But in reality, for the retiree living on investments, a steady flow of dividends adds a sort of and "auto pilot" to income needs. So Malkiel probably hasn't strayed from Boglehead principles too far.

I've seen some FIRE investors, on other boards, tout BerkshireHathway stock as their VTI replacement. Because BRK doesn't spin off a dividend and can better controlled as to how much to sell and when.

As a practical matter, dividends have been relatively low. A 60/40 portfolio might spin off 2.5% in both dividends and interest, which is a perfect base for a Boglehead type retiree. If they can live off of 2.5% "SWR" or less, they're set. If they need a little more (to 4%), they can sell some stock/bond. I think I read Rick Ferri has his clients doing exactly this. Seems like the perfect auto pilot, with a just little bit of human input.
Last edited by Leesbro63 on Thu Sep 22, 2022 6:16 am, edited 2 times in total.
User avatar
LadyGeek
Site Admin
Posts: 85106
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: [Burton Malkiel: Don’t Give Up on the Stock Market]

Post by LadyGeek »

I have retitled the thread to remove a phrase which is no longer acceptable in today's environment.

FYI - Burton Malkiel is one of the presenters at the Bogleheads 2022 conference.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
Leesbro63
Posts: 8455
Joined: Mon Nov 08, 2010 4:36 pm

Re: [Burton Malkiel: Don’t Give Up on the Stock Market]

Post by Leesbro63 »

LadyGeek wrote: Thu Sep 22, 2022 6:10 am I have retitled the thread to remove a phrase which is no longer acceptable in today's environment.

FYI - Burton Malkiel is one of the presenters at the Bogleheads 2022 conference.
And I modified my post, a few up, accordingly. But the SUBJECT in many of the posts above still shows up as not modified.
User avatar
burritoLover
Posts: 2739
Joined: Sun Jul 05, 2020 12:13 pm

Re: [Burton Malkiel: Don’t Give Up on the Stock Market]

Post by burritoLover »

McQ wrote: Thu Sep 22, 2022 12:22 am [Equities] … should be tilted toward stocks that pay high dividends. A stock like IBM pays a dividend of 5%, so living expenses can be financed without the need to sell shares… “dividend growth stocks” are the appropriate equity vehicle to provide both liquidity and inflation protection for those living off retirement savings.
Obviously ridiculous advice. Don't have context of the rest of the article, but on that statement alone, he seems to be implying that stock dividends are a perpetual withdrawal strategy. Maybe also he's recommending investing in individual stocks? A dividend growth fund isn't going to have a 5% dividend.
dkturner
Posts: 1739
Joined: Sun Feb 25, 2007 7:58 pm

Re: Burton Malkiel

Post by dkturner »

Leesbro63 wrote: Thu Sep 22, 2022 5:45 am Dividends are one of those "in theory vs in reality" thing. In theory, you don't really want dividends, because it makes more sense to control taxable events and liquidity needs by selling small amounts of long term capital gain stock. But in reality, for the retiree living on investments, a steady flow of dividends adds a sort of and "auto pilot" to income needs. So Malkiel probably hasn't strayed from Boglehead principles too far.

I've seen some FIRE investors, on other boards, tout BerkshireHathway stock as their VTI replacement. Because BRK doesn't spin off a dividend and can better controlled as to how much to sell and when.

As a practical matter, dividends have been relatively low. A 60/40 portfolio might spin off 2.5% in both dividends and interest, which is a perfect base for a Boglehead type retiree. If they can live off of 2.5% "SWR" or less, they're set. If they need a little more (to 4%), they can sell some stock/bond. I think I read Rick Ferri has his clients doing exactly this. Seems like the perfect auto pilot, with a just little bit of human input.
Unless I’m mistaken hasn’t Kenneth French documented that, historically, higher dividend paying stocks have produced higher total returns than low, or no dividend paying stocks?
User avatar
LadyGeek
Site Admin
Posts: 85106
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: [Burton Malkiel: Don’t Give Up on the Stock Market]

Post by LadyGeek »

Leesbro63 wrote: Thu Sep 22, 2022 6:17 am
LadyGeek wrote: Thu Sep 22, 2022 6:10 am I have retitled the thread to remove a phrase which is no longer acceptable in today's environment.

FYI - Burton Malkiel is one of the presenters at the Bogleheads 2022 conference.
And I modified my post, a few up, accordingly. But the SUBJECT in many of the posts above still shows up as not modified.
A moderator has to edit the post titles manually. I took care of it.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
Leesbro63
Posts: 8455
Joined: Mon Nov 08, 2010 4:36 pm

Re: [Burton Malkiel: Don’t Give Up on the Stock Market]

Post by Leesbro63 »

LadyGeek wrote: Thu Sep 22, 2022 7:41 am
Leesbro63 wrote: Thu Sep 22, 2022 6:17 am
LadyGeek wrote: Thu Sep 22, 2022 6:10 am I have retitled the thread to remove a phrase which is no longer acceptable in today's environment.

FYI - Burton Malkiel is one of the presenters at the Bogleheads 2022 conference.
And I modified my post, a few up, accordingly. But the SUBJECT in many of the posts above still shows up as not modified.
A moderator has to edit the post titles manually. I took care of it.
Nice! :)
Logan Roy
Posts: 430
Joined: Sun May 29, 2022 10:15 am

Re: [Burton Malkiel: Don’t Give Up on the Stock Market]

Post by Logan Roy »

I believe recent editions of Random Walk Down Wall Street have recommended dividend stocks in place of part of the bond allocation?

My recent thread on defensive stocks vs 60:40, from my own work, seemed to confirm that defensive, typically-dividend-paying, sectors (e.g. Utilities) have been an effective way to control portfolio risk (from recession and inflation), and at least over the past century, always the most effective way, with hindsight.

Obviously dividends are not a free income. I'd suggest he's skimming over some of the details in his reasoning (because most investors haven't even got past the whole 'no free dividends' thing), in that multiples could keep coming down, so growthier stocks might simply be revised down and down, providing no real benefit to medium(and maybe long)-term holders. Dividend stocks tend to be more established businesses, often more cyclical or defensives businesses, so there's less growth to price out, while demand for reliable earnings yields could provide some uplift to offset rising rates. So I think he's 100% right with regards managing risk, and even if inflation cools, there's not much downside to overweighting dividend stocks.
asif408
Posts: 2530
Joined: Sun Mar 02, 2014 8:34 am
Location: Florida

Re: [Burton Malkiel: Don’t Give Up on the Stock Market]

Post by asif408 »

whodidntante wrote: Thu Sep 22, 2022 2:05 am Perhaps his recommendations have taken a random walk.
That's why I'm waiting for the 13th edition due out in January. It should take a random walk back, since interest rates on T-bills will be about 4.5% when it comes out, while they were basically 0% in the last few editions. I predict a shift from dividend growth stocks back to T-bills for living expenses.
Last edited by asif408 on Thu Sep 22, 2022 7:50 am, edited 1 time in total.
Leesbro63
Posts: 8455
Joined: Mon Nov 08, 2010 4:36 pm

Re: [Burton Malkiel: Don’t Give Up on the Stock Market]

Post by Leesbro63 »

Logan Roy wrote: Thu Sep 22, 2022 7:42 am I believe recent editions of Random Walk Down Wall Street have recommended dividend stocks in place of part of the bond allocation?
There were ALOT of gurus and publications, in the last few years, suggesting people replace their bond allocations for dividend stocks because a 2 or 3 percent dividend is better than a zero percent bond coupon. My guess is that anyone who did this is sorry. Suffering through a few years of zero interest has, so far, turned out to be better than taking a 20% haircut. Hindsight is 20/20 I guess. But it never seemed prudent to me to substitute even conservative dividend-paying stocks for fixed income.
Logan Roy
Posts: 430
Joined: Sun May 29, 2022 10:15 am

Re: [Burton Malkiel: Don’t Give Up on the Stock Market]

Post by Logan Roy »

Leesbro63 wrote: Thu Sep 22, 2022 7:49 am
Logan Roy wrote: Thu Sep 22, 2022 7:42 am I believe recent editions of Random Walk Down Wall Street have recommended dividend stocks in place of part of the bond allocation?
There were ALOT of gurus and publications, in the last few years, suggesting people replace their bond allocations for dividend stocks because a 2 or 3 percent dividend is better than a zero percent bond coupon. My guess is that anyone who did this is sorry. Suffering through a few years of zero interest has, so far, turned out to be better than taking a 20% haircut. Hindsight is 20/20 I guess. But it never seemed prudent to me to substitute even conservative dividend-paying stocks for fixed income.
Personally, I actually sold the last of my regular bond funds in 2014. Economists thought rates were rising next year, and kept thinking that for the next 8 years. But I think valuations were unappealing by 2014, and returns over the next 10-15 years were somewhat predictable. I went into alts.

But in that thread, I found portfolios that overweighted Consumer Nondurables, Healthcare and Utilities have achieved market-like returns with 60:40 equivalent risk, and valuations are only just on the tipping point where bonds are offering similar earnings yields to defensive sectors.

Image
Leesbro63
Posts: 8455
Joined: Mon Nov 08, 2010 4:36 pm

Re: [Burton Malkiel: Don’t Give Up on the Stock Market]

Post by Leesbro63 »

Logan Roy wrote: Thu Sep 22, 2022 8:34 am
Leesbro63 wrote: Thu Sep 22, 2022 7:49 am
Logan Roy wrote: Thu Sep 22, 2022 7:42 am I believe recent editions of Random Walk Down Wall Street have recommended dividend stocks in place of part of the bond allocation?
There were ALOT of gurus and publications, in the last few years, suggesting people replace their bond allocations for dividend stocks because a 2 or 3 percent dividend is better than a zero percent bond coupon. My guess is that anyone who did this is sorry. Suffering through a few years of zero interest has, so far, turned out to be better than taking a 20% haircut. Hindsight is 20/20 I guess. But it never seemed prudent to me to substitute even conservative dividend-paying stocks for fixed income.
Personally, I actually sold the last of my regular bond funds in 2014. Economists thought rates were rising next year, and kept thinking that for the next 8 years. But I think valuations were unappealing by 2014, and returns over the next 10-15 years were somewhat predictable. I went into alts.

But in that thread, I found portfolios that overweighted Consumer Nondurables, Healthcare and Utilities have achieved market-like returns with 60:40 equivalent risk, and valuations are only just on the tipping point where bonds are offering similar earnings yields to defensive sectors.

Image
How is any of that actionable, other than to state the obvious that some speculations will beat?
donaldfair71
Posts: 987
Joined: Wed Mar 06, 2013 4:15 pm

Re: Burton Malkiel

Post by donaldfair71 »

dkturner wrote: Thu Sep 22, 2022 7:11 am
Leesbro63 wrote: Thu Sep 22, 2022 5:45 am Dividends are one of those "in theory vs in reality" thing. In theory, you don't really want dividends, because it makes more sense to control taxable events and liquidity needs by selling small amounts of long term capital gain stock. But in reality, for the retiree living on investments, a steady flow of dividends adds a sort of and "auto pilot" to income needs. So Malkiel probably hasn't strayed from Boglehead principles too far.

I've seen some FIRE investors, on other boards, tout BerkshireHathway stock as their VTI replacement. Because BRK doesn't spin off a dividend and can better controlled as to how much to sell and when.

As a practical matter, dividends have been relatively low. A 60/40 portfolio might spin off 2.5% in both dividends and interest, which is a perfect base for a Boglehead type retiree. If they can live off of 2.5% "SWR" or less, they're set. If they need a little more (to 4%), they can sell some stock/bond. I think I read Rick Ferri has his clients doing exactly this. Seems like the perfect auto pilot, with a just little bit of human input.
Unless I’m mistaken hasn’t Kenneth French documented that, historically, higher dividend paying stocks have produced higher total returns than low, or no dividend paying stocks?
Yes, and will continue to do so as long as the Quality factor persists and the Size factor does not.

Dividend Growth isn't magical, these are generally (but not always) defensive stocks that have a pretty substantial Quality Tilt and, essentially, a short on Size factor.
hammond
Posts: 98
Joined: Mon Jul 13, 2015 2:34 am

Re: [Burton Malkiel: Don’t Give Up on the Stock Market]

Post by hammond »

whodidntante wrote: Thu Sep 22, 2022 2:05 am Perhaps his recommendations have taken a random walk.
Lol. Wish we could +1 comments.
Logan Roy
Posts: 430
Joined: Sun May 29, 2022 10:15 am

Re: [Burton Malkiel: Don’t Give Up on the Stock Market]

Post by Logan Roy »

Leesbro63 wrote: Thu Sep 22, 2022 8:43 am
Logan Roy wrote: Thu Sep 22, 2022 8:34 am
Leesbro63 wrote: Thu Sep 22, 2022 7:49 am
Logan Roy wrote: Thu Sep 22, 2022 7:42 am I believe recent editions of Random Walk Down Wall Street have recommended dividend stocks in place of part of the bond allocation?
There were ALOT of gurus and publications, in the last few years, suggesting people replace their bond allocations for dividend stocks because a 2 or 3 percent dividend is better than a zero percent bond coupon. My guess is that anyone who did this is sorry. Suffering through a few years of zero interest has, so far, turned out to be better than taking a 20% haircut. Hindsight is 20/20 I guess. But it never seemed prudent to me to substitute even conservative dividend-paying stocks for fixed income.
Personally, I actually sold the last of my regular bond funds in 2014. Economists thought rates were rising next year, and kept thinking that for the next 8 years. But I think valuations were unappealing by 2014, and returns over the next 10-15 years were somewhat predictable. I went into alts.

But in that thread, I found portfolios that overweighted Consumer Nondurables, Healthcare and Utilities have achieved market-like returns with 60:40 equivalent risk, and valuations are only just on the tipping point where bonds are offering similar earnings yields to defensive sectors.

Image
How is any of that actionable, other than to state the obvious that some speculations will beat?
Well that's the question. My response would be: on the one hand, investors have to live with a level of uncertainty. On the other, most our views on the long-term returns of stocks and bonds, on wealth building, and on diversification and risk, come from observing this relatively short period of market history.

If we observe that stocks with a tilt towards defensive sectors (like Utilities, that add a level of certainty and subsidisation to earnings) have at least matched portfolios, in risk and return, doing the same with bonds, there's really no more evidence for one approach than the other. But if one were to navigate between the two views, I think history at least tells us valuations are closest we've got to a better-than-random way to do that.
Post Reply