April 27, 2023 by Rachel Ryan
It has been 50 years since economist Burton Malkiel first introduced the investing world to the stock-picking blindfolded dart-throwing monkey!
If you are unfamiliar with Burton, he is a Princeton economist and veteran financial executive whose philosophy has become a cornerstone in modern investing. Burton is best known for his 1973 investing manifesto “A Random Walk Down Wall Street”.
The book's central premise is that stock prices follow a "random walk" pattern, meaning that they move unpredictably over the short term, and it is nearly impossible to consistently predict or time these movements.
To make his point, Malkiel argued that given efficient markets, a blindfolded monkey throwing darts at the Wall Street Journal’s ticker page would perform at least as well, if not better, than a professional stock picker.
So How Did the Monkey Do?
For liability reasons, the WSJ was not able to get an actual monkey for the experiment, but for argument’s sake let’s say the monkey bought a passively managed S&P 500 index fund. The monkey’s portfolio would be a winner compared to most professional portfolio managers. Over the last 20 years, 85% of actively managed funds have underperformed their benchmark.
Of course, outcomes can vary depending on the specific funds and periods being analyzed, but a substantial body of research proves that passive index funds tend to outperform actively managed funds over the long term, particularly after accounting for fees and expenses.
So aside from investing in index funds, how else can investors take advantage of random walk theory?
By paying yourself first and establishing auto-deposits. The power of auto-deposits in an index fund is two-fold.
First, by making regular automated deposits into an index fund, investors enjoy the benefit of dollar-cost averaging, which can reduce the average cost per share over time.
Secondly, investors enjoy the compounding effect of market returns while avoiding the common pitfalls of market timing and emotional decision-making.
For example, if an investor pulled out of the market after the October ‘08 crash, and waited just one year before getting back in, they missed out on a 28% market rally.
While at times it is hard to stomach the market’s volatility, historically the market has proven to be a powerful wealth generator.
By making regular, automated deposits, investors can avoid the temptation to try to time the market or make impulsive trades based on short-term fluctuations in market prices.
If you do not have auto-deposits set up already, please reach out to your advisor to discuss the right option for you.