A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

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THREE GIANT STEPS
DOWN WALL STREET
Annual income twenty pounds, annual expenditure nineteen
six, result happiness. Annual income twenty pounds, annual
expenditure twenty pounds ought and six, result misery.
—Charles Dickens, 
David Copperfield
T
HIS CHAPTER OFFERS
rules for buying stocks
and specific recommendations for the instruments you can
use to follow the asset-allocation guidelines presented in
chapter 14. By now you have made sensible decisions on
taxes, housing, insurance, and getting the most out of your
cash reserves. You have reviewed your objectives, your stage
in the life cycle, and your attitude toward risk, and you have

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decided how much of your assets to put into the stock
market. Now it is time for a quick prayer at Trinity Church
and then some bold steps forward, taking great care to avoid
the graveyard on either side. My rules can help you avoid
costly mistakes and unnecessary sales charges, as well as
increase your yield a mite without undue risk. I can’t offer
anything spectacular, but I do know that often a 1 or 2
percent increase in the yield on your assets can mean the
difference between misery and happiness.
How do you go about buying stocks? Basically, there are
three ways. I call them the No-Brainer Step, the Do-It-
Yourself Step, and the Substitute-Player Step.
In the first case, you simply buy shares in various broad-
based index funds designed to track the different classes of
stocks that make up your portfolio. This method also has the
virtue of being absolutely simple. Even if you have trouble
chewing gum while walking randomly, you can master it. The
market, in effect, pulls you along with it. For most investors,
especially those who prefer an easy, lower-risk solution to
investing, I recommend bowing to the wisdom of the market
and using domestic and international index funds for the entire
investment portfolio. For all investors, however, I

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recommend that at least a portion of the investment portfolio
—especially the retirement portion—be invested in index
funds.
Under the second system, you jog down Wall Street,
picking your own stocks and perhaps overweighting certain
industries or countries. This involves work, but also possibly
a lot of fun. I don’t recommend this approach for most
investors. Nevertheless, if this is how you prefer to invest,
I’ve provided a series of rules to help tilt the odds of success
a bit more in your favor.
Third, you can sit on a curb and choose a professional
investment manager to do the walking down Wall Street for
you. The only way investors of modest means can
accomplish this is to purchase managed mutual funds. I don’t
prefer actively managed funds, but later in the chapter I will
at least present some helpful suggestions that may help you
choose the better ones if you insist on this option.
Earlier editions of my book described a strategy I called
the Malkiel Step: buying closed-end investment company
shares at a discount from the value of the shares held by the
fund. When the first edition of this book was published,
discounts on U.S. stocks were as high as 40 percent.

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Discounts are far smaller now, as these funds are more
efficiently priced. But attractive discounts can arise,
especially on international funds, and savvy investors can
sometimes take advantage. The Malkiel Step is described later
in this chapter.