Hill: How has your investment philosophy changed since you first wrote the book in 1973?
Malkiel: I'd say the one change; it is not really a change, but the one thing I emphasize far more than I did before is international diversification. In the '70s, the U.S. was really the sort of main stock market of the world. Today, the United States is only about 42% of the world economy. The rest of the world is growing more rapidly. By "the rest of the world," I don't mean Europe. What I mean is the emerging markets -- particularly economies like China, India, Brazil -- are growing much more rapidly than the United States.
So I think one of the things that I have emphasized more, particularly in the latest edition, is a tendency for investors to have a home country bias. That is to say, to simply invest in stocks in their own home country. I think that is a mistake. I think people are generally not sufficiently diversified internationally, and in particular, I don't think that they have the kinds of positions that they should have in the most rapidly growing emerging markets.
I'd say the other thing that probably has changed, and this is sort of one of the reasons why there are sort of new editions coming out all the time, the instruments available for investors are vastly different from what they were when I first wrote Random Walk. For example, I had mentioned earlier, index funds didn't exist when the first edition came out. Now there are lots and lots of index funds; there's a lot of competition and expense ratios have gone down.
But the other thing that you find now is you have exchange-traded funds. I am a great believer in exchange-traded funds for the long-term investor. I don't think that you ought to trade these things. I am not sure that I would use them for speculation, but expense ratios are rock bottom on the exchange-traded funds and so these kinds of new instruments are very important for people in putting their portfolios together and I don't think it is a change in philosophy, but it is a change in the kinds of instruments you can use to follow the philosophy.
Hill: What do you think is the biggest myth about the stock market?
Malkiel: I think the biggest myth about the stock market is that there are expert investors who can consistently beat the market. It just isn't true.
Now my view would be, because that isn't true, at least the core of every portfolio ought to be indexed. Now fully understand that telling an investor that you can't beat the market is like telling a 6-year-old that Santa Claus doesn't exist. And anyone with a speculative temperament is going to say, "Look, I want to go and pick some of my own stocks." And I think that is fine, and you can do it with much less risk if the core of your portfolio is indexed.
So I think things like the stuff that comes over the transom from The Motley Fool, with suggestions about individual stocks, I think this is fine for people, but I think what they ought to do is have the core of their portfolio, however, indexed. Then you can go and speculate on individual stocks with very much less risk than if it was your entire portfolio.
In a Forbes interview he is even more specific about his views on international allocation, and by international allocation he is referring to emerging markets. I'm with him
When you were talking before about putting a significant part of your portfolio into emerging markets, how do you define significant? That seems to be a number that varies widely across the Street.
Here's a guide: The U.S. is only a little over 40% of the world economy. So I would first of all say that at least half of your money ought to be overseas. Secondly, with respect to being overseas, the emerging markets are at least half just in terms of their GDP, their economic importance is at least half of non-U.S. markets. So just as a rough rule of thumb with ones equities, because this will give you the percentage that I'm in and that I've recommended, suppose you put 50% in the U.S., and I'm a little over in the U.S. because when you buy a stock like General Electric ( GE - news - people ) or Coca-Cola ( KO - news - people ), they have a lot of international exposure because they do a lot of business over there. So the allocations I've used would be, this is a rough rule of thumb, 50% U.S., 25% foreign developed and 25% emerging markets, including making sure that the growing ones like China, India and Brazil are in there.