Investing December 29, 2010, 10:53PM EST

Malkiel's Random Walk Goes Global

Burton Malkiel, author of a new edition of his investing classic, A Random Walk Down Wall Street, discusses ETFs, what Obama should do next, and more

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Under normal circumstances, a new, 10th edition of A Random Walk Down Wall Street, the classic investing guide by Princeton University economics professor Burton Malkiel, could have been a routine update job.

After all, Malkiel's advice hasn't changed from the first edition, published in 1973: Spread your investments among various asset classes and countries; keep fees low; and favor index funds over active managers who claim they can beat the market.

Yet the three years since the ninth edition of Random Walk, in 2007, have felt like a lifetime for many investors, consisting of a deep recession, a stock market crash and rebound, a housing bust, record commodity prices, a European debt crisis, rapid growth in emerging economies, and a proliferation of new investment products, including hundreds of new exchange-traded funds, or ETFs. In late December, Bloomberg Businessweek.com interviewed Malkiel, 78, about how his latest edition, to be released Jan. 10, keeps pace with changing times. Edited excerpts from the conversation follow:

Q: Your new edition has much more about investing abroad. Why?

Burton Malkiel: When that book was first published, the U.S. was almost half the world economy. Emerging economies are almost half of the world economy now. China is now the second-largest economy in the world. People are inadequately diversified and really need to be much more internationally diversified.

You've long been an advocate of index funds, but I keep hearing people say this is now a "stockpicker's market" that favors active managers. They say the concept of buy-and-hold investing is obsolete.

I don't think the data show that. Two-thirds to three-quarters of active managers are beaten by a low-cost index fund. And the one-third or so who may win in one year are not the ones who win in the next year. The old lessons are not dead. When you try to time the market, which many people do, you're more likely to do it wrong than right. If you were diversified with the asset classes I recommended, you actually just about doubled your money even in this horrible lost decade.

Everybody says we know diversification doesn't work. When all hell breaks loose—as it did in late 2007 and 2008—everything goes down together. That still doesn't negate the idea that you're better off being diversified. In 2008—this horrible year when everybody lost money—you made between 5 percent and 6 percent in a total bond market index.

So the key arguments of Random Walk haven't changed. But what is new about the 10th edition of the book?

Nobody can market-time, but once a year I suggest that one rebalance. [Rebalancing is adjusting a portfolio's mix to certain preset benchmarks, often by selling assets that have gained value while buying those that have lagged.] I've got an increased appreciation of rebalancing and have done a lot of work on it. It won't always give you an extra return, but in volatile markets it will keep your risk low or consistent with the [level right for you]. And in very volatile markets, it will tend to increase your returns.

Gold futures hit a record of $1,432.50 an ounce on Dec. 7. Yet in the book you do recommend some gold and commodities exposure to investors.

I'm not a goldbug, but I'm not anti-gold. A little sliver of gold isn't going to hurt you at all. But I'd rather own it through the stock of Freeport-McMoRan Copper & Gold (FCX), or shares of one of the gold miners, than the metal itself. Bloomberg Businessweek has done some very good reporting on the commodity markets and why some of these commodity funds have not actually done well for investors, even during a period when commodities have been very strong. My own preference is to get [commodities exposure] through stocks of companies that will benefit from commodity prices going up. And I do think commodity prices will go up.

There is a lot more in the new edition about China, about their voracious appetite for raw materials. So I am not opposed to having that kind of exposure in the portfolio, but I sure wouldn't go out and simply buy a portfolio of gold ETFs.