Wall Street guru Burt Malkiel: The tech industry’s boom and bust are an ideal argument for investing in index funds

Burt Malkiel, writer of the bestseller “Investing” A random walk along Wall Streettold Assets that attempting to get into individual AI stocks now might be a giant mistake for the typical investor. Just have a look at the fickleness of the markets over the past few weeks.

“If you look at individual investors, you see that the people who traded the most are the ones who lost the most money,” says Malkiel, who’s now chief investment officer at Wealthfront. “Nobody can time the market, so don’t try. And if you do, you’re much more likely to get it wrong than right.”

In a Letter to Wealthfront investors In his book, released Tuesday, Malkiel reminds readers that trying to select a sector of the stock market that may do higher than the remainder is like attempting to time the market: a losing proposition. The best practices for constructing wealth through investing remain the fundamentals, including “broad diversification, indexing, minimizing costs and taxes, rebalancing and staying the course.”

“It is equally important to avoid the common mistakes that have ruined even the best-laid investment plans,” he writes. “Among the worst mistakes is getting carried away by either extreme euphoria or waves of relentless pessimism, both about the market as a whole and the performance of specific sectors.”

Malkiel points out that the perfect strategy to actually get a good return from investing within the broader market is to purchase and hold for an extended time frame – not to leap out and in of the recent sector. Timing rarely works out in the long term; in actual fact, research has shown that many investors miss a lot of the perfect days of the market when attempting to time their investments appropriately, stopping them from making the largest gains. Investors are far more more likely to sell at the underside and buy at the highest, somewhat than the opposite way around.

He uses the ARK Innovation Fund (ARKK) as an instance this trend. The fund rose from around $50 per share in 2020 to over $130 per share in early 2021 after interest in artificial intelligence corporations increased. Investors began pumping “several billion dollars a month into the fund,” Malkiel writes, as Prices were at their peak. The enthusiasm eventually faded and ARKK’s price fell back to around $47 per share by April 2022; investors withdrew their money, leading to huge losses.

“As the ARKK example shows, timing errors can lead to negative returns even when investors correctly bet on a high-performing sector,” he writes.

Instead of attempting to get into the most popular stocks, Malkiel recommends investors follow dollar cost averaging, or investing money at a consistent rate every month no matter market trends. With this strategy, investors buy no matter market trends; over time, the highs and lows roughly even out.

In this respect, index funds are still king. And a broad-based fund also solves the issue of sector selection, because it offers a big exposure to the sectors that produce the perfect returns.

“The beauty of owning a broad index is that you probably have that AI winner in your portfolio anyway,” he writes.

Instead of trying to select stocks, Malkiel recommends investors concentrate on what they’ll control, including the associated fee of their investments. Keep fund fees and taxes minimal, and that could have a more positive impact on their performance in the long term.

“The long-term path to wealth creation is to just keep going,” he says.

Recommended newsletter: Fortune’s Next to Lead newsletter is required reading for the subsequent generation of C-suite executives. Delivered every Monday, the newsletter provides the strategies, resources and expert insights you have to land essentially the most coveted positions in business. Subscribe now.