Talking the Walk With Burton Malkiel

Are there any stocks grabbing your attention now?

Professor Malkiel: Let's see. ... The most recent stock I purchased was Merck(MRK Quote).

Merck's stock had fallen quite a bit, to the point where it clearly appeared to be trading below its worth. When I bought the stock, its price-to-earnings multiple was below 15.

I know with pharmaceutical companies there are times when the drug pipeline slows, but these things correct themselves with exceptional companies such as Merck. It seemed to me the market was overly pessimistic about Merck.

Do investors even need to own stocks?

Professor Malkiel: For the majority of investors, I would say no. It is very difficult for the average investor to beat the professionals and choose a stock that the market is currently undervaluing. Also, individuals need to be diversified, and an index fund provides that.

If you write another edition of A Random Walk Down Wall Street in five to seven years, what do you think the new lessons will be? In other words, this is a roundabout way of asking: What do you expect from the markets in the next five to seven years?

I'm not entirely comfortable with a forecast for the next five to seven years. But over the next decade or so, investors will realize that they have to further lower their expectations for market returns.

I believe the market is fairly valued at current levels, but I don't expect a return to double-digit annual returns from the stock market for the next decade. I think the market could return 7 1/2%-8%. Given the current fixed-income environment, in which 10-year bonds are returning less that 4%, that is a reasonable equity premium.

Nonetheless, individual investors, as well as many professionals, have not modified their expectations in line with this more typical rate of return. In fact, several pension funds still target expected rates of returns in the double digits.