Princeton professor Burton Malkiel is the author of the best-selling classic A Random Walk Down Wall Street, now in its eighth revised printing. Malkiel recently chatted with David and Tom Gardner on The Motley Fool Radio Show. We weren't able to broadcast their whole discussion, so we're publishing it in its entirety here, exclusively on Join us through May 9 to read a new portion of their conversation each day.

TMF: The average American today is really getting no financial education at the high school level and often very little, if any at all, at the university level. That American is then going into the workplace having to make a lot of different financial decisions, and we wonder what you think, Professor Malkiel, about the fact that a lot of these people are paying 1% of their assets to a financial advisor who recommends managed mutual funds that have another 1% to 2% in fees per year. Plus, these funds also have a lot of taxes because they trade actively. How are most Americans even making money outside of a 401(k) or an IRA plan?

Malkiel: You are absolutely right. That is the thesis of my book. The best way to have top-quartile performance is to have bottom-quartile expenses. If I am right, that we are in a single-digit return environment for stocks, that argument holds with even greater force that there is no way you are going to get ahead of the game. The index fund approach doesn't trade so there are no transaction costs, it is tax efficient, and the expense ratio is less than two-tenths of one percent -- far less than a managed fund.

So, that is exactly the reason why as a university professor I wrote Random Walk Down Wall Street, because I think people need financial education and hopefully that is one way they can get good financial education.  Let me just say to the both of you, having seen a lot of the stuff that you have done also in your books, I think they get darn good financial education from the things you have written and said.

TMF: Well, thank you very much, Professor Malkiel. Random Walk is now in its eighth edition, correct?

Malkiel: The new eighth edition was just recently published, yes.

TMF: More than a million copies sold?

Malkiel: Yes.

TMF: So, you could have retired 15 years ago.

Malkiel: Yes, I could have, but I enjoy doing this and I really enjoy the opportunity to get a message that I absolutely believe in out to as many people as I can.

TMF: Professor Malkiel, in recent weeks on our Motley Fool Radio Show we have interviewed various pundits, and they are pretty informed and smart people. We have had Jeremy Siegel, author of Stocks for the Long Run, tell us he likes the stock market today. We had Michael O'Higgins, a successful money manager in Florida, say he thinks we are moving into a Depression. So, we have still a wide divergence of opinion that we have featured on our show. What is the stock market's return in your mind over the next 10 years?

Malkiel: Over the next 10 years, as I told you, I think the best estimate I could make would be about 8%, perhaps a tad less. Less than we have been used to in the past, but in my view generous relative to a 10-year Treasury rate of less than 4%. And I am with Jeremy Siegel -- I am optimistic about the long run.  I think we have got a lot of problems now but don't bet against the United States of America.

TMF: You know, Dr. Malkiel, there are people out there who say we might be moving into a Depression.  Look at how gold is behaving and look at some of the possibilities of deflation and look at the worldwide sluggish economy. We would love to know from you, has the modern study of economics over the past century improved our economic and monetary policies in modern times? Are we less in danger of, let's say, the super-high inflation of the 1970s or the big deflation Depression of 1929 forward?

Malkiel: I really think so. I mean obviously, as an economist, I have got a vested interest in saying so, but remember, we had a deflation in the 1930s because the monetary authorities let the money supply decline by 25%. You see what Alan Greenspan is doing now. We have had a very accommodative monetary policy. I don't think we are going to have deflation. 

We have got a lot of uncertainties. We had a lot of overinvestment during the Internet bubble. We have got enough fiber optic capacity to circle the globe 1,500 times. Yes, there is going to be some adjustment.  But we are going to get over it just as we have gotten over every other one, because I really do think we have learned something in economics and we have got an accommodative monetary policy. We have got an accommodative fiscal policy, which if the tax cut is passed will become even more accommodative. We are not perfect by any means. But I think we have learned enough to avoid the kind of horrendous mistakes in policy that we made in the 1930s. 

TMF: We have talked about the next 10 years. How about the 20-year-old listener today looking forward over the next 40 or 50 years of their investment career? Is America different because it is a more mature marketplace now, and should investors expect a lower rate of return over the next 40 or 50 years than we received over the last half-century?

Malkiel: Well, as I have said, I think it will be a little bit lower. It will be a little bit lower because valuations are higher than they were in the 1926 period and through a good bit of history. So, I think they will be a little bit lower, but I don't see anything that has happened that makes me think that we have run out of growth opportunities. Quite the contrary. If there is one good economic statistic that we have seen over the past few years, it is a rather truly remarkable behavior of productivity. So, I do not think that we have lost the opportunities for growth; we still have a lot of things we can do in the high-tech area, in the medical area.  I think we have really just begun to make progress. 

So, I say to that 20-year-old, it may be only 8% returns on average rather than 10%. And I do say to every investor: diversify, diversify, diversify. I want them to own not only common stocks, I want them to own some real estate through a real estate investment trust. I do want them to own some corporate bonds because while the Treasury yield is extremely low, because of all the uncertainties that you have discussed earlier, the spread between corporate bonds and Treasury bonds is one of the widest it has ever been. Risk and return are related. You get paid to take on some risk. I think that corporate bonds also belong in an individual's portfolio.

Friday in part five: Malkiel on blindfolded chimps, the next great economy, and real estate bubbles.