In other words, is the market efficient? This is a question that every investor needs to think about because it has direct, practical implications for investing and portfolio management.
If you think the market is relatively efficient,
- then your investment strategy should focus on minimizing costs and taxes.
- Asset allocation is your primary concern, and you will still need to establish the risk level you are comfortable with.
- But beyond this, you should be a buy-and-hold investor, transacting only when absolutely necessary. Investments such as low-cost, low-turnover mutual funds make a lot of sense.
- Tools for analysing the market, particularly the tools of technical analysis, are irrelevant at best.
- Thus, in some ways, the appropriate investment strategy is kind of boring, but it's the one that will pay off over the long haul in an efficient market.
In contrast, if you think the market is not particularly efficient,
- then you've got to be a security picker.
- You also have to decide what tools - technical analysis, fundamental analysis, or both - will be the ones you use.
- This is also true if you are in the money management business; you have to decide which specific stocks or bonds to hold.
In the end, the only way to find out if you've got what it takes to beat the market is to try.
- Be honest with yourself: You think you can beat the market; most novice investors do. Some change their minds and some don't.
- As to which tools to use, try some and see if it works for you. If it does, great. If not, well, there are other tools at your disposal.
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