Investing In An Efficient Market

If we assume that the stock market is efficient, where should you invest? In an efficient market, the best alternative is likely a passive index fund. For example, funds that track the S&P 500 exactly mimic the portfolio composition of the S&P 500. Stocks are bought or sold only when changes are made to the companies included in the S&P 500. As a result, there is no management decision on which stocks to buy or sell, so management costs are small and the return of the fund will almost exactly track the S&P 500. With an actively managed fund, the manager must outperform the market in order to offset the management fees, a daunting if not impossible task in an efficient market. Eugene Fama, the Nobel prize winning father of the efficient markets hypothesis, argues that a passive investment strategy is likely the best performer. And none other than famed investor Warren Buffett has directed that most of his wealth be invested in passive index funds after his death.