A Random Walk Down Wall Street

Being an economics teacher, I get a lot of questions about where people should invest their money. Some of this arises from the misconception that all we "econ people" do is talk about the stock market. People who ask are usually expecting a hot stock pick. People are often surprised that I am not an active stock picker. In fact, I'm not even an active fund picker. I am a boring index fund investor. Why? This too comes back to my faith in the efficiency of markets. The basic idea behind what is called the efficient market hypothesis is that markets respond to new information almost immediately, so trying to pick stocks based on new information is futile. Therefore, only way to beat the market is to have access to information before the public knows (read: insider trading) or have the ability to divine future events. If interested read A Random Walk Down Wall Street. The data continue to support the strategy of index investing, check out this story in the Wall Street Journal.

Investors in actively managed mutual funds for the past five years have reason to wonder what they have been paying for: A new study from Standard & Poor's finds that 70% of large-cap fund managers who use the S&P 500-stock index as a benchmark for comparison have failed to match the performance of the index over that time....The failure of active management is replicated across almost all categories, not only U.S. stock funds but also bond funds and even emerging-markets funds. What's more, those numbers are similar to the previous five-year cycle.

Thanks to Mankiw's blog for the link.