The average retail investor may be better off sticking to a passive index fund or exchange traded fund investment strategy.
“A blindfolded monkey could select a portfolio that would do just as well as one selected by the experts,” according to Burton Malkiel, professor at Princeton University and author of “A random Walk Down Wall Street,” Bloomberg reports.
Every year, investors believe that it is a stock pickers market. Malkiel even pointed out that 2014 was a stock pickers’ market, but 86% of active fund managers underperformed the benchmark S&P 500 index. [Why Active Fund Investors Are Looking At Passive ETFs]
Malkiel argues that the so-called efficient market theory diminishes the likelihood of gaining an edge in the market. Specifically, the efficient market theory states that there are a lot of intelligent people around and they are capable of processing any new information almost immediately, which will be reflected in market prices without delay, according to NPR.
“You won’t have time to read the news and get in,” Malkiel said. “The market is very efficient at digesting news.”
Nevertheless, there are a few active managers that have exhibited a strong track record, like Warren Buffett’s value investment style. However, Malkiel points out that they are the outliers, comparing outperforming active managers to finding a needle in a haystack.
“It’s not that there isn’t anybody that can do it, but it is virtually impossible to find the one who’s going to beat the market,” Malkiel added on Bloomberg.
Instead, Malkiel suggests investors should buy the haystack or go with index-based funds.
Moreover, Malkiel advises investors to diversify. Specifically, he points out that investors should add exposure to previously underperforming areas, like the emerging markets, Japan and Europe, to capture potential growth opportunities, instead of relying on continued outperformance in the U.S.
“By diversifying, you will reduce risk, and over the long-haul you will do quite well,” Malkiel said.
For more information on index-based ETFs, visit our indexing category.
Max Chen contributed to this article.