Introduction to The Efficient Market Theory

Many investors set a goal of "beating the market." At the same time, we have seen a proliferation of index mutual funds that have the reputation of being difficult to beat. What is behind all this?

Some economic scholars hold that the investment markets are efficient. This means that they respond rapidly to investor sentiment, causing prices to adjust. This would make it hard for investors to exploit the market by buying undervalued investments before the market adjusts its price. That’s what the theory says, anyway. Nevertheless, there is a theory that says bumble bees can’t fly. Don’t tell that to the bees.

To be a savvy investor, you need to understand this theory and how it factors into your investment goals. Perhaps agreeing or disagreeing with it is too naive. Perhaps it is a bit more complex and worthy of study.

The efficient market theory is the underpinning of financial planning and long-term investment strategy. You need to know about it for it to benefit your investment philosophy.