The number of complex investment strategies available to investors has never been greater. But most investors are probably still best served by a few simple, market-cap-weighted index funds.
One of the pre-eminent reasons for the popularity of index-tracking funds revolves around the notion of market efficiency--the idea that the market quickly and accurately incorporates all available information about a public company into its stock price. This all-knowing market mechanism makes it difficult to identify stocks that are mispriced, so the logical conclusion is that you should simply own the index and take advantage of the market's long-term aggregate growth. This is a mostly valid argument (there are times when the all-knowing market can be a bit of a know-nothing), and one that I would largely agree with. But the rationale for using a market-cap-weighted index fund goes beyond market efficiency.
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Daniel Sotiroff does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.