Written by: Alexandra Bartsch, Intern
With such a diverse range of investment strategies out there, it can be difficult to determine which strategy is the best fit for you and your financial goals. Behind this decision lies an investor’s stance on the efficient market hypothesis.
The efficient market hypothesis posits that financial markets react immediately to incorporate new information. Therefore, an efficient market is one in which asset prices reflect all available information. There are three types of market efficiency:
The weak form efficient market hypothesis suggests that low-cost information including past prices/ returns and trading volumes is fully incorporated into asset prices. An investor who believes this form of the hypothesis is unlikely to invest their money with a technical trader because they believe that you cannot consistently beat the markets using only this information.
The semi-strong form efficient market hypothesis suggests that all publicly available information is fully incorporated into asset prices. This information includes earnings forecasts, management quality, dividend announcements and other public information, in addition to past prices/ returns and trading volumes. An investor who believes this form of the hypothesis is unlikely to invest their money with an active trader (without insider information) because they believe you cannot consistently beat the markets using only this information.
The strong form efficient market hypothesis suggests that all information, even insider information, is fully incorporated into asset prices. An investor who believes in this form of the hypothesis would likely only invest with passive management firms because they believe it is impossible to consistently beat the markets, no matter how much information you have.
Rather than trying to beat the markets, we work with clients to allocate their assets to various asset classes based on their financial goals, and then periodically rebalance their portfolio back to its target allocation model.
