Introduction
The wisdom of investing in actively managed funds assumes that you can successfully and persistently exploit inefficiencies in financial markets after considering costs and taxes. If a particular market is efficient, then you cannot ‘beat’ that market by purchasing mispriced (i.e. overvalued or undervalued) assets and, later, selling those assets for a profit greater than that market’s benchmark return after factoring in costs and taxes.
If a particular market is efficient, then you should not be actively investing in that market. This is true for equities and even more so for fixed income investing. Instead, you should purchase an index fund that mirrors the market benchmark.
There are two academic schools of thought regarding financial market efficiency:
Updated on January 12th, 2019