James d. Gwartney

Video:
A Random Walk Down Wall Street: Are Stock Markets Efficient?
Why not pick just the stocks that will do well, as Apple, Google, and Microsoft have,
and stay away from everything else? That is a great idea, except for one problem: The random
walk theory also applies to the prices of specific stocks. The prices of stocks with attractive
future profit potential will already reflect these prospects. The future price of a specific stock
will be driven by unforeseen changes and additional information about the prospects of the
ELEMENT 4.9
Indexed equity mutual funds can help you beat the experts without taking excessive risk.

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firm that will only become known over time. Countless factors affect the future price of a
particular stock, and they are constantly changing in unpredictable ways. The price of Apple
stock could be driven down, for example, because of an idea a high-school kid is working on
in his basement right now. Thus, there is no way that you can know ahead of time which stocks
are going to rocket into the financial stratosphere and which ones are going to fizzle on the
launch pad or crash after takeoff.
You may be able to improve your chances a little by studying the stock market, the
details of particular corporations, and economic trends and forecasts. For most of us, however,
the best option will be to channel our long-term (that is, our retirement) savings into an equity
mutual fund.
Video:
What is a Mutual Fund?
There are two broad categories of equity mutual funds: managed funds and indexed
funds. A managed equity mutual fund
(?)
is one in which an “expert,” the fund’s portfolio
manager, decides what stocks will be held and when they will be bought and sold. The fund
manager is almost always supported by a research staff that examines both individual
companies and market trends in an effort to identify those stocks that are most likely to do well
in the future. The manager seeks to pick and choose the stock holdings of the fund in a manner
that will maximize the fund’s rate of return.
The second type of fund, an indexed equity mutual fund, merely holds stocks in the
same proportion as their representation in broad indexes of the stock market such as the S&P