Modern Portfolio Theory says that a security's current market price is fair and fully reflects all available information about that security. This does not mean that prices are perfect; some prices may be too high and some too low, but there is no reliable way to tell. Investors cannot expect to earn above-average profits by constantly buying and selling securities. This strategy of active portfolio management adds costs but does not generally add additional returns. Over any period of time, some investors will beat the market, but the number of investors who do so will be no greater than expected by chance.
Since active portfolio management does not generally produce excess returns above the market, a logical conclusion is simply to buy and hold a diversified portfolio of securities. This passive portfolio management strategy ensures lower costs and should produce higher returns over time. At Mustard Seed Financial we follow a passive portfolio management strategy exclusively.
