"When it comes to the stock market, index funds are generally the smartest decision"
Q: Is the whole idea of skillful stock picking an illusion? Should people stick with indexes like Jack Bogle says?
A: That’s certainly my belief. Theres 2 things I know:
1. The consensus of opinion among professionals is that if there is skill, theres very little of it and very few people have it.
2. Many people believe they have this skill and most people believe there is skill, and that's an illusion that we [behavioral economists] can explain.
Eugene F. Fama is widely recognized as the "father of modern finance." He is the joint recipient of the 2013 Nobel Prize in Economics.
With the efficient market hypothesis (EMH) Fama demonstrated that stock prices are extremely difficult to predict in the short run, and that new information is very quickly incorporated into current prices. It is nearly impossible to "beat the market" because stock market efficiency causes existing share prices to incorporate and reflect all relevant information. These findings changed market practice and fuled the development of index funds in stock markets all over the world.
Sharpe advocates diversification through index funds. Sharpe suggests not to seek stock picking advice from gurus. Instead, he advocates index investing.
“In the long run this boring approach can give you more time for more interesting activities such as music, art, literature, sports, and so on. And it very well may leave you with more money as well.“