How Can Random Walk Theory Be Applied to Investing?
The random walk theory maintains that individual stocks do not move in any discernible pattern. Therefore, their short-term future movements cannot be predicted in advance.
Since the market indexes overall tend to rise over the long term, random walk theory would indicate that investing in a passively managed diversified index fund is the safest and most profitable investing strategy.
Key Takeaways
- Random walk theory maintains that the movements of stocks are utterly unpredictable, lacking any pattern that can be exploited by an investor.
- This is in direct opposition to technical analysis, which seeks to identify patterns in price and volume to buy and sell stock at the right time.
- Random walk theory also dismisses fundamental…
