Which one of the following investment strategies is the one to follow if markets are truly efficient?

• A. Dollar-cost averaging
• B. Buy-and-hold
• C. Low P/E
• D. Contrarian

Answer: (B)

In an efficient market, all available information is reflected in asset prices, making it difficult for investors to consistently achieve higher returns than the market average by using specific strategies or predictions about the future performance of securities. The buy-and-hold strategy aligns well with this principle because it involves purchasing securities and holding them for the long term, rather than trying to time the market or make frequent trades based on short-term fluctuations.

The rationale behind the buy-and-hold strategy is that, in an efficient market, any mispricing will correct itself over time, and assets will reflect their true value in the long run. This approach allows investors to benefit from the overall growth in the market and compounding returns without attempting to outsmart the market, which is inherently challenging in an efficient environment.

Other strategies, such as dollar-cost averaging, low P/E, and contrarian investing, may seek to exploit perceived inefficiencies in the market or utilize specific price metrics as indicators for buying or selling. However, in a truly efficient market, these strategies are less likely to provide an advantage, as the prices of securities already incorporate all relevant information and market sentiments. Therefore, the buy-and-hold approach stands out as the most suitable investment strategy when markets are deemed efficient.