Is it different this time?

The significant economic events of the past year have caused many to proclaim that traditional buy and hold investing is no longer valid. Supposed experts have also proclaimed that modern portfolio theory is dead. I've also read that the efficient market hypothesis no longer works. Have things changed in the U.S. or world economies so much that the tested, proven and researched tenets of modern investing no longer hold?

I would argue that things haven't changed and the modern ideas of investing are still correct. History has changed. Although history tends to repeat itself and what we've seen recently has happened before, many of us are seeing economic events occur that have not happened in our lifetimes. The reaction to these recent events by individuals and our government has been somewhat unprecedented, but that is a political discussion I don't want to get into at this point.

The efficient market hypothesis states that markets are efficient and asset prices reflect all known information or instantly change to reflect new information. The enormous amount of market volatility that we've seen recently has been due to the enormous amount of economic uncertainty. Once the uncertainty starts to recede, the market will react, as we've seen with some of the positive information being reported recently and the corresponding positive move in the markets.

The efficient market hypothesis is the best working model of how world markets function. The best way to invest in markets is to develop a diversified portfolio (Modern Portfolio Theory) with the appropriate amount of risk exposure. As opposed to markets "failing," much of recent economic history has been due to investors reassessing their level of risk and making appropriate adjustments. Despite the economic pain that has been inflicted on many, recent events have been an opportunity to really experience market risk and why the return premiums from holding equities (stocks and mutual funds) exist. Can we learn valuable lessons from this or are we bound to repeat these cycles again some time in the future?

Watch this eight minute video to hear Eugene Fama, the father of the efficient market hypothesis, share his views.