Last week on Business Insider (I infrequently write guest posts there) I wrote a post about how the uncommitted/unsophisticated investor can only do long term investments. I’ve been thinking about it, and now I believe that that strategy doesn’t work either
Unsophisticated investors (retirees, pensioners, employees, people who do investments for their savings, etc) do not have the emotional strenght to buy and hold on when the going gets tough. When a big financial crash comes along, the unsophisticated investor attempts to hold on at first But as the market keeps deteriorating, it seems as if all the supports are being taken out and there is no bottom to the crash. Unsophisticated investors panic, and sell at close to the bottom, only to watch the market soon rebound quickly. For example, in 2008 all the pensioners and retirees watched in fright as the market dropped one day after another. THen, when there seemed to be no hope left in the financial markets, they sold out in early 2009. And the DJ Average reached its bottom in March of that year.
So if these unsophisticated investors don’t have a chance in suceeding at investing on their own, then the logical alternative is to invest in somwith someone else (in san investment fund). But once again, this doesn’t work for unsophisticated investors. They have neither the knowledge nor capability to choose a fund that is the right one for his or her investment style (because they do not have a good investment style).
The only available choice is to buy bonds. And bond rates are reeeeeal low right now, so it’s not very appealing to be buying bonds. But let’s ASSUME that they do buy bonds. These unsophisticated investors who have 9 -5 jobs or play the markets part time have a steady stream of income to invest with. Eventually, the stock market will go back to its old highs, there will seem to be no limit to where the stock market can go, these stupid investors will buy stocks, and the cycle repeats itself again…..