I recently talked to a relative who works for the IRS about her portfolio and was surprised that her thinking was a little muddled on how her investments worked. She was under the impression that if the market went down, say, 50%, then instead of making a 30% return on her stock market index fund, she'd make a 15% return. It was a painful and tedious explanation that followed. She also was assuming that if her stock market investments were not doing well, then she could shift the money into bonds or t-bills. Yes, she could, I explained, but it might them be too late to prevent a major loss on her investment.
I wonder how many individual investors share similar misunderstandings. It could be that the middle class will get their quarterly or monthly reports and respond by shifting out of stocks into less risky investments. Instead of one big drop, we could see a series of plunges.
I doubt if most people in 1987 had the same options as they do today to shift investments. I'm under the impression that in '87, mutual funds were more typical and that with up-front loads, folks were tied into the long haul.
The relative in quesiton should have known better. She has a college degree, although admittedly it's only in Economics. Heh, heh, heh.
James in Philly
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