Early readers of Trees Full of Money may remember my article on investing in a turbulent market. In that article I argued that the financial markets were near “perfect”, and constantly juggling your investments to take advantage of market cycles will inevitably due you more harm long term:
The market is more transparent now that it ever has been. That is, every conceivable scrap of information that would have any impact on the markets (with the exception of illegal insider trading) is already factored into market prices. Economists refer to this transparency as being “perfect”.
No one can predict how much more negative or positive information will come out on any given day. If they could then that information would already be available and factored in to the markets.
When we lose sight of the main reasons we invest in a particular security (good products, services, poised for growth, etc.) all we have left as investment guides are our emotions. I challenge that you won’t get back into the market at the right time! Unless of course you’re lucky!
Amid this current financial collapse we find ourselves in , I am sadly loosing my faith that the market is anything close to “perfect”.
When investment banks began hiring mathematicians and physicists to concoct new ways of classifying and mitigating the risks of various mortgage backed securities (among other risky financial instruments) that had become too complicated, the back rooms of Wall St.’s investment houses effectively made the common American Investor nothing more than a pawn.
There can be no “transparency” of the market when even the investment houses have trouble understanding the products that they are packaging. In such situations, there certainly cannot be a “perfect” dissemination of information.
Prompted by the continued downward spiral of the world financial markets, Miranda’s survey asks readers what changes they are considering in their investment strategies.
“As The Economy Tanks, What Are You Doing:”
A) Nothing. Overall, things head back up. I’m sitting tight.
I answered “A”. My faith in the market has taken a hit, but I still believe my long term investment strategy will pay off in the end. That withstanding, I will be the first to admit that I’ve entertained thoughts of pulling out of this market!
B) Sitting back. I pulled everything out last year, and now I’m feeling good.
C) Taking a measured approach. Looking at my portfolio. Keeping the solid investments. Considering cash.
D) Panicking. It’s to pull everything out. NOW.