Re:Why the SEC Won’t Hunt Big Dogs
by yummyfajitas on Wednesday October 26, 2011 @05:38PM
(#3160551)
So if Grandma had 100K in her diversified portfolio of low-risk investments and the market exploded 50%, she'd have 50K, which represents a major loss of financial capabilities.
This is most likely not the case. There are many ways the market can "explode 50%". One way is for each security to take a 50% haircut. Another is for the high risk securities to take a 100% haircut and the low risk to take a 0% haircut. Obviously real life lies somewhere in between.
However, it's not by any means obvious that the low risk, well diversified investors would take a particularly large haircut in a market crash. This is particularly true if they don't cash out immediately after the crash.
The market essentially is a herd animal. Everything goes up or down together, in aggregate. Since wisdom in the financial market is to diversify, ie, hold in aggregate, a well-chosen portfolio generally does about as well as the market in the long term.
So if Grandma had 100K in her diversified portfolio of low-risk investments and the market exploded 50%, she'd have 50K, which represents a major loss of financial capabilities.
Whether it is better to drop such people in the cold while things reset or whether it is better to keep the cushion going, I leave to another media form, as such discussions tend to be too inflammatory online.