Jason Zweig had an article up the other day making the case for automatic enrollment into 401ks and the like. The article was so-so, but there was an interesting comment:
"Forced savings," without a requirement to also study the subjects of personal finance and economics, reads like the plot line for a future disaster.
I believe the reader is generally correct. In the past I have argued against privatized Social Security, citing previous articles from all sorts of places showing how bad 401k results tend to be. Most people who care enough about investing to read a blog like this one would probably think that privatized Social Security would be a great thing for them and maybe it would (or maybe not), but for society in general, I believe disaster is the right word.
Having lived through a couple of market meltdowns as have many people now, it seems clear that we are not wired to succeed as investors in capital markets. Normal human emotions work contrary to sound decision making at crucial points in the stock market cycle.
In the past, I shared a couple of anecdotes about the former client who would freak out and call me every time the stock market hiccuped and often the conversation ended with my reminding him that he had been through more of these than I had. At a less emotional time he could process this, but not when he needed to be able to process it most. He ended up putting his money into an annuity pretty close to the low and his decline was nowhere near close to what the market drop was. He simply couldn't comprehend the cyclicality of markets and their repetitive nature, and he is far from alone in this regard.
Fortunately, people with enough interest in investing can train themselves to not give in to emotion. I think it would be harder to turn the emotions off as opposed to training not to succumb to them. Here is where I think understanding market history is very important.
When the market was at its lows, really throughout the entire decline, one point I made regularly was that for anyone who took no defensive action and was regretting it, that the market would absolutely make a new high at some point, the variable being how long it would take to get back. The details of the last crisis (and the next one) might have been different but the market action was not unprecedented; it went down a lot, scared the hell out of a lot of people, and then it came back after some amount of time -- nominally on a closing basis. Yes, Japan is the exception to prove the rule.
If you can remember at times like now that large declines are a normal part of the cycle and that they do come along every few years, then ideally, it should be less scary when it arrives. If you are less scared then, you should be less likely to panic purge.