There was a quote by Jack Bogle, founder of The Vanguard Group, in the June 24, 2013 issue of Forbes magazine. Identified as a "Wealth Wizard" along with Burton Malkiel, Gary Schilling and others, Bogle shared some advice he had received from an older runner when he was a young runner at a Philadelphia brokerage firm. The advice was: "Nobody knows nothing." The saying shaped his philosophy on investing. Funds offered by The Vanguard Group hew to the low-fee, index approach which passively tracks the market. I want to write on financial topics because this passes for good advice.
Some people know more than others. Some people knew that tech stocks were overvalued in the period leading up to the year 1999 and put stop-loss orders in place which allowed them to continue to benefit as those stocks soared but still offered protection from a correction. (Had a person thought tech stocks were overvalued in 1997 they would have been right but tech stocks still had a long ways up to go). Some people knew that the government-sponsored entities Fannie Mae and Freddie Mac had implicitly guaranteed home loans and that this had caused banks to lend to those with less than sterling credit. As home prices soared, mortgage buyers were dangerously leveraged to property values. Hedge fund manager John Paulson anticipated this, although his more recent decisions to invest in gold and short the euro have not been successful.
[My personal theory is that this could be an example of what is called "disaster bias". It happens when a person encounters a disaster (in this case a profitable one) than continues to look for and see disasters everywhere. Forgive the digression].
If the markets are unknown and unknowable than it doesn't make any sense to amass a great deal of knowledge about them. Conversely, if the mind is capable of understanding the markets, than there are many good reasons to pursue that knowledge. Thought is a uniquely human characteristic - an investor who doesn't think through these issues is missing an important part of what it means to participate in the market. The refusal to engage and conceptualize these matters is an effort to avoid responsibility for one's financial decisions. That person can then always blame the economy when he or she misallocates capital. The person will extrapolate from the past in the hope that what has worked in the past will continue to work in the future.
There are many ways for a person to put their finances on autopilot which are considered prudent investing. One which quickly comes to mind is target-date funds. As a person approaches retirement his or her portfolio gradually shifts from stocks (considered risky) to bonds (considered safe). This obviously defies market dynamics but sounds prudent and reasonable. Another way to avoid taking responsibility for one's investment decisions is dollar-cost averaging. It is the idea of periodically buying a security, spending the same dollar amount each time. This strategy only works when the market is declining and assumes the value of the security will eventually rise above the average purchase price. In a rising market, the fixed dollar amounts will purchase fewer and fewer shares.
It is not realistic to expect the average investor to stay abreast with developments in the stock market, bond market and broader economy. The typical lawyer or doctor has a career to manage and probably a family. It is the role of financial researchers to provide actionable insight about the market. Anything less is a default to ineffectual, consensus-driven advice. Conventional wisdom is the reason most savers who have a moderate income will not become wealthy from their investments. Many will have a retirement lifestyle well below what they had hoped. They will be right when those people feel they were done a disservice by those who claimed to be experts in financial planning.