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Why Should Naive Investors Avoid Stock Markets ?

Author

Listed:
  • Michael Donadelli

    () (Department of Economics, University Of Venice C� Foscari)

  • Federico Silvestri

    (Allianz Investment Management Spa Milan)

Abstract

The goal of this paper is to present an original and simple analysis aimed to understand why investing in capital markets can be very dangerous for �naive investors�. Stock markets are characterized by instability and subjected to external shocks. The probability of making money on them is often very low, especially in high volatility periods. We will show that, in absence of any �wise� asset allocation strategy and not being professional investors, a risk-free portfolio may perform better than a portfolio composed entirely by risky assets.

Suggested Citation

  • Michael Donadelli & Federico Silvestri, 2010. "Why Should Naive Investors Avoid Stock Markets ?," Working Papers 2010_19, Department of Economics, University of Venice "Ca' Foscari".
    • Handle: RePEc:ven:wpaper:2010_19
    as

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    References listed on IDEAS

    as
    1. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    2. Philippe Jorion & William N. Goetzmann, 1999. "Global Stock Markets in the Twentieth Century," Journal of Finance, American Finance Association, vol. 54(3), pages 953-980, June.
    3. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    4. Narayana R. Kocherlakota, 1996. "The Equity Premium: It's Still a Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 42-71, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Asset Allocation; Investment Strategies; Stock Markets; Risk-Free Securities;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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