With the presidential election finally decided, the market now faces less uncertainty and is better positioned to deal with the economic slow down and end-of-the-year sell off, says Emory University economist Hashem Dezhbakhsh. But new theories that attempt to explain patterns in the rise and fall of the stock market still require investors to use traditional investment strategies.
"In the new behavioral finance theory of investing in the stock market, investors are seen as not behaving rationally all the time," says Dezhbakhsh, a popular teacher as well as chairman of Emory Colleges economics department. "People tend to see patterns in market phenomena that are basically random. Theres also conservatism; people hold onto a belief in their stocks and cant let go. And people like to conform and some investors will join in a trend of buying or selling, even it its not sound."
With millions of Americans now investing trillions of dollars in the market, Dezhbaksh offers this advice:
o Invest for the long run; buy and keep stocks. Get rich slowly but surely.
o Dont try to time the market. In the decade of the 1980s, the S&P increased 18 percent annually BUT more than six percent of that increase came during only 10 days of the 2,500 trading days of the decade.
o Diversify, diversify. Consider using the new index funds that trade like individual stocks but are diversified like mutual funds. Each share represents a portfolio of stocks designed to closely track the performance of any one of an array of stock market indexes; and
o Avoid stocks that have high P/E (price/earning) ratios. Historical market P/E ratio is 15, with cross industry differences. But stocks with ratios in the hundreds are just too risky.
Dezhbakhsh can be reached at 404-727-4679 or firstname.lastname@example.org, or visit his web site at www.emory.edu/COLLEGE/ECON/stock.htm.
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