Is Stock Always the Right Choice? Should Naive Investors Avoid Stock Markets?

Michael Donadelli

Advances in Management and Applied Economics, 2011, vol. 1, issue 3, 5

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 display often exploding volatility. They are characterized by instability and subject to external shocks. If extraordinary periods are considered, the probability of making money on them can be very low. It can be shown that, in absence of any “wise†investment scheme, unpleasant results emerge. A simple empirical analysis shows that a riskless portfolio may perform better than a portfolio composed entirely by risky assets. In such circumstances, investors might make the wrong choice.

Date: 2011
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