Catherine Gordon helps oversee Vanguard's Institutional Asset Management group, which provides policy consulting, portfolio recommendations, and investment management to our endowment, foundation, and defined benefit clients.
Much has been made of the market’s recent volatility. Today, 300-, 400-, and even 500-point swings in the Dow feel almost normal.
Many factors have been cited as contributors to the big moves: hedge funds delevering their portfolios, institutional investors selling liquid assets (i.e., stocks) to raise money to fund commitments to less liquid investments, mutual fund redemptions, and so on. No doubt, they’ve all played a role—and with no apparent end in sight.
I would add another factor at work: The market is trying to reprice the economic system in the United States.
Once again, we read the sad headlines about investors misled by an investment manager who had a “sure thing” investment strategy that led to a devastating outcome.
The size and scope of the recent debacle appear unparalleled, raising painful questions: Why do these things happen with some regularity—and to people we consider sophisticated? Why don’t we learn from past mistakes, especially since so many of them have been widely publicized?
Robert Cialdini, a professor of psychology at Arizona State University, was quoted in a recent Wall Street Journal article (subscription required) pointing to three elements that contribute to bad investment decisions made by smart people:
1. The opportunity has an air of mystery about it, and only someone who’s smarter than you are can figure it out.
