MIT Finance Professor Andrew Lo says that getting out of the market during though times isn’t the biggest mistake investors make — it’s failing to get back in soon enough.
Lo says MIT is studying “artificial stupidity”, a tongue-in- cheek reference to the effort to try to systematically understand and simulate the mistakes investors tend to make, in order to develop ways to help correct those mistakes. He says the process is designed to understand when humans’ investing instincts are helpful, and when they are damaging, and learn from that. Lo also talks about why he thinks buy and hold is an incomplete strategy. He says the approach doesn’t take into account the human factor — that it’s not reasonable to expect human beings not to panic when stocks are plunging. Exiting the market at such times isn’t necessarily the problem, he says — the problem is that “investors often go to cash and stay in cash way too long.”