Most financial economists recommend that individual investors:

Question

BlackTom AI · Accepted Answer

When evaluating guidance from financial economists about how individual investors should allocate portfolios, several common themes emerge. 
Option 1: 'Trade individual stocks.' This approach exposes an investor to idiosyncratic, company-specific risk and typically requires substantial expertise and time to research. Active trading can incur higher transaction costs and taxes, with many studies showing lower net returns after costs for ordinary investors. 
Option 2: 'Invest primarily in your company stock.' While convenient for some employees, this creates concentration risk: if the employer falters, both income and investment may suffer simultaneously. Diversification is a core principle of prudent investing, and heavy reliance on a single stock typically increases risk without commensurate expected return. 
Option 3: 'Buy last year's best performing mutual funds.' Past performance is not a reliable predictor of future results. Funds that performed well in the prior year can underperform going forward, and selecting funds based on recent success tends to be a biased, hindsight-driven strategy that ignores fees, risk, and fit with an investor's goals. 
Option 4: 'Buy Index Funds with low fees.' Index funds offer broad diversification, transparency, and typically very low fees, which helps to reduce the drag of costs on long-term returns. This passive approach aligns with many financial theories that emphasize market efficiency and reducing costs, making it a common recommendation for many individual investors. 
Overall, the contrasts highlight that the recommended path tends to favor broad, low-cost diversification over concentrated bets or cost-inefficient, performance-chasing choices. The emphasis on low fees and simple, passive exposure is intended to improve net outcomes over time by minimizing costs and tracking broad market exposure.

MGT 012Y 001 SQ 2025 Week 10 HW - Investor Behavior

Most financial economists recommend that individual investors:

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