The trusting investors are very important to the stock market. There are many of them and their capital is needed to expand companies' operations and to expand the economy. The media and politicians are correct when they state that there is a crisis in investor confidence. They are right when they advocate a need to restore investor confidence.
What happens when the trusting investors lose all faith? Most of them never regain it. Consider the stock market crash of 1929 and the ensuing Great Depression. It took nearly 25 years for the stock market to recover to its pre-crash highs (it did so in 1954). Why 25 years ? In part, the recovery was delayed because the majority of the trusting investors of the 1920s never invested in the market again. It took another generation of people to slowly gain trust and begin investing.
American investors are not alone in occasionally losing confidence. For example, Japan experienced its own stock market crash in 1990. In December 1989 and January 1990, the Nikkei 225 Index peaked at nearly 39,000. By the end of 1990, the market had fallen 43 percent to 22,000. Although it has experienced both ups and downs , the Nikkei has mostly fallen ever since. In the fall of 2002, the index had fallen to less than 9,000 ”more than a 75 percent fall since early 1990. In other words, it had been more than 12 years since the Nikkei's peak, and the index still stands at only 25 percent of its former value. The previously trusting investors will not be coming back to the Japanese stock market. How long will it be before a new generation will begin to trust the securities markets there?