Shelly is a 30-something office manager in the Fort Worth area with a new retirement plan at work and a fear of investing in the market that is keeping her from putting anything into it.
“I keep looking at the funds in the plan, and I know I am supposed to pick them thinking about how much money they can make me from now until when I retire,” said Shelly, whose only investment outside of bank certificates of deposit and U.S. Savings Bonds is a balanced mutual fund account she inherited from her grandfather and has never touched. “Instead, I keep thinking about how much money they could lose for me.”
What Shelly doesn’t realize is that she has stumbled on a good way for a nervous investor to pick a mutual fund.
Investment analysts routinely say that average investors have been so nervous about market declines since the financial crisis of 2008 that they have missed the market’s gains since. Worse, they have been losing ground to inflation by keeping their cash in instruments like bank accounts that have virtually no return.
Stuck between the twin devils of greed and fear, they might turn the typical investment-selection process on its ear, and find a way to invest that appeals to their fearful side rather than simply hoping to develop the nerve to pursue the strategy that they think will deliver the proverbial big gains.
For investors who fear losses more than they love gains — and that includes most people — asking “Which of these funds will do best?” is less appropriate than sizing up funds by wondering “Which of these won’t be too bad?”
“Too bad” would mean delivering losses that cross the line to where the shareholder feels they have to get out.
By figuring out which funds are likely to avoid the worst performance — rather than… Read more…