| Buying at market peaks (or at least closer to the | | | | manager(s) who manages the portfolio is not |
| top of a period of market expansion) is pretty | | | | emotionally invested in the fund's performance. |
| common. Most people invest during "high" periods | | | | This means that the manager does not believe |
| for reasons that make perfect sense -- they are | | | | for one moment that he or she cannot retire in |
| tired of sitting on the sidelines with their safer, | | | | <i>x</i> years if the portfolio continues |
| lower-paying interest accounts and certificates, | | | | to lose value and he or she does not invest in a |
| they see how well friends and family have done | | | | low-paying interest product (in fact, most equity |
| with equities in the past few years, they realize | | | | funds cannot invest in interest-paying securities). |
| that with the way "things" are going, they had | | | | This means that the portfolio will actually hold the |
| better get on board or risk missing out on the | | | | best of the best securities that are more likely to |
| growth that is being talked about night after night | | | | be defensive and less volatile than others in the |
| on the news, in the papers, online, etc.. | | | | portfolio. This results in smaller losses, providing at |
| What makes a little less sense is that these same | | | | least some reassurances to mutual funds |
| people will want to dump their equity based | | | | investors. |
| investments when things get tough. And like | | | | 2. Most mutual funds are managed by |
| buying at market peaks, it makes sense why | | | | professionals who have either experienced or |
| people would want to dump losing equities at the | | | | extensively studied periods of market and |
| worst possible time. They fear that the markets | | | | economic pullbacks. Most people either forget |
| <i>could</i> get works, they fear that | | | | about such periods (too busy worrying about |
| they missed out when interest rates were higher | | | | staying employed, making ends meet, saving for |
| and now want to not only "save" their portfolio | | | | the kids' education, etc.). The level of familiarity |
| from losing even <i>more</i> value, but | | | | that an investment professional will have over a |
| want to lock into a low rate before those rates | | | | regular investor will provide the much needed |
| disappear altogether. Where buying was | | | | resolve to stay invested and, more importantly, |
| motivated by fear of missing out on good | | | | keep investing, when values are at their bleakest |
| growth, selling is motivated by fear of losing even | | | | (i.e. lowest). |
| more portfolio value. | | | | In addition to professional management, mutual |
| When investing in mutual funds, however, | | | | funds are operated by qualified professionals with |
| investors are less likely to sell at those worst | | | | tremendous experience to keep their decisions in |
| possible moments when the markets and equity | | | | check with what logic and history have taught |
| values are just about ready to turn around. Here | | | | them. Because of the lack of a personal |
| is why: | | | | connection, mutual funds are likely to stay |
| 1. Mutual funds are professionally managed. Even | | | | invested when most retail investors would invest |
| though a fund might experience months of cash | | | | elsewhere at the worst possible time. |
| outflows during poor market periods, the portfolio | | | | |