Marshall was willing to pursue aggressive strategies to realize sizable returns. But that doesn’t mean you should approach investing the same way. To evaluate where you stand, follow market activity closely, determine your risk tolerance level, and seek solid financial advice. black enterprise has also developed The Moneywise 100—our semiannual guide to 100 mutual funds that merit your attention. Working with Chicago-based mutual fund research firm Morningstar, we’ve identified funds based on criteria including three- and five-year returns in the top quartile of their respective categories and, for the first time, indicated risk ratings for each.
Even though recent events have reminded many that investing can be a risky business, the outlook is not entirely gloomy. The stock market has had many corrections and crashes over the years, yet investors who tolerated the downs have enjoyed the ups: Long term, stocks have delivered much higher returns than bonds or bank accounts. For a quarter of a century—from late 1982 to 2007—economic historians maintain that the stock market has produced a total return of more than 2,000%.
In fact, last year turned out to be a good time to take certain types of risks. International stock funds returned nearly 16%, on average, while domestic stock funds gained about 6%. Among foreign stock funds, the leaders were specialized categories such as Latin America (up 46%), Pacific/Asia, excluding Japan (48%), and diversified emerging markets (37%). Japanese stock funds, on the other hand, lost more than 9%. The narrower a fund’s focus, the more risk investors assume.
Sector funds also demonstrated this risk–reward tradeoff. Top performers included those with holdings in natural resources (37%), precious metals (23%), and utilities (20%), while investors were punished if they held funds specializing in financial firms (-12%) or real estate (-15%).
Test Your Tolerance
These days many investors are seeking the safety of money market funds. “There are three main reasons for investing in a money market fund,” says Dail St. Claire, president of New York-based Williams Capital Management Trust. “They are preservation of capital, liquidity, and generating income.”
In today’s environment, the first two are far more important, according to St. Claire. That is, protecting against loss and having access to your money should be prime concerns, rather than seeking an extra quarter-point of yield.
“Do your homework,” St. Claire says. “Before investing in a money market fund, read the prospectus as well as statement of additional information, or SAI, and the one-page fact sheet. See if the fund is identified as a ‘2a7’ fund. Those funds are subject to federal regulations on portfolio maturity, credit quality, diversification, and liquidity.”
Overall, putting together a mutual fund portfolio that matches your risk threshold can prove challenging. First, determine how much market turbulence you can stomach. You can take a risk tolerance quiz online at BlackEnterprise.com. “If you work with a financial adviser, you should go through this kind of exercise before making any investments,” says Outlaw.
Find the Right Mix of Funds
Experts say most investors have moderate or slightly lower-than-moderate risk tolerance levels. Once