How to invest in 2012 and in life – Part 2

An investor can have a healthy inclination toward risk, and not without reason. After all, mighty forces come to the aid of the bold. Yet even truer than that adage is the one that says “No one likes losing money.” There are fine lines between taking calculated risks and throwing your hard-earned money down the drain of the investment ladder. Gamblers do not make good investors.

Risk management is of course a tough thing to master. Unless you are an absolutely brilliant investor with plenty of time to monitor your chosen sectors, or have the money to hire someone to do so, most traders are reduced to a passive take on the market, with their time spent in denial of outperformance. That is not a great investment strategy.

It would take years and tons of paper to detail all of the pros and cons of passive vs. active investment approaches. So for the benefit of the beginner investor, let’s take a closer look at mutual funds, since they are by far the most dominant part of this bustling niche.

A depressingly large amount of all retirement funds and 401k’s are index huggers. This is the safe route traders take to avoid mistakes in investment. Paid advisors should never suggest index huggers, and for someone who wants safety and passivity on the charts, options like an index mutual fund or an exchange traded fund are far better alternatives.

These are the investments that make the end of the year covers of financial magazines and report soaring highs and tumbling lows with each report. The obvious trouble with these investments is that much like the payoff is amazing, the downturns are devastating.

It is of course perfectly understandable to want to own a fund that generates tremendous profits. Yet, be prepared to suffer from the other side of that investment strategy’s coin. You do not have to strike all return chasers from your portfolio, but certainly take the time and monitor them carefully, so you can pull out before greater damage is done.