By Chuck Jaffe, MarketWatch, Aug. 15, 2010
BOSTON (MarketWatch) -- It's been nearly a week since the man known as the "JetBlue flight attendant" got mad as hell and decided he was not going to take it any more. He cussed out everyone in sight, grabbed two beers, popped open the airplane door and escaped down an emergency slide onto the airport tarmac.
He even got away with it for a little while. And since "Steven Slater" and "fed-up JetBlue flight attendant" have become top Internet search terms, he may even profit from his notoriety.
It is a situation that anyone in a frustrating position can identify with. And few things have investors more frustrated than the stock market and their mutual funds.
Plenty of people are ready to throw up their hands, cuss out management, pull the rip cord and escape for the safety of the sidelines.
For anyone who does that, however, the outcome is not likely to be nearly as good as what the JetBlue flight attendant can expect. There won't be any reality-show deals, but there might be a horror show in your portfolio. And just as Slater's lawyer has suggested that the flight attendant hopes to work again for an airline, most investors who want to bail out on funds need to stick around and work with them in order to meet their long-term savings goals.
That's why it is so important that anyone feeling frustrated with funds dig a little deeper, rather than having the knee-jerk reaction to get out.
Seat belts, please
When a purchase doesn't turn out as expected, frustration comes easily but strategy comes hard. The vast majority of money going into funds lands in issues with high star ratings from investment researcher Morningstar or top scores from fund-tracker Lipper; no one buys funds that they expect will be dogs.
When investors are frustrated with a fund, therefore, one of three things typically has changed from when the investor first bought in.
Funds change, markets change and people change. Understand which of these factors is in play with your fund portfolio and how to respond. Investors who can manage on their own -- building a diversified portfolio either directly in stocks or using exchange-traded funds -- don't need mutual funds, but the average investor will find that they are better equipped to buy a portfolio through a fund than to manage a portfolio of many stocks on their own.
When markets change, it's critical for the investor to gauge what has happened and come up with an appropriate response. Markets go through cycles, and funds fall out of favor during those market turns. Yet the fund, typically, was not purchased just to make money for this cycle, it was bought for diversification and asset-allocation purposes.
"There's a big difference between saying 'I'm giving up on the market' versus 'I'm giving up on this particular fund,'" said Russel Kinnel, director of mutual fund research at Morningstar. "You can listen to the debate over whether we'll head into deflation, inflation, or one after the other, and how the economy is suffering now, but it's hard to reach your goals without stocks and bonds."
People who react when markets change tend to be making the worst decisions. That's how investors locked in losses during the first quarter of 2009, rather than sticking with their plan and seeing a healthy rebound.
Safe travels
Funds not only change managers, but also investment strategies, styles, asset classes and more. But investors typically look at how a fund is doing in the good years, when the real measure of a fund is how it does when times are tough.
If the fund has changed significantly, then it's not the same issue you bought in the first place. At that point, cussing it out, grabbing the beer and heading for the exit in fact makes some sense.
Finally, investors change. Just as the JetBlue attendant's feelings towards his employer and its customers was shaped by years of experience, so are investors shaped over the years. A fund that is volatile and high risk and perfect for a start-up investor with a long time horizon may be a bad idea when that same investor is starting to put the kids through college.
Plenty of people say they can stomach risk; what they can't stomach is losses, or being down from where they started. If you no longer believe in the fund or if it no longer meets your needs, it may indeed be time to act on your frustrations. But by making it a thoughtful act -- rather than an irrational one -- you'll have better control over the situation, so that your new fund will be less likely to put you over the edge.
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