Monday, July 6, 2009

A Taste for Risk—Again

Small investors, afraid of being left behind in a big rally, are piling into mutual funds that invest in emerging markets, junk bonds and volatile energy businesses

It's amazing the difference a rally can make in investors' appetite for risk.

A few months ago, mutual-fund investors were yanking money out of stocks and high-quality corporate-bond funds and parking it in safer places, like money-market funds and U.S. Treasurys. Lately, however, as stock and bond markets have rebounded, mutual-fund investors have had a split personality.

They're back to buying relatively safe investments like high-quality corporate bonds. But they're also pouring money into the riskiest investments. They're lukewarm toward U.S. stocks but plunging into high-octane vehicles like emerging-market companies, commodities and junk bonds—making these among the 10 best-selling mutual-fund categories this year.

"Some have said, 'Well, if we're going back in [the market], let's take a real risk,' " says Iain Clark, chief investment officer of Henderson Global Investors.

Some market watchers think these investors are trying to quickly recoup their massive losses from last year. Or they believe these investors are simply chasing performance.

Whatever the motivation, though, they may be overdoing it.

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