What Is a Nervous Nellie?
Nervous Nellie refers to an investor who is not comfortable with investing and the risks associated with it. Nervous Nellies have very little risk tolerance. As a result, their investment returns are likely to suffer because they will put money only in very low-risk, low-return investments. Even a medium-risk scenario may prove too much for a Nervous Nellie investor.
Without taking on greater risk, Nervous Nellies may not be able to generate the returns they need to meet such goals as being able to retire. A smart advisor who understands the personality of a Nervous Nellie can help their client make better choices for their portfolios.
- Nervous Nellie is a phrase used to describe a worried or anxious person.
In the world of finance, it means a reticent or overly frightened investor.
- Nervous Nellies may hoard their cash in a low-risk savings account rather than invest.
- Nervous Nellies often make unsound choices when it comes to their stock portfolio due to anxiety or fear of losing their investments.
- The right kind of financial advisor can help Nervous Nellies make better choices and to be less afraid.
- Often Nervous Nellies reverse the old adage of "buy low, sell high" and instead "sell low and buy high" due to financial anxiety.
Understanding a Nervous Nellie
In general parlance, a Nervous Nellie is an unduly timid or anxious person. If a Nervous Nellie decides to take a chance on a higher-risk, higher-return investment like stocks, they will most likely sell the moment the market ticks downward. Investors who sell when their holdings decline in price might miss some bad moments in the market, but they are also likely to miss the upswings.
Nervous Nellie and Buy High, Sell Low
Anxious investors like Nervous Nellies often buy high and sell low, the opposite of the old investing truism “Buy low and sell high.” When markets are unstable, changing quickly, Nervous Nellies may action that isn't in their best long-term retirement goals.
A nervous investor who is prone to making rash, ill-advised moves often buys and sells at the worst times.
Nervous Nellies are often too scared to buy into a position until it has been rising for some time, increasing the likelihood of a decline. And once the position declines, Nervous Nellies will often sell before it has a chance to recover. This behavior leads to the Nervous Nellie locking in losses on a consistent basis in their retirement portfolio, which can lead to more negative thinking or poor choices overall when it comes to their investments.
The buy-high, sell-low behavior of Nervous Nellies, combined with transaction fees associated with constant buying and selling, causes their portfolios to underperform. Nervous Nellies would have fared far better putting their money in almost any mainstream asset allocation, like a 60/40 split, and not touching it for 20 years.
Following the 2008 financial crisis, Millennial savers put more money than ever into their 401(k) retirement savings accounts, and affluent Millennials are less likely than Generation X to have a robust stock portfolio. Those investors may be sacrificing the advantage of a long investment horizon, which would allow them to easily absorb the volatility of a high-equity allocation in exchange for higher returns.