Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Coronavirus China Infection Statistics Analysis, Probability Forecasts 1/2 Million Infected - 21st Feb 20
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20
China Under Reporting Coronavirus COVID-19 Infections, Africa and South America Hidden Outbreaks - 12th Feb 20
Will USD X Decline About to Trigger Precious Metals Rally - 12th Feb 20
Copper Market is a Coiled Spring - 12th Feb 20
Dow Theory Stock Market Warning from the Utilities Index - 12th Feb 20
How to Get Virgin Media Engineers to FIX Hub 3.0 Problems and NOT BS Customers - 12th Feb 20
China Under Reporting Coronavirus COVID-19 Infections by 66% Due to Capacity Constraints - 12th Feb 20
Is Coronavirus the Black Swan That Takes Gold To-Da-Moon? - 12th Feb 20
Stock Market 2020 – A Close Look At What To Expect - 12th Feb 20
IBM AI Mega-trend Tech Stocks Investing 2020 - 11th Feb 20
The US Dollar’s Subtle Message for Gold - 11th Feb 20
What All To Do Before Opening A Bank Account For Your Business - 11th Feb 20
How and When to Enter Day Trades & Swing Trade For Maximum Gains - 11th Feb 20
The Great Stock Market Dichotomy - 11th Feb 20
Stock Market Sector Rotation Should Peak Within 60+ Days – Part II - 11th Feb 20
CoronaVirus Pandemic Stocks Bear Market Risk 2020? - Video - 11th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Why Mutual Fund Managers Cannot Protect Investors In Stocks Bear Markets

Stock-Markets / Stocks Bear Market Mar 29, 2014 - 05:45 PM GMT

By: Sy_Harding


Over my 27 years in the business, I often discuss bull and bear markets with investors. A couple of popular beliefs frequently surprise me.

The first is that bear markets are rare events. Investors are still surprised, some even shocked, that two bear markets, 2000-2003 and 2007-2009, took place within a nine-year period. Yet there have been 25 bear markets over the last 113 years, or one on average of every 4.5 years.

So in fact, the last two bear markets arrived just about on that historical average. The abnormal 1990’s bull market, which lasted for a record ten years, probably tricked many into assuming that such endurance is typical of bull markets.

The other belief that often surprises me is the expectation that holding investments in managed mutual funds (as opposed to non-managed index funds) provides protection against losses in bear markets.

Investors realize that if they hold a market index fund through a bear market they will experience whatever drawdown or loss the market experiences. However, many believe if they hold a managed mutual fund through a downturn, the fund’s manager will take steps to protect them from loss. Moreover, that if he does not, he is not doing his job.

However, the facts are that if a fund manager is doing his job, he or she probably cannot do much to protect the fund against bear market losses. That is because fund managers are quite limited in how far they can go in re-allocating assets even when they determine the market is at high risk of a substantial downturn.

They can buy and sell stocks, taking profits (and losses) and moving on to different holdings. In fact, investors would probably be surprised that, while mutual funds advise investors to simply buy and hold, that is not how they manage their funds. Studies by fund-tracking service Morningstar Inc. show that the average turnover rate for managed mutual fund portfolios is 85% annually. That is, on average they hold 85% of the stocks in their fund’s portfolio for less than 12 months.

When expecting a market correction or bear market, they can therefore protect their portfolios to some small degree by selling riskier stocks and buying defensive-type stocks that are not likely to decline as much in a correction.

However, they cannot move substantially into cash in times of high risk, or hedge with downside positions or short-sales. In accordance with the restrictions imposed by their prospectus (I know, who reads those), they must remain pretty much fully invested at all times.

They must also remain pretty much fully invested in whatever is the strategy spelled out in their prospectus and advertising. That is a growth fund must remain invested in growth stocks, a value fund in value stocks, a technology fund in technology stocks, and so on.

Why do the prospectuses of mutual funds require that the fund remain fully invested at all times, even when its manager believes the overall market is in for a significant decline?

Because investors, and particularly money-management firms utilizing the fund, need to know that if they want to be, for instance 60% in stocks, and 40% in bonds, that when they invest 60% of their assets in a stock mutual fund the fund will remain 100% invested in the market.

If the mutual fund manager were to decide market risk is too high, and move the fund to for instance, only 50% invested, 50% cash, those money-managers and their investors who want to be 60% in stocks would unknowingly be only 30% in stocks. Similarly, if an investor wants to be 30% in the tech sector or the financial sector, he must be confident that the mutual fund has not deviated from its mandate.

So even in serious market declines, even if the fund manager would rather not be, his fund must remain fully invested.

Therefore, it is important for investors to realize that whether in an index fund or a managed fund, any changes in exposure they may feel the need for, any risk management they envisage, is on them. The mutual fund manager will not take care of that for them.

As we approach the end of the market’s favorable winter season, with the market over-valued by most measurements, and the Federal Reserve rapidly tapering back the QE stimulus that has been so important to the five-year bull market, this might be a time to make plans regarding risk management, as in being prepared. It does not usually work to wait until a serious downturn is well underway before beginning to think about how to handle it. That approach tends to add to the statistics showing that many investors hold on all the way down, only then exiting near the bottom in disgust, maximizing losses and missing out on much of the next bull market.

Food for thought.

Sy Harding is president of Asset Management Research Corp., and editor of the free market blog Street Smart Post.

© 2014 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Sy Harding Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules