Thursday, February 01, 2007
Mutual Funds extended
Mutual Funds extended
Mutual funds try to maintain a broad range of investments, bonds, stocks, other funds even a small percentage of cash. This keeps your investment as safe as possible while maximizing the amount the investment can gain. These mixes also help fish in uneducated investors to the mutual funds. It is taught that investors should mix their portfolios by subtracking their age from 100 and investing the answer in stocks, the age quantity should be invested in bonds.
Mutual funds now have some of the lowest cash holdings ever. This means two things. We’re the most invested we’ve ever been in the markets, stocks or bonds. Money must stay in the markets to keep them rising or to maintain the price.
This is a good thing for the markets. We need this. But the bad thing is that the amount invested in stocks and bonds can only go down at this point.
One of the reasons we see such extreme losses when they do happen is because as mutual funds put more in cash and money markets, stocks fall. As stocks fall, people withdraw their money.
This defensive strategy is what is most damaging to the markets. Pulling out as prices drop is not only a dumb long term move but a move that can cause a total topple. AKA 1929. Long term money is made by investing when prices are at there lowest. As mentioned earlier, investing a set percentage weekly regardless of price is the best way to get in at all prices of the market and maximize the compounding potential. Investing weekly rather than annually will bump your returns hundreds of percentage points over the course of your life and or your retirement.
Right now mutual funds are fully extended into the market. Buying into a fund now will yield the highest stock and bond mix. In a few months it wouldn’t surprise me to see that funds pull back to 5-6% in cash as interest rates settle.
I’m really sorry for the whole doomsday scenarios I’ve been posting lately, but the next two topics promise to be an upper.