InvestorGeeks

I receive the Swiss Stocks magazine and something in Stocks caught my attention. An author said that the funds are going to be the problem spot once the market retraces. I did not quite understand his thinking so I kept reading.

The essence of the problem is that funds are buying stocks and driving prices up. Funds keep very little liquidity. This is good for the market going up. Where things get bad is when the market goes down. If a investor decides to pull out of the fund then the fund manager has to sell stock due to the lack of liquidity of the fund. This has a backdraft effect in that fund managers MUST sell regardless what the stock market is doing. Fund managers cannot time their sales and thus are caught in a bind. Now imagine if more and more people start selling. The market will plummet to the ground with an amazing velocity because more and more people will be pulling out of the funds causing required sales.

I saw a bit of this behavior recently with the Swiss market. People decided to lock into some profits and for two days the Swiss market was in a tail spin. I did not pullout, but I held my breath for two days as the market retraced about 7% and then bounced back.

What made this author nervous is the length of doing well, and the lack of volatility. It will be interesting to see if this person’s prediction is correct.

Hello There Mr Roboto!
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