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Thread: (late) weekend commentary - mutual fund outflows

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    Default (late) weekend commentary - mutual fund outflows

    (snip)"Investors Are Ditching These Four Funds in Droves

    Should you stick it out?

    By Karen Dolan, CFA | 06-30-08 | 06:00 AM

    Outflows are typically a nuisance for fund managers who have to sell more than they are buying, but they can become a destructive force when trading volume for the fund's holdings dries up. In that case, selling can actually lead to worse losses as the fund's traders have to offer fire-sale prices in order to find a buyer. In the last 12 months we've seen a sharp increase in cases of destructive redemptions that have turned poor market returns into awful losses. The following four funds have seen a huge pickup in outflows. Have these funds' outflows crossed the line into the destructive kind? "(snip)


    I won't include the names of the four specific funds listed in the article ... but ultimately this is a problem for all broadly based mutual funds. When individual investors want to cash out, the mutual fund manager is forced to sell some of the fund's stock / bond holdings in order to raise cash. To cover his own a$$, the fund manager typically chooses to sell stocks / bonds on which some actual unrealized gains exist. However, as this continues, it means that the fund is losing its 'winners' while still holding onto its 'losers' (which could only be sold at tremendous losses vs original purchase price). This basically amounts to 'dry rot' from within ... which many of the investors still holding onto their shares in these mutual funds may not be aware of !!!

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    Default Re: (late) weekend commentary - mutual fund outflows

    Great article Melonie.

    Everyone and their mother is complaining about their 401k. It seems in many 401ks there aren't any mutal funds that are gaining. ( 401ks are limited in the number of funds you can choose) This could be part of the reason why.
    Nature knows no indecencies; man invents them. ~ Mark Twain


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    Default Re: (late) weekend commentary - mutual fund outflows

    The big guys need to find someone to dump the underperforming stocks on, they can't be all buyers.

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    Default Re: (late) weekend commentary - mutual fund outflows

    Quote Originally Posted by Melonie View Post
    <<<Multi-snip>>>


    but ultimately this is a problem for all broadly based mutual funds. When individual investors want to cash out, the mutual fund manager is forced to sell some of the fund's stock / bond holdings in order to raise cash. To cover his own a$$, the fund manager typically chooses to sell stocks / bonds on which some actual unrealized gains exist. However, as this continues, it means that the fund is losing its 'winners' while still holding onto its 'losers' (which could only be sold at tremendous losses vs original purchase price). This basically amounts to 'dry rot' from within ... which many of the investors still holding onto their shares in these mutual funds may not be aware of !!!
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

    Interesting.... Question: What would you consider "Broadly based" mutual fund to be?? Aren't they all sort of broadly based as they have a broad base of stocks & bonds, not concentrating too much on 1 sector or company?
    Moving on- no, average IRA or 401K investor wouldn't be aware, especially if they're not taking anything out now & such "unrealized gains" aren't taxable.

    BUT- what about mutual funds that aren't in IRA or 401K? In those cases, share price may decline, yet at the end of the year, will show some "capital gains" to sock you with. What would be considered "excessive capital gains" in those cases that would be symptomatic of those "4 losers" in article? 1%?? 2%?? 5%, 10% of share price, whatever???

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    Default Re: (late) weekend commentary - mutual fund outflows

    Aren't they all sort of broadly based as they have a broad base of stocks & bonds, not concentrating too much on 1 sector or company?
    well that was my point ... with a narrow base fund i.e. a single market sector fund, the share owner expects to win big or lose big. With a broad based fund the share owner expects that 'diversity' will provide small gains and smaller losses. The nasty surprise is that heavy requests by mutual fund shareholders for 'liquidation' isn't preserving the supposed advantages of diversity ... the fund manager selectively sells component stocks that have experienced decent gains over the past months / years in order to preserve the fund's 'performance' stats. But this leaves behind a shrinking pool of poorer and poorer performing component stocks - the result of which won't show up until the next quarterly report.

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    Default Re: (late) weekend commentary - mutual fund outflows

    Everyone and their mother is complaining about their 401k. It seems in many 401ks there aren't any mutal funds that are gaining. ( 401ks are limited in the number of funds you can choose) This could be part of the reason why.
    Obviously the fund choices an employer makes available in regard to their 401k plan vary widely from company to company. Usually there isn't any 'contrary' option such that the best a 401k holder can hope for during a market downturn is to shift their money into a money market fund to (hopefully) avoid losses. Some non-risk adverse 401k holders I know have actually borrowed against their 401k holdings (i.e. sold off their 401k funds while preserving the 401k tax umbrella for their money), and then reinvested the proceeds in 'contrary' investments outside of their 401k !

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    goldengrl69
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    Default Re: (late) weekend commentary - mutual fund outflows

    Ok Melonie (or anyone else with knowledge) whats the best course of action? My old corporate day job I only had my 401K for 2 years.

    I never made there 5 year requirement.

    So.... I either I collect the cash and pay interest up my ass or I transfer it to a IRA? Roth?

    Im new with this stuff.

    Please share your Knowledge. Id rather invest or something. [I] dont need the money right now, but rather not play the fool and lose all of it.

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    Default Re: (late) weekend commentary - mutual fund outflows

    I'd recommend setting up a self-directed Roth ... which is open to any sort of investment vehicles you choose, including contrary funds / commodities / precious metals. As you point out, there's no real upside to 'cashing in' your existing corporate 401k and paying the taxes / penalties when you can roll it.

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    goldengrl69
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    Default Re: (late) weekend commentary - mutual fund outflows

    Thanks Mel!

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