Tuesday, March 25, 2008

Mutual Funds Selling Stocks

Bloomberg reports that mutual funds are selling stocks and hoarding cash. Of course, this would have been a better strategy when stocks were at a peak, rather than after they have dropped. This is definitely not a case of better late than never.

When it comes to selling stocks in anticipation of dropping prices, I take the approach of better never than late. I just stay invested in stocks through the ups and downs because I don’t believe that I can predict the future direction of the market. It always seems easy to look back and think that what happened was inevitable, but it’s never so easy when you look forward.

Mutual funds have a history of selling stocks at market lows and buying in at market highs. We can see this by tracking their cash levels. At market lows mutual funds tend to have high cash levels, and at market highs they tend to have low cash levels according to Larry Swedroe in his book “Rational Investing in Irrational Times.”

So, it seems that the professional money managers running mutual funds are no better than I am at predicting the future of the stock market.

I feel confident in predicting that the current pain in the stock market will end sometime, but I have no idea when. Many individual investors will continue to sell their stocks and “wait until things get better.” This strategy will work for some of them. However, many of these investors will get it wrong and will miss the rebound in stock prices. So, I’m just going to sit tight.

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