Do Investors Need Stop Losses?

The market is bouncing up and down like Marqeus Haynes dribbled a basketball. Are stop losses necessary?

Investors are edgy. Money and Markets reports – “Alarming Survey: Record Number of Fund Managers More Bearish than 08 Crisis”.

“…. Bank of America’s monthly survey…is warning investors to take caution and heed the market’s warning signs.

…investors managing about $646 billion in assets completed the survey, and a record 85 percent of respondents said the global economy is “late-cycle”.

BofA Fund Survey

Can you time the market?

Everyone wants to buy at the low point and exit at the top. If you do, you are lucky!

During the tech boom my broker and I both bought a high-flying stock. We watched it double twice. It hit $100; we were sitting on nice gains.

Suddenly it dropped to $80. We talked about getting out – but decided to hang on. We were rewarded; it went back to $100. It did it again – then it hit $75.

It continued down. Each discussion ended with, “It can’t go any lower!” We kicked ourselves, feeling stupid, wishing we sold earlier. We finally capitulated, losing much of our profit. Yes, it can go lower – it bottomed around $4.

Much of today’s market is automated computer trading. Money managers tout their sophisticated tools reassuring investors they have programs to protect against catastrophic losses. They reassure investors about being safely diversified in their “family of funds”.

Oh really?

Gillian Tett warns, “The top 1% of mutual funds have 45% of the assets.”

Bloomberg reports, “JPMorgan Sees $7.4 Trillion Passive Selling Pressure in Downturn”.

“That’s the warning from JPMorgan Chase & Co., which says $7.4 trillion of assets managed by passive funds around the world – concentrated in large-cap and U.S. small- and mid-cap stocks – will exacerbate a rout during the next recession.”

Passive investing is a strategy that tracks a market-weighted index or portfolio. The most popular method is to mirror the performance by buying an index fund like the S&P 500.

More than passive funds will be in big trouble. Funds will have a liquidity crisis like we have never seen before. Those with individual stocks may be able to liquidate, but at what price? Investors will learn “diversification for safety” is a lot more than a “family of funds” in the US stock market.

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