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Chapter 7. Timing the Market > Professional Timing

Professional Timing

You may be surprised to learn that your favorite stock mutual fund is conducting some subtle market timing. Stock mutual funds are supposed to be fully invested in the stock market. If I want my portfolio to be composed of 80% stocks and 20% cash securities, I may put 80% of my money in a stock mutual fund and the other 20% in a money market fund. When I invest in a stock mutual fund, I expect the fund to be fully invested in stocks.

Actually, mutual funds cannot be totally invested in stocks. On a daily basis, mutual fund shareholders may contribute new money to invest or request withdrawal of money from the funds. In practice, the fund will have some portion of its assets in cash to deal with these disbursements. However, when new money is added to the fund, the manager should get the cash invested in stocks quickly. If the fund managers think the market is relatively high, they may keep new contributions in cash until they think the market is relatively low. If the managers think the market is low, they will invest the cash into stocks quickly. Therefore, mutual fund managers can conduct some subtle market timing by delaying the purchase of stocks or quickly purchasing stocks. Depending on the daily amount of cash inflow to and outflows from the fund, it may need to keep as much as 8% of its assets in cash. Therefore, we can consider an equity mutual fund with less then 92% of its assets in stock to be doing some subtle market timing.


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