Indexed Mutual Funds

Admin | February 05, 2012 | Comments Off

Indexed Mutual Funds

Indexed Mutual Funds

With a plethora of mutual fund types available, what do you need to know and be forewarned of when looking at investing in high growth companies?

Growth Stock Mutual Funds and Bear Markets

Many high growth stock funds perform poorly in bear markets. Why? While high growth investors such as William J. O’Neil, founder of CAN SLIM, tout massive gains in bull markets, their losses in bear markets can be many multiples higher than the market average. One investor who follows the Investors Business Daily 100 index (a high growth index) reveals just how big those losses can be. In some cases it can be 6 times the market average.

Why might these rockets run out of fuel in bad markets?

  1. High earning expectations turn into large EPS misses when spending is tight.
  2. Share price might be extended far beyond intrinsic value leading to a big correction.
  3. Investors abandon growth in favor of stable blue chip stocks in volatile conditions.

Keep in mind that this is not always the case. The folks at The Motley Fool are quick to point out that many value stocks can be stinkers too. Also, some growth stocks are able to keep surging in bad markets because they capitalize on recessionary spending. Not all growth stocks have massive price to earnings ratios either.