Mutual Funds - I think they track individual holdings closer than the aggregate

BradMM said: "I've been wanting to have the time to look more closely into this but I was looking at a MF that I might add to my retirement account and I knew that several of the individual stocks were doing pretty decently because I held them. Strangely (to me), the MF chart was tracking the two stocks that were tanking at the time (AAPL and MON as I recall). I thought the benefit of MF's was to diversify and balance out the risk/reward. However, it makes logical sense to me that a MF as an entity within itself is going to sell based on the same emotional motivators that individual stocks do, right? The MF NAV is not a proportionately distributed collection of the values of all the stocks... it's just whatever it will bring in the marketplace! I think that MF's will track the value of the worst performing stock in a bear market and perhaps the best performing in a bull market. If that's the case, then there's little to no benefit for holding these except that's [I]all my retirement plan will allow[/I]. [B][SIZE="3"]THAT[/SIZE][/B] makes me think that there might be some powerful people who want us to hold these MF's as stabilizers for the market in general - they promote them as good investments for the masses - but they are really just covering their own asses! That goes along with my conspiracy theory that the same powerful people are the ones who tell us to "BUY AND HOLD" no matter what... again to protect their investments by stabilizing market responses. Anybody ever seen anything to support or refute these theories???"

AlfredSokol said: "I guess you are basically saying that the NAV is manipulated?"

BradMM said: "[QUOTE=AlfredSokol;66259]I guess you are basically saying that the NAV is manipulated?[/QUOTE] I'm saying that the NAV for a mutual fund is not some aggregate price for all of its holdings. It's just the price for that product based on market demand. If one or two of the holdings are tanking, especially during a bear market, then the entire thing is going to tank (theory) because people will sell it off to avoid the impact of that one stock dragging everything down. It's the fear factor. Other holdings may be doing perfectly well but that one (or two) stock essentially determines the market price of the entire fund. If that's the case, then owning the fund is little/no better than owning that one stock and mutual funds are no advantage over buying individual stocks. My theory but I haven't backtested it yet. Disagree?"

LARegresa said: "[QUOTE=BradMM;66279]I'm saying that the NAV for a mutual fund is not some aggregate price for all of its holdings. It's just the price for that product based on market demand. If one or two of the holdings are tanking, especially during a bear market, then the entire thing is going to tank (theory) because people will sell it off to avoid the impact of that one stock dragging everything down. It's the fear factor. Other holdings may be doing perfectly well but that one (or two) stock essentially determines the market price of the entire fund. If that's the case, then owning the fund is little/no better than owning that one stock and mutual funds are no advantage over buying individual stocks. My theory but I haven't backtested it yet.[/quote] Sorry, but your theory is wrong. The NAV is simply the total value of the fund's holdings (stocks, bonds, cash) minus liabilities. Buying or selling shares of the fund itself doesn't affect the fund's NAV because it's OPEN-ENDED. That means the amount of shares outstanding changes as investors buy or redeem shares. What you're describing is the way a closed-end fund works (which most mutual funds aren't) which has a set amount of shares and trades on an exchange. I'm sure if you look closely at the fund's holdings and their weightings, you'll see that the NAV is determined by the value of those holdings and nothing else."

BradMM said: "[QUOTE=LARegresa;66296]I'm sure if you look closely at the fund's holdings and their weightings, you'll see that the NAV is determined by the value of those holdings and nothing else.[/QUOTE] Thanks, as I said, I haven't had a chance to look closely but, when most holdings in a fund are doing well but the chart mirrors the two that are doing poorly, seemed like a cause and effect tied to the ones doing poorly."