As I continue from Part 1, let me explain further why mutual funds can get killed during bear markets. A down market is the best way to lower the cost basis of the fund’s securities positions.
But during a bear market, funds have very little cash because investors aren’t buying funds. As well, remember that fund managers can’t go to cash so they’re not able to lower the cost basis of their most undervalued positions.
But they have another, often bigger problem to contend with; net redemptions.
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