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Investors Pull Money Out of Markets, How Does This Work?

Some of our readers and viewer are very knowledgeable in a wide range of businesses and while there has always been a marriage between money and poltics, currently, it is becoming more and more difficult to separate equity markets in particular from geopolitics

To understand this, is to understand managed funds – funds in which investors turn over their savings or investment money and have trained professionals invest on their behalf. Think about a 401k or a fund that you have invested your extra cash into, these funds are vast pools and move into and out of markets, as the called professional fund managers trade on your behalf. So in December, when global equity markets started to break down, a total of $143 billion dollars was pulled out of funds forcing these funds managers to reduce risk. 

When vast pools of money are placed in stock markets, there is a quick process of selling stocks and returning cash to client accounts, The fund managers are told by their clients (anyone who buys equity via a pooled fund), to sell positions.

FAANGs – Facebook, Apple, Alphabet, Netflix and Google belong to this group. 

Think of it this way, it makes sense that if you had $1,000 dollars of FAANGS stocks (we often focus on FAANGs), that you invested in 2008 putting $200 in each stock, those five stocks would have produced massive returns. Imagine that $1,000 investment turning into $2,000 dollars over that period from 2008 to 2018 and these numbers are hypothetical returns not actual(note we are using rounded numbers).  Well the $2,000 total in October 2018 could break down and you might lose 10 percent of that total win. And think of it as a win. So as markets, the S&P500 and Nasdaq, implode (read our comments on trade wars and economic slowdown fears) rather than give up all those investment earnings, sell out all positions. You call the firm managing your money to sell said stocks. So if the $1,000 investment became $2,000 by October 2018, you sold it and booked your profit while you tried to avoid the carnage of December when some stocks dropped by as much as 40%. Remember our old friend Facebook? 

So think of waves of individuals like you and me selling positions to protect these wins – hence the total of $143 billion pulled out or taken back from these investment vehicles. As fund managers called – along with thousands of other investors – to sell their positions. 

And if one were to look at a chart, you would see those tech stocks dropping hard and fast. Look at Apple stock from the highs around October 4th, 2018, at $232.00 to $142.00 on January 4th of 2019. Remember in just 24 hours, this stock dropped 7 percent and market guru, Warren Buffett saw his winnings in this stock drop by some $2.8 billion. So investment gurus like Mr Buffett as well as many individuals alike suffer the same on a more limited scale.

Now as we are looking at these stocks that were rocked in November and December by fears of aggressive rate hikes by the Federal Reserve, a global economic slow down and growing fears of trade wars with China, what will happen when these stocks are at very low prices – some are down 30% or more – and Mr Trump and Mr Xi sign a trade deal? Well, we see some of these stocks benefiting and will rally as money comes back into the market. However, the rot in Silicon Valley is deep and some of these firms, Facebook being the one to keep your eye on, could have more acute challenges down the road. 

Please view our website with information and learning about markets and finance in our guides section. We enjoy your comments and hope to grow together in geopolitics, finance and economics. 

 

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Disclaimer: We do not provide investment advice or strategies, this article is not intended as such but only to provide you the reader with information. Please conduct your own research before any investment of any kind.

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