Be Wary of Widely Held Stocks: Apple, Google, Amazon

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Some of the most popular investments could also be among the most vulnerable to the downside if overall market sentiment turns negative. This doesn’t necessarily have anything to do with the fundamentals of these companies. Rather, it has to do with the way in which mutual funds and hedge funds operate.

When the market turns lower, investors begin to get concerned that the market will fall even further. This in turn leads them to sell their stakes not just in individual stocks but in mutual funds and in hedge funds, as well.

When mutual funds and hedge funds get redemption requests they must honor them, with the exception being hedge funds that lock up your money for an agreed-upon amount of time. When these funds begin to get redemption requests, they have to sell some of their holdings, even if they like the fundamental story.

Which stocks are managers most likely to sell? The two categories that come to mind are stocks that comprise their largest holdings and stocks that have performed the best in the recent past. Investors should keep in mind that for many fund managers, these are the same stocks. If a stock rises more so than others, then it becomes a larger portion of any given portfolio.

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