Is Your Portfolio Ready for the Next Leg Down?
By Ron DeLegge
June 22, 2009
SAN DIEGO (ETFguide.com) – Is the worst over? It’s an open-ended question that solicits many diverse opinions but none that yields any clear answers. And no matter how good the thesis sounds about which way the market is headed, the future is forever unknowable. What does this mean for your investment portfolio?
Not knowing the future is hardly an endorsement for leaving your investments up to chance.
Even during difficult economic periods and directionless markets, it’s possible to achieve profitable results. For example, four of ETFguide.com’s live model ETF portfolios have outperformed major benchmarks like the S&P 500 (NYSEArca: SPY) and the MSCI EAFE Index (NYSEArca: EFA) on a year-to-date basis. What does it prove? Getting the correct mix of assets inside your portfolio still works. Desirable results don’t typically happen by accident.
What can you do to prepare your money for the next market decline? Let's evaluate three simple strategies.
Avoid Financial Puberty
“Financial puberty” is a term I invented to describe a state of financial immaturity that prevents people from prospering. The three main aspects of financial puberty are: 1) Having behavioral disorders counterproductive to successful investing; 2) Having limited or no education about the realities of successful investing, and 3) Having a distorted investment philosophy or having no investment philosophy at all.
Do you have symptoms of financial puberty?
One way to know is through self-examination of your attitudes. For example, many investors have adopted a defeatist attitude. “If my neighbor’s portfolio is down 60% and mine is down 50%, I’m not gonna complain,” they tell themselves. Other investors have become callus to risk. They’ve convinced themselves, “My portfolio is down so much, I need to take on more risk to earn back my losses.”
In both cases, this kind of flawed reasoning is rooted in financial puberty, an all encompassing self-destructive characteristic.
Remember: This isn't "Play Money"
Entrusting your money to investment managers is no guarantee of success and sometimes results in full-blown disaster. Not realizing this caught many people by surprise.
In 2008, the Oppenheimer Core Bond A (Nasdaq: OPIGX) cratered 35.83% yet the Barclays Aggregate Bond Index as tracked by Vanguard’s Total Bond Market ETF (NYSEArca: BND) climbed 5.17%. How long will it take Oppenheimer’s bond fund shareholders to make up that 41% deficit?
"Thousands of parents of college-age children who thought their college savings were sheltered in low-risk portfolios watched their accounts shrink last year after a bond fund (Oppenheimer Core Bond Fund) offered by at least four state 529 plans lost more than a third of its value," reported the USA Today. OPIGX was offered by 529 plans in Oregon, Texas, Maine and New Mexico.
What if 529 state administrators in charge of this mess had enough sense to just use low cost index funds or index ETFs? Is it possible they could have protected college savers from the nightmare scenario they’re now facing? Treat your money and invest your money like you care. It isn’t play money.
Be Alert, Stay Vigilant
Nothing can be more dangerous to a soldier’s safety than his or her own complacency. Sometimes when it appears everything is calm and safe is right when the enemy strikes! From an investment perspective, being inattentive, apathetic or lazy could cost you a bundle.
Towards the end of February and early March, the downtrend for the Nasdaq Composite began to slow (NasdaqGM: ONEQ). Much earlier the Dow and S&P 500 had already dropped significantly below their 2008 lows, whereas, the Nasdaq did so much later and to a smaller degree, which indicated a shift towards riskier stocks.
This, along with a composite of other indicators, led the ETF Profit Strategy Newsletter to issue a Trend Change Alert on March 2nd, only four days before the S&P 500 bottomed on March 6th. Along with a number of ETF profit strategies for conservative, moderate, and aggressive investors, the alert forecasted the following: “A multi-month rally, the biggest rally since the October 2007 all-time highs, should lift the indexes by some 30-40%. Tuesday's 4% spike may be an indication of the initial intensity of the rally.” Being alert to this reversal in stock prices paid off. For aloof investors, they were too busy doing nothing to notice.
What’s Your Action Plan?
This is not the friendly stock market of a few years ago. Combining today’s bear market and economic recession with the wrong investment philosophy will inevitably lead to financial disaster. Millions of investors have lost more far more of their wealth than they expected to lose. And millions more will join them. What will you do?
If the stock market has trashed your portfolio, isn’t it time you made the necessary changes to get your money back on track? Avoiding financial puberty, treating your money with care and staying alert are three simple steps to preparing your money for whatever lies ahead.