|
Down 30 Percent In 30 days, Is Now The Time To Buy?
October 10, 2008
By Simon Maierhofer, Co-Founder
SAN DIEGO (ETFguide.com) - Imagine this, you are in Las Vegas, a bouncing ball eventually resting on red just set you back a hundred bucks. Should you walk away or stick around for another round of Roulette, trying to get even-stephen?
The latest bear market has created a lot of “buy-and hold” or “long-term” investors. To be clear, this is not by choice. It’s simply because investors are hesitant to turn their paper losses into actual losses. Paralyzed by the market, most 401(k) and IRA owners are sitting on their hands hoping for better times.
To put things into perspective, the Dow (AMEX: DIA) lost 25% in less than 30 days. The S&P 500 (AMEX: SPY), which has a higher exposure to financials, shed 27.5% in the past 14 trading days. The massive 3497 holdings strong Vanguard Total Stock Market ETF (NYSEarca: VTI) fared slightly better with a 23% loss.
Protect Your Wealth And Profit With ETFs >>> The ETF Profit Strategy Newsletter - Sign Up Now
Clearly, this correction is not just a mere hick-up in a bull market. This bear is strong, mature and hungry for more as it has shown by breaking through support levels like a knife through butter. A record 2.99 billion shares traded on September 19th, but this intense selling pressure will have to be relieved at some point.
What to do now
Here is what you can do NOW. Analyze your portfolio. If your portfolio is falling faster and harder than the major benchmarks, you have some work to do. Compare your portfolio to the iShares Russell 3000 (NYSEarca: IWV), the iShares Russell 2000 (NYSEarca: IWM) or the iShares Russell 1000 (NYSEarca: IWB). The bigger the gap between your portfolio and the Russell (or any other major) Index, the more work there is to do.
Don’t panic
If you haven’t done anything yet, don’t panic and don’t succumb to knee jerk reactions. A 40% correction deserves a respectable counter move. I would not necessarily recommend to actively trade into this move, but if you are looking for a better price point to lighten up on your U.S. ETFs and funds, chances are you will get it before the end of the year. Don’t be fooled into thinking everything’s all right when prices go up again.
Cut expenses
If you own ETFs, take solace in the fact that you are likely outperforming mutual fund counter parts, at discount prices. If you own flagship funds like the American Funds Growth Fund Of America (Nasdaq: AGTHX) consider a comparable ETF. AGTHX has lagged the S&P 500 SPDRs all year long and charges three times as much. AGHTXs top holding is Google. Any active fund whose top holding is off by more than 50% should be questioned.
The Fidelity Contrafund (Nasdaq: FCNTX) was able to buck the general trend for a bit longer but caved in to match the performance of the plain index benchmarks. The American Funds ICA (Nasdaq: AIVSX) underperformed all along. Neither is worth hefty fees and loads, front, back or otherwise. Remember, higher fees equal fewer dollars in your pocket.
View your investments like a business decision
Compare the upside to the downside. What’s the benefit of becoming more conservative? You will keep your remaining money safe(er) while others lose their shirt. If the upside outweighs the downside, compose a shopping list.
Compose a shopping list
The time to bullet proof your portfolio is when most people think that everything’s getting better, not when everyone is panicking. Be prepared and know what you want to own. Safety (at least to what extent still possible) can be found in U.S. Treasuries. Consider the iShares Lehman 1-3 Year Treasury Bond (NYSEarca: SHY). If you don’t trust the U.S. government, find a safe bank.
Protect Your Wealth And Profit With ETFs >>> The ETF Profit Strategy Newsletter - Sign Up Now
Depending on your level of risk tolerance you can use short or inverse ETFs to hedge your portfolio or take advantage of a continuous bear in a fuller extent. The ProShares UltraShort S&P 500 (AMEX: SDS) or UltraShort Russell 2000 (AMEX: TWM) are broad market short ETFs.
In reality, certain sectors are prone to contract harder and faster in recessionary environments, such as consumer discretionary. Of course financials are down and out. Keep in mind that just because a sector has already shed 50%+, doesn’t mean it can’t lose another 50%. Take a look at the UltraShort Consumer Services ProShares (AMEX: SCC) and UltraShort Financial ProShares (AMEX: SKF).
Treat conventional wisdom with a grain of salt
You would expect the “hard asset value” of gold to skyrocket in these uncertain times. Surprisingly, gold’s performance has been very subdued. The SPDRs Gold Trust (NYSEarca: GLD) and iShares COMEX Gold Trust (AMEX: IAU), which have seen records inflows in recent weeks, were down most of Thursday’s session and ended up modestly around 1%. If gold doesn’t set new highs now, when will it ever? If you own gold, watch it carefully. If you are looking to add gold, do it with caution.
More detailed ETF profit strategies can be found in ETFguide’s subscription based ETF Profit Strategy Newsletter. Subscribers have been warned about the meltdown weeks in advance and will be in the know about opportunities in Europe, Asia, Russia and even the price movements of oil.
>> Sign Up Now |
