RSSETFs and the 'Lost Decade'
By Tom Lydon | November 20, 2008 | 3:21 PM | 1 Comment
There’s a reason that the last ten years are more commonly being referred to as “The Lost Decade”: if you had been in the S&P 500 for that entire time period, you would be right back where you started. What’s more, you’re ten years older and ten years closer to retirement. It’s wasted time and full of missed opportunities.
That’s why we advocate following trends and actively managing our portfolios using exchange traded funds (ETFs). Whether the broad market travels sideways or falls, a trend is always in the making.
In this most recent nine-year sideways move, the S&P 500 has fallen in value an average of 0.37% per year, a far cry from the stock market’s historical average annual returns of 10% to 12%.
Many financial advisors focus on your timeframe for growth, but it doesn’t matter if you have five years or 25 years left until retirement. You can’t afford to let your investments sit idle for nine years. Worse yet, an idle investment doesn’t take advantage of the beauty of compounded growth.
No matter what the cause, the market’s recent non-action underscores the inherent danger of the buy-and-hold strategy. Sure, the markets will likely rebound eventually, but that will be of little consolation to investors who need their money now for retirement, or who may have bailed out of the markets at or near the bottom.
What’s an investor to do? Your strategy should involve sticking to a plan and keeping your emotions out of it. I should caution you that coming up with a plan isn’t hard. And it’s not hard to make the decision to buy. The challenge is having the will to hit the eject button at the appropriate time, and the more attached to what you’re holding you are, the more difficult this will become.
Here are three rules that should help keep most ETF investors out of trouble:
- Maintain an 8% stop-loss on your ETFs.
- Keep an eye on the trend. If your ETF declines below its 50-day average, that’s not a good sign. If the same ETF declines below its 200-day average, sell.
- Don’t chase markets that are too hot. The last time many world markets and industry groups collectively hit new highs was in 2000. You know what happened then – the boom went bust. Keep your emotions in check.
Momentum can certainly turn on a dime. Just look at the health care sector in 1991 as an example. It was up 50% for that year, but the following year it was down 19%.
Whatever trend you’re following, just be sure to take a disciplined approach and remember to follow through with your strategy.
- Resolve to stick to your discipline. We know the past year has been rocky, and it is hard not to get emotional. We can’t predict the future, so we don’t know what’s in store for the rest of 2008. One way to avoid pulling every last hair out of your head in frustration over the uncertainty is to have a plan and adhere to it no matter what.
- Resolve to pay attention to the news. Political upheaval, major weather events and leadership changes are among the things that can indirectly affect your holdings. Don’t just isolate yourself to the business section.
- Resolve to pay attention to your investments. Are you coming up on a major life change, such as having children or entering the homestretch before retirement? Look at your portfolio and make sure it’s still working for you.
- Resolve not to invest in something simply because it’s “hot.” That’s the best way to get burned. Invest because it fits your needs, interests and your portfolio.
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