Holding Steady With ETFs In the Market Storm

By Tom Lydon | October 09, 2008 | 5:53 PM | 0 Comments

The events of the last several weeks, and especially the last seven days, have struck fear into the hearts of the most daredevil of investors. The government is scrambling to find a cure for what ails the markets while the Dow continues to fall.

Times like these test our mettle as investors. The natural inclination is to go into all-out panic mode, making decisions based on fear instead of through rational thought and research.

We've been getting lots of questions from investors about what they should be doing,  as well as what we're doing.

We use and recommend a trend-following strategy, which involves being in those areas of the market that are trending higher and being out when they’re not. We get in only when a fund is above its 200-day moving average, while we get out when a fund drops 8% off its recent high or below the 200-day moving average.

Right now, very few areas are trending higher, and as a result we’re 100% in cash. We’re waiting for this storm to pass.

 However, this strategy doesn't necessarily hold for the buy-and-hold type of investors. They're in it for the long-term, riding out those peaks and valleys. But the recent market activity has to be making even the sturdiest buy-and-hold investor a little seasick as they wait for the markets to move higher once again.

If you have this strategy, you don’t necessarily have to take this if it’s become too much for you. If it would make you feel more comfortable to sell all or part of a position while the volatility continues, do so. When the trends appear again and you’re ready, get back in.

As for when to get back in, we revisit our trend-following strategy:  we wait until funds have moved above their 200-day moving average before we consider them. We look at other things too, such as diversity within the holdings, expense ratios, trading volume, fundamentals of the sector or area the fund represents, and so on. But above all else, a fund has to be above its long-term trend line. What we don’t recommend doing is chasing performance, running from area to area, looking for the “hot” fund or trying to call the bottom of a tanking sector.

 

Check out Tom's new book iMoney here.