The New Normal: An ETF Coping Strategy
December 18th at 6:00am by Tom Lydon
Past history suggests that the normal way of investing, that is, following the masses, is wrong. This holds true, whether it be through the use of stocks, exchange traded funds (ETFs), bonds or any other investment tool. But what’s the “new normal.”
The investment world has seen its fair share of bubbles. Most recently, there was the tech bubble, the real estate bubble and the credit bubble. Most investors who jumped on the real estate bandwagon thought they saw the same opportunities everyone else did, but they were wrong. Time after time, those who defy common practices tend to outperform. [How to go against the masses.]
The formation of bubbles has become the new normal and, according to Barton Biggs of Newsweek, there are bubbles some believe are likely to form in emerging markets and in Treasury bonds. That is, if they haven’t already started to form, as many surmise.
He states that emerging markets have surged this year, but are still 30% below their 2007 highs and Treasuries are likely to remain plump as foreign central banks keep buying them and yields stay decent.
How to cope in the “new normal”? Investors can no longer sit back and ride out the highs and lows of their investments. It’s important to take a more tactical approach to your portfolio to protect yourself against the cycle of bubbles. The strategy we use involves the 200-day moving average. This strategy gives you the opportunity to take a position in time for a potential long-term uptrend, and the stop-loss has you out before your losses become too great. [How to watch trendlines.]
Most importantly of all, a strategy you can stick to will help you quiet your emotions – those very things that tend to lead to market bubbles in the first place. (How to choose ETFs.]
For more on trend following, visit our trend following category.
