ETF Investing: How to Cope with Indefinable Risks

Investing in the markets and exchange traded funds (ETFs) carries its own set of risks. But just as there’s no true definition of “normal,” there’s no one definition of “risk.”  Risk depends on your perception.

One person’s risk is another person’s thrill ride. Investing is inherently risky, comments Roger Nusbaum for Random Roger. Sometimes an obvious risk to one person may be completely missed by the next person.

Risk lurks everywhere. It can be found in a portfolio of mutual funds with the same manager. It can be found in a portfolio with a lot of single-country ETFs, which could leave an investor overweight in financial stocks since the financial sector makes up a big portion of most single-country ETFs. [How to Follow Trends.]

This perception is a behavioral quirk, writes Nusbaum. To the detriment of their investments, investors tend to go along with their individual behavioral quirks. That’s why we use a trend following strategy in an attempt to try to reduce human error caused by emotions and behavior. [10 Tips for Managing Risk.]

We use the 200-day moving average to determine when we’re in and when we’re out. When a position is above its 200-day, it’s a buy signal. When it drops below or 8% off the recent high, it’s a sell signal. Having such a strategy has you in a position in time for any potential long-term uptrend, while having a point at which you sell puts a cap on your losses. [New Year, New ETF Strategy.]

For more information on trend following, visit our trend following category. Or take a look at The ETF Trend Following Playbook.

Max Chen contributed to this article.