Use a Disciplined ETF Strategy

July 02, 2007 at 8:05 am by Tom Lydon      Bookmark and Share

Etf_promo  What a pleasant surprise it was to see someone else touting the importance of discipline when investing in exchange traded funds (ETFs). As we’ve rigorously outlined our ETF investing philosophies in various posts, I’ll say again that the best defense against the market roller-coaster is a strong discipline to stick with your selling points. And Alan R. Elliott of Investor’s Business Daily agrees. Here’s a sample of how great minds think alike when it comes to ETF strategies:

Elliott says to sell a stock once it drops 7% to 8% below your purchase price. We couldn’t agree more. That’s why we closely follow the 200-day moving average of all our ETFs. If an ETF falls below it, or if it drops 8% off its high without going below its 200-day average, it’s sold. Below is a chart of SPY for the past year. As you can see, last summer it fell below its long-term trend line. Thus if we had owned it, we would have sold it.

Etf_spy_chart

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  • Charles
    What is the strategy to buy back a stock (ETF) once it dips below its 200 day moving average and was sold??
  • Congratulations ETF Trends. You are right and were right from the get go.

    I am trying to make this point be understood in real estate also where sellers still do not do their homework.
  • Tom Lydon
    Great question Charles!

    We did a post on it to answer your question, hope this helps.
    http://www.etftrends.com/2007/07/strategies-to-b.html

    Thanks, Tom
  • Neal Greenberg
    Thanks for all the great information given at ETF Trends.
    However I strongly disagree.
    I used to follow the IBD rules as well and sell when it dropped 8 % from what I paid for the ETF.
    Then within a month after I sold it 9/10 times it came back higher than what I paid for it.
    Now since I am a long tem investor I do not follow those rules I follow my own.
    Even with the sell off recently, February 2007, summer 2006 etc all my ETF's without me selling.
    Some of them were down 15 % last week only to recover where I am only down 5 % this week even with Monday-Tuesday sell-off.
    I learned never to panic , wait for market to come back(it always does) and buy when most people run for the exits.
    I don't know what happens short term but long term I feel market is going much higher.
    I am in my mid 40's and I have time to wait.
    Market will always be their.
    You can buy 10 ETF's and they all can go down 8 % within a week.
    You panic sell and then in 2 weeks storm clears and the ETF's have come back.
    Remember why you bought the ETF in the first place and don't let the short term trading alter your decision.
    This has worked very well for me.
    Just my 2 cents.
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