When investing in exchange traded funds (ETFs), having an exit strategy limits your downside. So if your exit strategy is similar to ours where you sell if an ETF dips below its long-term trend line (200-day moving average) or 8% off its high, you know exactly what your risk is. It’s clear-cut. However, if you don’t have an exit strategy, then your risk tolerance may not be as well defined. It takes a high tolerance of risk and lots of patience to suffer 20% or more in losses that some sectors and regions have experienced a few times over the last several years.

While we are clear proponents of having an exit strategy, we understand that there can be some confusion when certain ETFs drop quickly and then climb sharply. Looking at the market today, there’s a chance you might have sold a position that declined further after you sold it but now is rebounding. When this happens, remember that you can treat the cash you have from previously selling an ETF as a "free agent." This means that there’s no rule that says you must buy back the same ETF you sold if it’s performing well now. Shop around; see where new trends are developing. There might be a different ETF that’s even better for your portfolio now.

Tags: Sector ETFs