January 11, 2009 at 9:00 am by Tom Lydon
The past year and a half was a bevy of not-so-pleasant surprises for investors and their investments, including exchange traded funds (ETFs). The best thing to do going forward is to examine what happened and glean any lessons from the past so that in the future we won’t repeat the same mistakes.
Ben Stein for Yahoo Finance has five lessons to highlight while he continues to study what went wrong over these past few years.
- Back-testing is not foolproof. The reason even the most rigorous back-testing failed is that no back test allowed for the amount of stress the markets were under in 2007-08. Back-testing that went lower than 33% just did not register.
- Investors weren’t prepared for the intense volatility. All investment categories collapsed: large caps, small caps, mid caps, U.S. growth, U.S. value, foreign developed, foreign emerging, foreign growth, foreign value. Corporate and muni bonds both fell sharply, as well as commodities. No amount of diversification could help save capital.
- Useless hedging is a dangerous game. Investors were caught off guard by the amount of volume on the sell side that the hedge funds and investment banks could put into the market as they had to meet requests for redemptions and sell to meet demands of lenders. Crazy moves from the downside action that were supposed to protect investors went haywire.
- A lesson about hedging. Hedging is a necessary tool for protection and to stay in the game. The very basic actions of hedging are needed in order to stay in the investment wars and remain protected from the unexpected, or expected volatility.
- Have a plan and a strategy going forward. Keep your money in stocks, but also in insured cash and Treasuries. Also be sure to keep a few years’ worth of spending in cash or near cash. This type of hedging is simple by keeping more in US government bonds and in cash, you are already protected.
Most of all, remember where your true value lies, in your life, your family, your dog, your friends, and the beautiful days that you are here to enjoy.
Tags: Bond ETFs
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