With the recent volatility in the market, what is an exchange traded fund (ETF) investor to do? Oil prices go up, then down, then up again. Same with other sectors and asset classes. You are concerned about what’s happening in Japan and the Middle East and your emotions tell you one thing for your investments and your head tells you another. Having a discipline with investing can make times like these a little easier.
For our clients, we look at the long-term trend line (200-day moving average). Simply put, if a position is above its individual trend line we consider it safe to be invested. But once it crosses below that line, it is our signal to sell or stay out. This helps keep the emotions out of investing, but the key is to stick to your plan, whatever it might be. If an ETF falls below its trend line we sell. The cash that is available from that sell is a free agent; it doesn’t have to go back into the same fund at a later time. You do want to make sure that when you do redeploy the funds that it goes into an ETF that is trading above its 200-day moving average. [ETF Trend Following Plan].
Each ETF has its own pricing and movement, so its own 200-day moving average. Look at them individually to know when to buy or sell. Below is a chart of iShares MSCI Japan Index Fund (NYSEArca: EWJ) over the last year. You can clearly see that the ETF went above its trend line in October and below recently.
Once your plan is in place you can put your worries to what is happening in the crisis areas and not so much into your investments.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.