Riding out the unstable markets may have caused some investors stress, but it gave exchange traded funds (ETFs) a chance to demonstrate their ability to withstand tumultuous times through their diversification. The MarketWatch example ETF portfolio experienced half the amount of volatility that the market suffered from July 19 through Aug. 15. John Prestbo for MarketWatch reminds investors that the recent "midsummer meltdown" was 64% worse than the late February correction, which was soon forgotten as the market recovered and reached new highs. With that fact in mind, Prestbo shares his perspective:
- The nature of the downturn makes a difference.
The closer to home the point of disaster is, the stronger and longer-lasting the market reaction. February was a sharp sell-off in Chinese stocks, whereas the summer meltdown was a home-grown credit market crisis.
- The length of the catalytic event’s "tail" matters.
Whenever credit markets are involved in a crunch, prepare for the worst. The mess is still unfolding here at home, whereas the February decline was an initial panicked reaction that quickly recovered and returned to normal.
- Certain industries and dividend-paying stocks can cushion the fall.
In a general market decline they can help, but they don’t always perform well and sometimes may fail.
- Diversification can soften a fall.
A diversified portfolio can cut damage almost down to half in relation to the overall global stock market.
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.