By safety of principal, Graham means protection against loss under normal or reasonably likely market conditions. In our current economic state, one cannot pretend to be protected against loss while real estate is still crumbling, being that it is the foundation for most financial stocks.

When evaluating whether or not to jump back into financials, a look at how financial institutions are investing may answer the question as to whether or not it is time to get back on board. The heads of financial companies lack the confidence and/or cash to buy their own shares. When these banks and institutions don’t know what their own assets are worth, there really isn’t any way for outsiders to value a stock without speculation. If the heads of financial companies won’t buy, why should you?

Although it might not be the right time to ride the financials wave quite yet, this sector will have the greatest turnaround once the market rights itself. Up until the market corrects itself, it is essential not to over speculate. It is a much better strategy to wait until positive trends are evident rather than predicting turnarounds. Use the 200-day moving average to spot trends, and save yourself from potential losses that often come from trying to make predictions.

Some ETFs that may be affected by a turnaround include:

  • iShares Dow Jones US Financial Sector (IYF), down 21.4% year-to-date
  • Vanguard Financials ETF (VFH), down 21.1% year-to-date
  • Financial Select Sector SPDR (XLF), down 23.3% year-to-date