We received this question from an ETF Trends reader this weekend:
What do you suggest for right now? Our portfolio is down to almost half its value and everything seems to be trading below the trend line (except for short ETFs). Do you recommend:
a) Liquidating the portfolio and waiting for things to start rising
b) Hanging in there and adjusting the portfolio when something starts to move upward?
c) Liquidating the portfolio and investing in short ETFs, gradually transferring to others as the market turns?
Would love your advice – my husband and I disagree and need someone to resolve the dispute.
You’re not alone in asking this question. Investors everywhere are in your shoes, stunned by a downturn that is longer and steeper than anyone had anticipated it would be.
If you followed our plan of exiting when a fund is 8% off the high or below its 200-day moving average, you’re doing okay. But if you’re a buy-and-hold investor, these are the kinds of things you might be asking.
Now, while we’d love to help you out on the home front, we can’t do much for you there, as we’re not licensed marriage counselors. But what we can help you with – your portfolio – should help keep the squabbling to a minimum.
Many experts feel that the horse is already out of the barn, but things might get worse before they get better. Here’s a suggested simple plan for coping that’s easy to follow, will help stop the bleeding and helps to remove emotions from the process. If you follow this, you’re not bailing entirely on your portfolio, you’re just taking steps to protect yourself in case the market continues south:
- Sell one-third of your invested equity positions now.
- If the remaining two-thirds decline 5%, sell another third.
We might like to think we’re at or near a bottom, but the truth is, nobody knows.
If you sell a portion of your portfolio now, however, you need to be committed to get that cash back in when the trends reverse themselves. To that end, our entry strategy is as follows:
- When a fund crosses above its 50-day moving average, put 25% of the value of your portfolio.
- When the fund goes up 5%, put another 25% in.
By the time this happens, the 200-day moving average should be well within sight, and things should begin operating in line with our normal buy parameters once again.
The truth is that bear markets often end with a whimper rather than a bang, says Jason Zweig for the Wall Street Journal. Investors tend to believe that a market can only hit bottom when a huge number of investors dump everything, called “capitulation.”
But the problem is that no one can define this moment – not even market pundits. Like many other events, it’s best identified in hindsight.
Without any indisputable signs that a bottom has been reached, we might just be better off sticking to the strategy and waiting for the trends to appear.