5 Ways to Maximize the Use Of ETFs | ETF Trends

When it comes to investing, you have many options when it comes to exchange traded funds (ETFs), stocks, bonds, futures or options, but one thing is certain: a sound strategy is more important than anything else.

During the worst financial crisis in the past 70 years, you may have watched your nest egg dwindle to half of what it was – or even more.  Now that financial stability is slowly starting to emerge and millions are trying to pick up the pieces, it’s important to keep in mind that the best financial advice is completely worthless if it is not followed, states Greg Salsbury of Investment News.

Were you one of the ones who lost their cool when the markets were at their worst? If so, read on for some tips about how to do better the next time the markets go topsy-turvy:

  • You now know this: do not allow emotions to drive investment decisions.  Often, people think that their gut feelings will enable them to cash in on the next Google (NASDAQ: GOOG). Fear makes them sell too quickly. Exuberance makes them buy without fully examining the pros and cons.
    • It is important to stay diversified.  This allows investors to reap the rewards of gaining exposure to high performing sectors and industries while not banking on the performance of one or two stocks.  A good portfolio has exposure to bonds, domestic equities and foreign equities. ETFs enable investors to gain broad exposure to a growing number of asset classes and sectors.
    • The third artery to building a good retirement portfolio is education.  It is vital to know what your portfolio holds, economic conditions, both macro and micro, which could potentially hinder your holdings, and know what your choices are.  After all, you control the destiny of your portfolio.
    • Have an exit strategy. Don’t hang on, hoping against hope that a position will come back. Instead, a stop loss will help stop the bleeding when a trend winds to a stop. Investors who had a stop loss that had them out between October and March were able to sit out a good chunk of the market’s downturn.
    • Have an entry strategy, too.  There are many out there, including a trend following strategy, which uses the 200-day moving average as a guide.  It is easy to use and enables investors to tuck their emotions away.  The key to employing a strategy is to use it. Don’t rationalize your way out of it when the signals say you should act.

    For a better understanding of the trend following strategy, take a look at our new book on trend following. There’s $4 trillion on the sidelines, but the average investor doesn’t believe we’re in a recovery at this point. Investors don’t typically buy until there’s a full recovery, but if you waited until that point, you would miss a sizable portion of potential gains.

    For more stories on trend following, visit our trend following category.

    Kevin Grewal contributed to this article.

    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.