ETF Trends
ETF Trends

The commodities sell-off Wednesday was the latest sign that investors are growing more sensitive to risk with the Federal Reserve’s stimulus program set to expire at the end of June.

The latest plunge in silver and oil prices had investors dumping stocks Wednesday as the Dow suffered a triple-digit loss.

Investors are all too familiar with risk and volatility within markets these days, but there are ways to protect against these factors. An exchange traded fund (ETF) portfolio should be mulled over to assess potential shock and then make sure you’re not overexposed to any one country or sector, advises Bernard Baumohl, chief global economist at Economic Outlook Group in Princeton, N.J.

Investors should take note of any risk their portfolio is vulnerable to, and should take specific action to fortify any soft spots, writes Jonathon Burton for The Wall Street Journal. Here are some factors the article suggests investors consider:

  • Interest Rates and Rising Prices: These are common risks that all investors should take into consideration. Higher energy and commodity costs remain a threat to producers and consumers, so sticker shock and supply-and-demand fluctuations are realities that loom. As the threat of interest rates rising are also present, the values of existing bonds will be affected. Long-term government bond holders have been burned this year already.But don’t jump ship on the bond market–bonds protect you in deflation, liquidity crises, periods of slower growth, and combined with other assets, they are part of proper diversification. [What’s Your ETF Trend Following Plan For 2011?]
  • Geopolitical Risk, Disaster, War: Financial markets are typically not affected long term by  large geopolitical events, but these risks that are not predictable can wreck havoc on a portfolio that is not diversified. For instance, the social unrest in the Middle East has oil prices all over the place and the earthquake in Japan has resonated in the technology and auto industries. Burton says that physical commodities such as gold, and other precious metals are an investors best bet, and can offset declines in other asset classes. [Sell ETFs in May And Go Away?]
  • Markets and Companies–Constant Risks: Market risk is a simple reality of investing. “The Seven Immutable Laws of Investing,” published recently on the website of investment firm GMO, highlights three key risks all investors should understand: valuation risk, or overpaying for an asset; fundamental risk, buying something that turns out to be flawed; and financing risk, using leverage. Be prepared with a proper asset allocation strategy and make sure your ETFs are not overlapping in sectors and classes. [VIX ETFs Thrive as Market Stumbles.]
  • Playing It Too Safe: This is the worst risk, as sitting out of the game completely causes one to miss major market movements and adds the danger of not having enough money later on. Suit up with a trend-following strategy that has a clear entrance and exit strategy, and be sure to stick with it. This will keep losses to a minimum and can help one sleep at night if the market takes a twist. At ETF Trends, we follow the 200 day-moving-average.

Tisha Guerrero 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.