Most investors have chased after hot stocks or sold off after a bottom. However, the more egregious habit would be to sit out of investing entirely. Instead, investors can implement a trend following strategy to help navigate markets and exchange traded funds.
According to Bankrate.com research, almost three-quarters of Americans indicate they are not “more inclined to invest in the stock market right now,” reports Chuck Jaffe for MaketWatch.
The numbers match up across all ages and income groups from surveys done in 2012 and 2013, when 76% of Americans indicated they were not going to increase their stock market exposure back then.
While investors are not falling into their classic poor behavior of buying high and selling low, most Americans have missed out on a low interest rate environment that is fueling a stock market rally. Instead, most are sticking to savings accounts and cash. [Robust Demand Lifts Treasury ETFs]
“Individual investors, what money they are squirreling away is overwhelmingly dedicated to those liquid investments; they’re looking to keep money in a savings account or a money-market account which is indicative of just how nervous people are,” Greg McBride, chief analyst at Bankrate.com, said in the article. “Individual investors are not warming to the stock market…despite those record-low yields on cash and fixed-income and despite a record high in the stock market.”
By staying in cash, investors counter principal risk, or the chance they lose money in a market decline. However, investors could face purchasing-power risk, or the risk of losing out to inflation, and longevity risk where money could run out before your lifetime.
“Five percent CD yields are not coming back any time soon,” Scott Wren, senior equity strategist at Wells Fargo Advisors, said in the article. “Right now with low interest rates and a stock market that looks pretty good in my opinion, there’s not a lot of good things to take from people sitting on cash that is yielding virtually nothing.”
Investors who are thinking about dipping their toes back into the stock market waters should have a strategy in place. While some may fall back to chasing hot stocks or selling off at a bottom, a trend following strategy could help provide a structured investment regiment to limit emotional trades. [Don’t Let Emotions Ruin Your ETF Portfolio]
For instance, at ETF Trends, we try to use the 200-day exponential trading average to guide use through trades. If an ETF moves above the long-term trend line, it is a buy signal, and if the ETF dips below the trend line, it is time to exit the position. [An ETF Trend-Following Plan for All Seasons]
For more information on the markets, visit our current affairs category.
Max Chen contributed to this article.