First, reduce exposure to ETF assets that have “rolled over.” These assets include ETFs with strong ties to the depreciating euro-dollar as well as the recently troubled British pound. You do not have to sell every share of funds like Vanguard Europe (VGK) or iShares MSCI European Monetary Union EMU (EZU) or iShares MSCI United Kingdom (EWU). By the same token, lightening up on highly correlated assets to the S&P 500 that have already dropped below respective long-term moving averages should be beneficial in a corrective phase.
Second, understand that the debate on whether the U.S. economy is actually improving or stagnating is less critical than the market’s reaction to various data points. And what we have seen throughout 2014 is relative underperformance by small-cap and micro-cap stocks. Lighten your exposure to small cap proxies like iShares Russell 2000 (IWM); the reality that IWM is hitting lower highs is disconcerting to chart watchers. Even more disconcerting has been the abysmal performance of the smallest public company shares in iShares MicroCap (IWC). This exchange-traded tracker has been logging lower high since March, has already declined 10% from March highs and currently trades below its 200-day. (Note: Market reactions to the Federal Reserve’s report on small business ownership probably does not help either, as the percentage of American families that own a small business is at the lowest level ever recorded.)
Third, use some of the cash that you have raised to increase your exposure to safer haven assets. I recommend employing assets that might be trending higher already and that provide historical cover in stock market pullbacks. While the Japanese yen, the Swiss franc and gold have safer haven properties, the strength of the U.S. dollar has wreaked havoc on them lately. Longer-term U.S. Treasuries and longer-term investment grade U.S. bonds have been winners during the stock rally. It follows that they possess capital appreciation potential in the present as well as traditional safer haven appeal going forward. Vanguard Long-Term Bond (BLV) and Vanguard Extended Duration (EDV) should serve you well in a “stock shock.”
