Perhaps ironically, the longer a rally continues unabated, the more that people gain confidence in “hold-n-hope.” Investors even become more aggressive with their allocation to stock. Pundits routinely downplay risk of losing capital; they attach little importance to volatile price swings. Meanwhile, the Wall Street marketing machine dismisses the successful investing notion of selling high and buying low. Just buy it, hold it and forget it. With your money invested somewhere other than cash, commission-based brokers and mutual fund managers generate more wealth for themselves.
You do not need a broker or a planner who tells you that he will allocate your assets according to your risk tolerance and leave it there. You can do that yourself. For example, a 50-year old who plans to retire at 65 and wishes to to hold-n-hope until retirement might consider a variation of the following “hold-n-hope” ETF portfolio:
| A Typical Recommendation For A 50-Year Old “Hold-N-Hope” Investor | ||||||
| Allocation % | ||||||
| SPDR S&P 500 Trust (SPY) | 30.00% | |||||
| iShares Russell 2000 (IWM) | 15.00% | |||||
| Vanguard All World Excluding U.S. (VEU) | 10.00% | |||||
| Ishares Small Cap Europe (SCZ) | 10.00% | |||||
| Vanguard REIT (VNQ) | 5.00% | |||||
| Vanguard Total U.S. Bond (BND) | 15.00% | |||||
| iShares 7-10 Year Treasury (IEF) | 10.00% | |||||
| Vanguard Total International Bond ETF (BNDX) | 5.00% | |||||
| 100.00% | ||||||
Unfortunately, this portfolio lost 36% of its value in an 18-month stretch (10/9/2007-3/9/2009). How many hold-n-hopers at retirement will still be as bold to do so when the $750,000 they believed they had has dwindled to $480,000? How comfortable will they be taking more stock risk, as they pray for central bank intervention through a fourth and fifth and sixth iteration of quantitative easing (QE)? More importantly, what if the current central bank distortions cause bond and stocks to collapse together, as opposed to the safe haven nature of bonds in the past? Yes, $750,000 might easily erode to $325,000.
There are plenty of methods for minimizing a catastrophe. Put option protection, “long” volatility funds, increasing cash levels at new 52-week highs, “short” ETFs, multi-asset stock hedging, trendline analysis, stop-limit loss orders – you might even diversify your methodology. Regardless, it is imperative to apply insurance principles to the investing process.
Another idea? Invest in ETF assets with considerably lower P/S ratios. According to data at Morningstar as well as Wisdom Tree, the WisdomTree Small Cap International Dividend Fund (DLS) has a P/S of roughly 0.62. It may be worth waiting to buy a proverbial dip after an impressive year-to-date run. Nevertheless, both the revenue growth data and the rate cutting activity by central banks internationally bode well for DLS.