Zooming out then to focus on the longer term, because that is the more important time frame, can hopefully serve to avoid unnecessary risks like chasing a lottery ticket biotech stock. I first used the term lottery ticket biotech a long time ago and sure enough a reader shared that he put a quarter of his portfolio in some unnamed (by him) lottery ticket that did not get a favorable FDA ruling, imploded and then went to zero. How old are you, how much do you have, how much will you need and how long would it take to recover from that type of hit?
Reading this you might snicker at having 25% in a lottery ticket but what about the investors (or mutual fund) that had 15-20% in names like Fannie Mae or Wachovia? Net net it’s not much different.
Not that investors should not use individual stocks or that advisors shouldn’t include single names in client portfolios I believe in including holdings (but of course there is no single right answer on this that is right for everyone) but a portfolio of ETFs broadly diversified combined with an adequate savings rate, the ability to remain disciplined along with the understanding that the only way this quarter (and likely this year) will play a large role in determining your financial future is if you do something truly stupid.
Your strategy is unlikely to be the best performer in a given year but that is not a prerequisite for success. There will be a few years where your portfolio is a top performer but not year in and year out because no strategy can do that but again, you don’t need it to.
This article was written by Roger Nusbaum, AdvisorShares ETF Strategist.