“The only significance of stock market gyrations to the true investor, is that they [provide] an opportunity to buy good common stocks when they are cheap – or at least reasonably priced – and at times offer…an invitation to sell out at temptingly high levels.”
Benjamin Graham
Here are some things to consider.
An ETF is a basket of stocks. The size can vary from a few, to many hundreds or 1,000. The stocks in an ETF typically have something in common. For example, PXE and FCG are ETFs focused on the Energy Sector. Many attempt to mimic an index like the SPY mimics the S&P 500.
An important advantage is that they trade like stocks. So, you are able trade them throughout the day.
One of the best features is they can provide a degree of diversification at a relatively low cost.
We assume that the “now” in your question was referring to the current market downturn.
This downturn, that has seen the S&P 500 decline by almost 20% since Jan 2022, is not your typical market correction, but it is the situation we are in at the moment and must deal with.
Generally, ETFs focused on a good group of stocks would be considered a reasonable investment. Especially if you’re prepared to use stop-loss transactions to limit your risk.
However, the current situation is far different from the norm.
Today there are many factors at play that are impacting stock and ETF performance.
Energy costs, in general, are up with gasoline and diesel fuel prices at all-time highs. There are serious supply chain problems and, of course, record inflation, as well as a host of other problems.
The basket of stocks that the ETF represents is a way to diversify and also cushion the effect of several stocks in the basket having poor returns, assuming others in the basket have done well enough to compensate.
When the market goes down, ETFs go down as well. However, individual stocks may go down less or more than the ETF they are linked to.
As a result, some analysts are suggesting that a strategy of investing in individual stocks would allow you to invest in only those stocks that are most likely to benefit from the current situation rather than the entire basket.
If we use the last downturn of 2020 as an example. Stocks like hotels, restaurants, airlines, movie theaters, entertainment centers, car rentals etc., etc., did very poorly.
While stocks like home entertainment, package delivery, online shopping, online food delivery, video conferencing, home exercise equipment, etc., etc., did very well.
Investing in individual stocks may also allow you to spread your investments over a more diverse set of industries thereby offering greater diversification and potential returns.
At this time, we feel we have more control and better opportunity by buying individual trending stocks with all Risk Management options in place.
As an asset class, ETFs are the ‘new kids on the block’. We are enthusiastic buyers of both ETFs and individual stocks and feel very fortunate that both options are available to investors.
Many pundits on every business channel are saying to get ready to ‘buy on the dip’. We have a different point of view.
We believe waiting until those depressed stocks and ETFs start to trend upward before investing is the right move. In other words, ‘buy on the rebound’!
Here is the rub.
If you did not have trailing stop loss orders in place for the stocks and ETFs that you had in your portfolio so that they could be sold when the market started tanking, where is the cash coming from to ‘buy the dip’ or even the rebound???.
Because we always use every risk management tool at our disposal, especially trailing stop loss orders, stocks in our portfolio have been selling off when the stop price was reached and we moved to cash. In addition, a number of our stocks are still doing fine.
The moral of the story is: buy stocks, and ETFs, when they are trending.
Sell when the trend fades or the market takes a serious turn and go to cash. Get ready to go back in after the market has begun to come out of that dip, aka “buy on the rebound”!
With Trend Following, you never get in right at the beginning of a trend because you have to be sure the trend is established.
And you never get out ‘at the top’, but rather when the trend has faded and you sell or your stop is executed.
Trending Stops calculates a stop loss position based on that individual stock’s recent volatility.
Thereby allowing you the opportunity – to Ride Your Winners and Cut your Losses!
And, buy on the rebound!
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Want to know more about why we created Trending Stocks? Here you go.
