Recently, Charles Kirk of the popular portal KirkReport.com interviewed me about a variety of ETF investing trends. Kirk was particularly interested in how a money manager reduce risks in his/her portfolio and whether or not “do-it-yourselfers” could employ similar strategies.
In essence, the answer is “absolutely”. However, you must put aside what you think you know about diversification and asset allocation… at least for the moment. Instead, you need to develop a better understanding of investment outcomes.
There are only 4 things that can happen in any investment – a big gain, a small gain, a small loss and a big loss. Three of them are good. In fact, the only unacceptable outcome is the “big loss.”
A conscientious steward of money refuses to let that happen. He/she can ensure a big gain, small gain or small loss through a variety of techniques -- stop-limit loss orders, put options, Inverse ETFs, or even the pairing of non-correlating assets.
Unfortunately, far too many folks are still stuck in “buy-n-hold-n-hope” mode. Moreover, they’re getting lazy guidance from financial institutions, journalists and advisers who benefit from money staying in one place. Yet irrational markets require rational risk management, not merely a “long-term time horizon.”
For those who began working in the 80s and who remember the 1987 crash – for those who studied the 30s and the 70s -- buy-n-hold-n-hope is/was entirely unacceptable. While indexing controls investment costs, exchange-traded index funds, or ETFs, give risk managers an ability to limit portfolio loss.
In a nutshell, that’s how I became a huge advocate for ETFs in the 90s. ETFs give you the tradability to reap the rewards of low-cost diversification via indexing. What’s more, they’re the vehicles that I used to limit risks associated with the dot-com blow-up of 2000-2002 and the credit collapse of 2008.
My crystal ball may tell me that investors/traders want the markets to succeed in 2011, and they will likely buy the dips of 2011 pullbacks. But good money managers don’t play around with the risk of a big loss.
Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.