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Will this “Spider” bite me if I hold it?

|Includes: EFA, SPDR S&P 500 Trust ETF (SPY)
Last week I began increasing risk by lowering it…. What does that mean?! As an investment advisor one of the most challenging strategies to implement is selling. That goes for all investors but since I’m paid to do this on behalf of clients, I take it all the more serious. As an RIA (Registered Investment Advisor), I also have a fiduciary duty to make decisions only in the best interest of my client and not every professional in the finance industry can say that while looking you in the eye.
Selling an investment is so much harder than buying one. Even the most pessimistic person can be shown the upside of a potential investment and see some possibility of an intangible promise being delivered. Most of us go into an investment with the hopes of it increasing in value. Historically, markets go up and they go down, but over time the trend has always been up. With this in mind, the old adage of buy and hold is seared in most investor’s heads. What I find to be more common though, is the buy and forget mentality and it’s with that thought that I share my riskiest move with you.
Last week, I began lightening up on the S&P 500 by selling “Spiders” (NYSEARCA:SPY). Per the tea leaves that I read, and from a technical perspective, the markets could be getting a bit frothy, thus a pullback is likely. Selling SPY for each and every client across the board does not mean that I’m all out of Large Cap as an asset class but rather I’m lightening up on an easily exchanged instrument, the ETF (exchange traded fund).
Isn’t the idea to “buy low and sell high”? This is the oldest adage in investing but how many folks consistently implement this or even have a program in place to do it for them? (few that I’ve ever met) The risk, however, is that the market continues to run-up. The SPY closed up fractionally today and finished at $117.01. We also finished with the Dow at 11,020 and EFA trading at $56.68. Speaking of EFA (MSCI EAFE Index), that also is getting quite close to a level where I may want to capture some recent profits. In sum, I’ve been saying this for over a year now….we are in a range bound market. If you opened your statements in January, then went on vacation and completely checked out for 12 months…. I believe when you opened your year-end statements in December they wouldn’t look all that much different. Yet for those of us who fired up the boob tube every night, read the daily fish wrap, and dutifully opened each monthly brokerage statement, it was a heck of a bumpy year. I’ll write more on this topic with further specificity as I implement additional moves, but the bottom line is that if you’re not making adjustments based on shifting markets…you’re falling prey to a song we’ve all heard too many times before…

Disclosure: Long EFA