Four Keys To Investing Success In
Today's Volatile Markets
By Leland B Hevner
In over a decade of teaching personal
investing I have never seen the market so fraught with both promise
and danger. And I have never seen individual investors at such a
loss on what to do.
A market that falls 50% and then rises
50% in the span of a little more than a year is uncharted territory
and unfortunately the investing public is not prepared to handle
volatility like this. In these unique times, it has become apparent
that many conventional investing methods no longer work,
buy-and-hold being one of them. A new, more proactive approach to
personal investing is needed.
What problems do we need to solve?
First, the world of personal investing today is too complex and
confusing. We are overwhelmed by the sheer volume of information and
the number of investing choices. Second, we are forced into a risky
buy and hold strategy because we don’t know when or how to adjust
our portfolios on our own. Third, many of us don’t have a lot of
time to devote to the investing process. And finally, because of
these barriers we simply let financial advisers take charge of our
financial security. This is not acceptable. You must regain control.
The first step toward this goal is to
open an account with an online broker. This enables you to change
your portfolio at any time from the comfort of your home and gives
you the tools needed to implement the four keys to a better
Key 1. Use ETFs. We must reduce
the complexity of the investing world without sacrificing returns
potential. Fortunately an investing vehicle called an Exchange
Traded Fund (ETF) enables us to do so. ETFs hold baskets of stocks
or bonds just like a mutual fund but can be traded like stocks. An
ETF exists for just about any market index. So, for example, you can
buy the entire stock market using SPY, an ETF that holds all of the
stocks in the S&P 500. You can own the entire bond market with AGG
or invest in gold using GLD. Using only ETFs you can build an
efficient portfolio by buying one ETF for each of a diverse set of
markets. I suggest considering these markets: Total U.S. Stock,
Total Foreign Stock, Total Bond, Gold, Energy, Agriculture
Commodities, Real Estate and Emerging Markets. With one ETF for each
you will have only eight investments in your portfolio and they need
never change! No more sorting through thousands of stocks, bonds and
funds. The world of investing just got a lot simpler.
Key 2. Use Charts. Working with
only eight investments you can focus on when to buy and sell. For
each of the ETFs you consider, bring up its price chart using your
online broker’s tools and look at the price trend. You can detect
the trend by simply “eyeballing” the chart or by using a simple
moving average line. For example, if the price line is above the 50
day moving average line then the intermediate trend is positive. I
also like to check if money is flowing into the ETF or out. A simple
indicator called On Balance Volume tells you this at a glance. When
you initially set up your portfolio only include only ETFs currently
in a price uptrend.
Key 3. Use Trailing Stop Orders.
After buying an ETF you need to control the risk of owning it. This
is easily done using an order type called a Trailing Stop. Here’s
how it works. Let’s say you want to buy SPY at the current price of
$100. You would place a market order to buy at $100 and at the same
time set a trailing stop of, say, $8 (you can also use a % stop
loss). Now, if the price drops to $92, without first going up, the
system automatically sells your position at $92. But if the price
rises to $110, the trailing stop moves up with it to $102,
maintaining the specified $8 drop. Yet if from $110 SPY’s price
moves down to $106, the trailing stop stays at $102. This is the
beauty of a trailing stop; it goes up but never down. In this manner
it limits losses and lets profits run. To determine where to place a
trailing stop look at the ETF’s price chart. Choose a stop loss
amount that is outside the range of normal daily volatility.
Key 4. Use Automated Alerts.
Virtually all online brokers offer an automated alerts capability
that sends you an email when certain conditions are met. Use alerts
for two purposes. The first is to take profits. Using our example
from above, if you buy SPY at $100 you may decide to consider taking
profits if it gains 8%. You can set an alert at $108 and when SPY
hits this price you will get an email. This will prompt you to look
again at the chart to see if the price trend is still positive. If
not, sell and take your profits. If so, you may leave all, or a
portion, of your position in place and simply increase the alert
price. The second use of alerts is for ETFs that you did not
initially put in the portfolio because they were not in a price
uptrend. You can place these in a “watch list”, offered by virtually
all online brokers, where they are automatically monitored. For each
ETF you can be alerted when its price starts to move up. A simple
alert condition would be “send me an email when the price line
crosses above the 50-day moving average”. This will prompt you to
look at the price chart and decide if now the ETF is a “buy”.
This new approach accomplishes our
goals. We reduced the complexity of the investing world by working
with only 8 specific ETFs. We made the purchase decision easy by
looking at trends on simple price charts. We limited the risk of
each purchase without sacrificing profit potential by using trailing
stops. And we don’t spend a lot of time monitoring the portfolio
after initial set up as we only need to pay attention when we get an
Now you have the tools and approach to
take advantage of rising markets while avoiding downdrafts. You are
empowered to regain control of your portfolio.
Leland Hevner is a leading figure in
the world of personal investing education and has been for more than
10 years. He teaches personal investing classes at the college level
and has written 12 investor education publications. He is the
founder and president the National Association of Online Investors (NAOI).
A noted media source, Hevner also provides consulting services to
financial organizations around the world. He is the author of The
Perfect Portfolio: A Revolutionary Approach to Personal Investing.
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