Reading tea leaves or other people’s minds has never been one of my strong suits. But the writing is on the wall: Investors return to boost stock market ETF rally. Retail investors have returned in large numbers extending the stock market ETF rally. USA Today has reported that more retail investors are returning to the stock market removing money from their mattresses to invest in riskier stock assets both in the US and globally.
How long can this last? Who knows for sure but there is an old adage in stock trading circles: Don’t fight the tape. And like any other adage there is a seemingly polar opposite; one that says that when retail investors take a shine to something then it’s probably a good idea to take cover.
Despite fears of slowdowns in Europe, the financial debt crises that have rolled through the PIIGS (Portugal, Italy, Ireland, Greece and Spain), the Fiscal Cliff and Sequestration (kicked down the road) here in the US, a stubbornly high unemployment rate domestically and a slow down in China, stock investors are voting with their dollars despite concerns.
Maybe it’s just like Groundhog Day but in this case investors have seen their shadows and think that there is an economic thaw coming early this year. Or maybe retail investors have just finally capitulated to the pressure of a low-yield world and are tired of getting a measly 0.0% (after inflation and taxes) on savings. Just like cabin fever eventually folks yearn for some fun in the sun and sometimes delude themselves into what hopefully becomes a self-fulfilling positive cycle.
While there certainly are a host of threats to already weak economies here and abroad, I fundamentally believe that there are still (and always will be) opportunities for investors. The key is how to invest, where to invest and knowing “when to fold ’em” as Kenny Rogers would sing in his song.
Unfortunately, most investors tend to run from one end of the fear-greed spectrum to the other with all too predictable consequences.
I think that the keys to successful, long-term positive results lies in having a plan. This takes the emotion out of investing. You know what to buy and sell based on some predetermined goals (i.e. price goes up X% or price crosses a 200-day moving average). You need to invest globally to really reduce your risk. You need to also consider alternative assets that aren’t prone to move with the whipsaw action of some stocks – so consider alternatives like private loans, tax liens or business investments, Master Limited Partnerships, real estate and managed futures.
As much as I am a long-term bull on the market, there certainly are risks. And investing shouldn’t be like gambling. It should be about risk management. That’s the point of diversification. And one other effective tool to help mitigate the potential risk of a sudden “run for the exits” is to hedge a portfolio. While calls and options can be used, other good tools here include stop-losses for individual stocks or Exchange Traded Funds (ETFs) as well as ETFs that track movements in the Volatility Index (“VIX”). Putting all of these tools to work may help reduce the downside draft of any market especially one that may be fueled by revived retail investor enthusiasm.
For more on these trends, I recommend checking out “Stock ETFs Rally As Investors Return to Risky Assets” by Tom Lydon at ETF Trends (www.ETFTrends.com).