Don’t Let Emotions Ruin Your ETF Portfolio
Some investors have bad habits. Instead of chasing hot assets and betting on speculative plays, exchange traded fund investors should begin implementing a strategy to help provide a disciplined approach to long-term investing.
According to a recent DALBAR Inc. study, “Quantitative Analysis of Investor Behavior,” investors have lagged the funds they bought since 1984, writes Chuck Jaffe for MarketWatch.
The research firm calculates that the average equity fund investor only saw a 5.02% return over the past 20 years, whereas the S&P 500 returned 9.22%.
Investors would monitor a potentially up-and-coming asset and buy a fund after a period of strong returns. When the category begins to cool, investors then begin to look for the exit and then shift the money into another hot asset. In essence, most are buying high and selling low. [Value ETFs Take the Lead]
Investors have opted to sit out on the sidelines after a huge sell-off, missing out on the potential upside off the bottom, DALBAR found.
While investors can try to play the guessing game in an attempt to time market bottoms, investors can stick to a by-and-hold or systematic investing strategy where buy and sell executions are based on individual needs, not on short-term events.
“No matter how much people have been educated that past performance is no guarantee of future results, they want to buy what’s been hot and they expect it to stay that way,” Lou Harvey, DALBAR’s president, said in the article. “But even if you say it’s human nature to buy funds at the wrong time, you can still go off and buy good funds — ones where there is a higher probability of the future delivering good results like the past — and then getting the performance of those funds from the moment you buy them forward,”
At ETF Trends, we like to follow the trends to help guide us through our investments. For instance, we take the long-term, 200-day exponential moving average to help us determine when we are in or out of a position. If the ETF crosses over the 200-day EMA, it is a buy signal, and if the fund dips below its long-term trend, it may be time to let go. This simple trend following strategy limits primal fight-or-flight emotions that can seep into your investment decisions. [An ETF Trend-Following Plan for All Seasons]
For more information on investing, visit our ETF 101 category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
