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By Ian Wyatt, NewsletterAdvisors.com |
FXY | Oct 22, 2008 |
In this week’s issue of Investment Expert Insights, we interview Tom Lydon, editor of ETFtrends.com, president of Global Trends Investments and author of iMoney: Profitable ETF Strategies for Every Investor, a book that guides investors through the benefits of exchange traded funds and provides useful advice on how to incorporate them into their portfolios.
1. What advice are you giving subscribers/clients to weather the current storm?
First of all, we have a very firm discipline when it comes to investing: we use the 200-day moving average as a guide. When an ETF is above it, we’re in. When it drops below, or 8% off the high, we’re out. As a result, we got out earlier this year and have been safely in money market funds as the market has fallen sharply.
We are advising our clients to stay calm and not make any rash decisions. We’ve told them that this, too, will pass and that we just need to stay on the sidelines until the storm passes. We are letting them know that their money is safe and we’re looking out for their best interests. It’s very difficult to remain rational and think clearly in times like these; the average investor can find that to be a challenge. We know that our clients are looking to us for some calm, and we strive to give them that. Most importantly, we won’t buy back into the market until there is evidence that the trend has once again turned positive.
2. Is your focus on safety or profits or both, and why?
Safety during downtrends; our trend-following plan is all about protecting the downside. When an ETF drops below its 200-day moving average or 8% off the high, we sell it. On the flip side, we get in when ETFs are above their long-term trendlines. Right now, there are very few areas showing positive trends, so our focus is squarely on protecting the money our clients have instead of chasing short-term trends and taking the risk of losing more. However, there will be buying opportunities along with the ability to capture a good percentage of the next bull market by following this plan.
3. What do you think it will take to inject confidence into the markets?
The credit markets need to become unstuck. As long as banks aren’t lending between themselves or to anyone else, consumers will continue to suffer. Once this happens, the wheels will begin to turn again — lenders will lend, consumers will buy, stocks will rise, and so on. Aside from the lending aspect, consumers will need to see their pocketbooks freed up. They’re just not going to spend if gas and oil cost as much as they do now, and if their grocery bills are as high.
4. Would you have voted for or against the last "rescue" bill, and why?
I understand the reason for the rescue. If it hadn’t been put into place, we might have seen some form of financial Armageddon. However, I’m concerned about the continued financial support from the government, which is really debt that we will be responsible for. I’d be more comfortable if there was a limit or cap put on financial help.
5. What would be your fix for the financial crisis, and is a fix in this sector necessary to boost the markets?
The financial sector needs greater regulation. There has been too much greed and too little record-keeping of strange derivative products that have allowed this crisis to spin out of control. For the public to truly trust the financial system again, they’re going to want to see this happen and believe that the government is taking the necessary steps to fix it. Those in the financial markets knew there was potential trouble and did nothing to mediate the issue. Protection needs to be put in place so this doesn’t happen again.
6. What three stocks would you buy today?
Based on our strategy, few ETFs would be worthy of our consideration at this point in time. Many funds are below their trend lines, some in the double digits. But there are some areas we’re currently finding attractive right now:
CurrencyShares Japanese Yen (FXY): The downturn has made investors risk-averse, and aside from gold and treasuries, they’re seeking out the yen as well. A low-yielding yen is considered a worldwide barometer for risk.
iShares Lehman 1-3 Year Treasury Bond (SHY): Treasuries are considered the next best thing to cash, since they’re backed by government debt. The risk of default is very low. However, yields right now are low because of the rush of investors seeking them out, so there won’t be much return. But for safety, treasuries can’t be beat.
PowerShares DB U.S. Dollar Bullish (UUP): The U.S. dollar, after months of declines, has recently been on a renewed surge. In an economic crisis, cheap currencies such as our own are left in a better position to recover, making them attractive now.
7. How does your advisory service help its subscribers/clients get through times like these?
First and foremost, we’re making sure that our clients are comfortable by keeping up regular communication, answering their questions and addressing their concerns. We’ve had a number of calls from concerned clients in the last several weeks, so we’ve spent time with everyone, and we’ve sent out regular emails and letters to let them know that their money is safe and that we’re sticking to our strategy. We’ve taken a very proactive approach that we believe our clients find soothing.
8. If you had the average investor standing in front of you, what would you say to him/her to ease concerns and raise confidence in the economy and markets?
I would tell that person to, first of all, remain rational. Don’t panic on the bad days, and don’t get overly excited by a big one- or two-day rally. If he has a buy-and-hold portfolio and is worried about the damage being done, I’d advise him to sell a third and wait out the markets. Otherwise, I’d tell him to just wait and watch. The trends will appear again, and soon it will be time to re-enter the market.
Since valuations are historically low right now, we’re using a 50-day moving average as a “buy” signal instead of our traditional 200-day moving average approach. When a fund crosses the 50-day mark, we’ll get back in incrementally, putting in 25% for each 5% increase until we’re fully invested. This allows investors to capitalize on an uptrend while still buying low.
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