Boring and Stable Are OK

 | Mar 27, 2013 | 12:30 PM EDT  | Comments
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Stock quotes in this article:

dgs

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ivv

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spy

I always get a laugh out of so-called pundits who, after a market run-up of any length, profoundly declare: "A pullback is inevitable!"

Ya think? Wow, what an insightful observation.

Yes, markets move cyclically. There are rallies, and then there are retreats. Check some index charts going back for several decades. That's what you'll find. I promise.

But implicit in the dire warnings about predictable market behaviors is a recommendation to panic and DO SOMETHING! Yes, I guess I seem extra snarky today, but I'm a little tired of calls to churn accounts because of worries about how stocks may perform at some future date.

About six weeks ago, I got a call from a new client who had previously worked with a broker, rather than an RIA. He was in the habit of paying somebody to trade stocks for him (rather than strategically growing his account), so naturally, he was tuned in to the media chatter about the dire consequences of an imminent market top. He called to ask if it was time to sell some of the index ETFs in his current portfolio. 

Remember: This was in early February when the S&P 500 and other indices were rallying to multi-year highs. I think we all know what has happened since then.

But pundits needed to chatter about something in TV interviews, and an ever-popular question is, "Where do you think markets are headed?" So retail investors get worried when the discussion turns to the pullback that inevitably follows a rally. (Of course, the opposite side of that conversation also stokes worry: Investors don't want to be the only ones who miss out on the absolute moment when markets turn from correction mode back into rally mode!)

Over the past 60 years, adjusting for inflation, S&P total return has averaged 6.56% on an annualized basis. Unfortunately for those whose memories of the market go back to 2008, 2000 or even 1987, it's too easy to get spooked by pullbacks or even the prediction of a pullback. That's just how our minds work. According to the loss aversion theory, explored by psychologists Daniel Kahneman and Amos Tversky, we humans tend to be more concerned about preventing losses rather than accumulating gains.

Of course, risk management is a key component of a proper investment strategy, but that also includes managing upside risk. As I noted in my article earlier this week, we continue to see upside potential for major indices, while acknowledging the inevitability of a pullback (aka "buying opportunity") at some point in the not-so-distant future.

Toward that end, I continue to like fairly boring ETFs, pegged to plain-vanilla ETFs indices, as a way to get exposure to market gains, as well as a way to capitalize on pullbacks, when stocks go on sale.

I wrote about the WisdomTree Emerging Market Small Cap Fund (DGS) a few days ago. Today, I want to point out the most basic of the basic, when it comes to asset classes: Domestic large caps. We see S&P 500 earnings growing 8% to 10% in 2013, so ETFs such as the iShares S&P 500 Fund (IVV) or SPDR S&P 500 ETF Trust (SPY) are perfect ways to gain exposure to this potential.

Yes, boring, but nice and liquid, and also inexpensive.

Later this week, I will elaborate on some other areas in which I see opportunity for investors, but the point I'm making today is: Boring and stable are OK. It's not necessary to jump in and out of investments, and certainly not wise to try and predict what you think might happen soon, and begin making trades on that basis.

Yes, a pullback is coming, but that's an accurate statement during any market rally. Sometimes, in a steep correction or market meltdown (a la 2008), it does make sense to sell. But trying to predict those events? Good luck with that.

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