There's an appeal to simplicity. The idea of trading or owning nothing but index funds or index ETFs. It might be why Vanguard, outside of the SPDR S&P 500 ETF (SPY) , continues to dominate the mutual fund and ETF landscape in assets under management (AUM). And that's just equities, which continue to bulge at the seams from all the money pumped in over the past few months from investors.
Most traders, at least in the spoken word, refuse to acknowledge their participation with an index on a large scale. Sure, there's the braggart who scalps the SPY (and probably lets you know about every tick on Twitter), but for the most part, traders I know stick with stocks, or at least that's what they say, because who wants to be average?
Of course, there is nothing wrong with being average. Average can get you a lot of places, and given how many investors and funds trail behind their comparable index year after year, index-type returns like the SPY are anything but average. Boring might be a better word, but not average.
One driver behind index investing and trading is diversification. A large basket of stocks in one fell swoop eliminates a major risk in trading and investing: single stock risk. On the other hand, this risk is also what makes single stocks so appealing. Rarely, if ever, are you going to see a 20% single upside investing in the SPY.
Nor are you likely to see a move like Acacia Communication's (ACIA) tripling in price from the end of July to the start of September. The stock took barely two months to run from $40 to $120. Then again, it took even less time to go from $120 to $60. Single stock risk. Up a few hundred percent or down 50%. It was all based on short-term timing.
The challenge with this incoming administration is going to be an expansion of single-stock risk, specifically in the large-cap space. This applies to both longs and shorts. Trump has specifically targeted individual companies with recent tweets. Boeing (BA) and Ford (F) were two early victims and today he's ranting about Obamacare. While not an individual stock, it is a very focused group of names.
I've been accustomed to the occasional earnings warnings, but for the most part, large-cap names move more like freight trains than rockets, those saved for the smaller names or biotech names. Unfortunately, if we are going to see more and more POTUS tweets aimed at specific stocks, it is likely going to be large-cap names/conglomerates.
Trader radar is going to have to shift to high alert and constant monitoring in terms of political policy. Admittedly, this isn't a huge strength for me, which has me leaning toward more index trading and investing for the first half of 2017.
Yes, I said it out loud. Yes, I still think one can succeed investing and trading with these equities. And yes, it will likely be a bit more boring, but I'll take boring in terms of trading to start the year, because I think the markets will be anything but, and that's going to be stressful enough on its own.