Corrections and Sell-Offs and Bears, Oh My!

Nobody… anywhere… can predict the future of the markets. If a person accurately forecasts a big market drop one time, he/she’s likely to have erroneously screamed that “the roof was caving in” 4 other times. And vice versa with regard to the market going to Dow 40,000!

Nevertheless, you can successfully protect yourself from unnecessary market risk. The two best ways to do this involve: (a) Considering down market performance of your investment when you buy, and (b) Selecting stop-loss points for all ETF choices on when you would sell. For example, The S&P Utilities Sector Index (XLU) fared far better over the last week than the market as a whole and tends to do better in market downturns.

With regard to stop-losses, I set stops on all ETF investments that I purchase for clients. For conservative investments, like the Australian dollar ETF (FXA) or iShares 1-3 year Lehmann Bond Index (SHY), I am inclined to use a 5% trailing stop. For moderate equity positions in the domestic markets, like the S&P 500 Index (SPY) or the S&P Technology Sector Index (XLK), I use a 7% trailing stop. Yet, once you start looking at.

Asia, international and emerging markets… especially emerging markets… you have entered a riskier arena. You’ll need to allow 10% off the high reached from the date of your purchase as a method for protecting principal and locking in gains.

Disclosure statement: Some of Pacific Park’s investment clients may hold positions in any of the investments mentioned above.

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