ETF Expert

How many times, in one form or another, have you heard someone utter the following:

This is the time when the patient long-term investor is able to get many of the most incredible investment opportunities ever. And 5 to 10 years from now, we will all look back at October/November 2008 as the benchmark for when exceptionally profitable investment decisions should have been made.

Do I agree? Heck yes, I agree. That said, I recall many of the same utterances shortly after 9/11… when the market opened roughly a week later on 9/17/01. The Nasdaq 100 proxy, QQQQ, traded at 30.5, down nearly 10% at the close of market on 9/17 of that year.

So if you employed the patient long-term investor thinking and bought at the low point of 9/17/01, where are you at today… 7 years later? The PowerShares QQQQ currently trade at 28.5., a cumulative 7-year return of -6.5%.

Granted, this may not be the fairest comparison. I have cherry-picked part of the 2000-2002 bear and included all of the 2008 bear.

Yet here's a point that no one can dispute. Had you bought the quad-Qs at 30.5 at that time, you would have witnessed your investment drop another -36% to 19.5 before the bear concluded in October 2002. That's quite a bit of loss, while waiting for the inevitable turnaround.

The turnaround did come, of course. One was made a whole by July 2003. And one can claim a 65% unrealized gain by October 2007. However, not many investors locked in the unrealized Nasdaq 100 gains; most have lost it all. It follows that we frequently here about the opportunity to get in at unbeatable values, but we don't here about getting out at unsustainable peaks.

So why then do I agree with the unbeatable value scenario described in italics above? For one thing, the bear of 2000-2002 was a stock market bubble. When it was over, stocks went from overvalued to fairly valued in 2002. In 2008, we've seen a fallout effect from the global financial crisis that has pushed nearly all assets into the toilet, creating stock and bond market values that haven't been seen in 30 years.

Secondly, unlike those who are screaming about the incredible opportunities, my agreement comes with preconditions. I use stop-losses on positions, in case the fit continues hitting the shan. In addition, I don't buy-n-hold; that is, I am willing to sell for a big gain, small gain, or small loss… in an effort to avoid the only thing that hurts long-term success… big losses.

Big portfolio losses are those that require 5-7 years to recover. If you are down 15%-20% in the current bear, that's a true accomplishment. (Tough to swallow, but accurate.) Historically, those losses can be recovered in 6-9 months from a bear bottom. But if you let your portfolio sink 40%-45% alongside the S&P 500, you need a 70%-75% gain to break even. In other words, it will likely require 5-7 years to recoup.

With preconditions duly noted, here are the opportunities that I believe all investors need to begin putting on their wish list:

1. iShares S&P Preferred Index Fund (PFF). Paulson recently put a lump of coal in this stocking. While it is clearly better to shore up the banks by taking a preferred share equity stake via the TARP bailout program, the abandonment of buying bad debt has caused many to reevaluate financial company risk. But simply stated, the Fed, the Treasury and the world are working round the clock to make sure that the banking system survives. Buying preferred shares of the world's largest banks, like the U.S. government and Warren Buffett have been doing, makes PFF and its 10%+ yield about as attractive as it gets for Joe Q. Public. 

2. iShares Investment Grade Bond (LQD).  No matter how gruesome the economy, no matter how troublesome the financial strain, the idea that an index of the most highly rated corporations will all fail to pay their bondholders is silly. Throughout the 2002-2007 bull market, as interest rates climbed, the value of LQD dipped ever so slightly… from 110 to 100 in that time-frame. Practically, over night in the peak of the credit crisis in October, LQD dropped to 80. It has settled in the 90 range, but it is clearly 10% below where it ought to be at 100, with a 6% yield to boot. I would hardly be surprised by a 15% gain between appreciation and yield over the next 12 months for LQD.

3. iShares Japan (EWJ). I referred to Japan's prospect before. But rather than write up my case for Japan yet again, I strongly advise reviewing my feature, "Why Japan May Make My Christmas Wish List."

If you'd like to hear more about the ETFs I am avoiding and the ETFs I am recommending, you can tune inanytime to the podcast version of my radio show, "In the Money With Gary Gordon" on 1700 AM San Diego.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc.web site.