ETF Expert

In May of 2008, Goldman Sachs' acclaimed oil analyst, Arjun Muti, predicted $200 per barrel oil by the end of the year. He made the prediction just around the time that oil topped out near $150. It ended the year near $45 per barrel.

(Note: I refrained from predicting where oil would go; nevertheless, in "What If The U.S. Dollar Strengthens" on 6/4/2008, I explained why oil could just as easily go to $75 per barrel as it might go higher.)

Blackrock, with its acquisition of Barclay's ETFs, is now the largest asset management firm in the world. This occurred in spite of Chief Investment Officer Bob Doll's bogus outlook for 2008. He forecasted that the U.S. would avoid a recession and that emerging markets would outperform developed markets in 2008.

We certainly didn't avoid a recession. Moreover, due to the global credit crisis, and the flight to the perceived safety of the yen and the U.S. dollar, Vanguard Emerging Markets (VWO) lost more than 50% whereas the S&P 500 SPDR Trust (SPY) lost 38% in 2008. (Those who predicted "decoupling" also failed.)

Do I even need to remind folks about Jim Cramer's "year of natural gas" assertion in 2008? Yikes! And you thought recommending Bear Stearns a week before it fell 90% in value was a bad call.

The point here isn't to punish the prognosticators. Nor should we be punishing ourselves had we listened to them. The point here is to recognize that we can learn from the foolishness of believing in a crystal ball.

The truth is… nobody knows what's going to happen. We gather information, we make informed decisions and… then you sit back to hope for the best? NO!!!

Risk is measured on the downside — risk being defined as the possibility of loss. So one must actively protect against excessive losses. I prefer the use of trailing stop-loss orders.

For example, let's say that you read a lot about natural gas. And let's say that you believe the commodity is undervalued. Perhaps you even agree with my assertion on 6/8/09 that natural gas, the commodity, should catch up with natural gas companies.

You make an informed decision to buy United States Natural Gas (UNG) on 6/8/09 at a price point of 14. Now you have to consider a trailing percentage stop price, so that you can lock in a large gain, a small gain or a small loss… anything but a large loss. (If you choose a 15% stop-loss, your original stop point would be 11.90.)

There are times when your investment may last for weeks, months or many years. Yet there's no such thing as a "hold-forever" position. Just ask the owners of "senior income funds."

Inevitably, someone asks, "So when do you get back in?" Who says you have to buy the exact same ETF? Maybe you will purchase something entirely different. You simply revisit the possibilities and make yet another informed decision, always recognizing that risk management requires eliminating large losses.

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "live" or via podcast or on your iPod at this link.

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.