ETF Expert

“Even the heavens rain on a dog’s arse some days.” — Anonymous

Are there going to be bear markets? Of course there are, and we’ve seen some doozies. The last decade gave us two wealth-destructing stock bears — the infamous 2000-2002 dot-com disaster as well as the 2008 credit collapse. In fact, another bear could happen sooner than most folks think.

Yet I question the doom-n-gloom nature of “perma-bears.” In the perma-bear’s universe, the apocalypse for stocks is an immediate threat… always.

Perma-bears may have appeared heroic in 1987, 1990, 2000-02 and/or 2008. However, they missed 15%+ compounded for 20 years throughout the 80s and 90s. (Note: $50,000 invested in 1980 may have been $820,000 on New Year’s Eve, 1999, without contributions. Yet the perma-bear wasn’t wrong… just early?!?!?)

The 2000s may have been a painful “lost decade” for buy-n-hold bulls. However, it wasn’t any more lucrative for a buy-n-hold bear. One might wish to recognize that simple trend-following would have helped you avoid the bulk of the 2000-2002 and 2008 bear markets, while letting you participate in the 2003-2007 and 2009-2010 bull markets.

In other words, a buy-n-hold bull will get killed if he/she rides out bear markets. At the same time, heeding the perma-bear’s ever-present condemnations is equally disadvantageous.

Indeed, the permanent stock bear always has an ultra-negative angle. Today, he (Martin Weiss) might focus on the U.S. bond “bubble” that is destined to bring down the U.S. economy and its stocks. Today, he (Marc Faber) might speak of Dubai being the tip of the sovereign debt default iceberg.

Keep in mind, there were completely different angles from the SAME doom-n-gloomers that did nothing for wealth building from 11/1987-3/2000. But don’t expect CNBC to call these folks to the carpet!

Has anyone ever noticed how uninspiring the performance of perma-bear investors has been? Consider David Tice’s widely recognized Prudent Bear Fund (BEARX). It only began in September 1996, where most of its performance had the unique opportunity to benefit from the ”lost decade.”

Since inception, BEARX offered a total return of 5% whereas Vanguard 500 (VFINX) returned 100%+. Remember, we’re talking about the 2000-2002 bear and the 2008 collapse… and you still have extreme out-performance by the S&P 500.

Those who have read my columns over the years knows that I regard buy-n-hold as exceptionally dangerous. I sell when I need to sell… I protect when I need to protect my clients’ interests. By the same token, I’ve never seen a perma-bear consistently make money over time.

Instead, your ETF investing attack might contain two lists… one for growth and one for income. First, put together a list of exchange-traded vehicles that provide cash flow such that, if the investment’s price went nowhere for 10 years, you’d still be pleased with the income component. Previously, I’ve suggested investments such as SPDR Capital Convertible (CWB), JP Chase Alerian MLP Index Note (AMJ), and SPDR Select Utilities (XLU).

Then compile a list of growth-oriented ETFs.  For example, if you want emerging market exposure to Asia sans Japan, perhaps you would incorporate iShares All Asia excl Japan (AAXJ). Or if you want to target value stocks in the U.S. mid-cap space, maybe you’d look to the iShares Russell MidCap Value (IWS).

It is your intention to keep a growth-oriented ETF for as long as that holding remains above a 200-Day trendline… a popular strategy for knowing when to exit a position. Other folks prefer using stop-loss protection, or even a combination of both approaches.

However you choose to protect against a sharper bear market loss, you now have raised your cash levels. You may then choose to leave higher cash levels until the same or another growth-oriented ETF climbs above a 200-day trendline, or reaches a stop-gain. In contrast, you could also choose to dollar-cost average into the income ETFs mentioned above, effectively lowering your true entry point for those choices.

One thing is for certain… you’ll make some mistakes. Yet if you focus on keeping losses small, and ignoring the siren’s call of a perma-bear or perma-bull, you’ll be better positioned to thrive in any market environment.

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