The Smartest ETF Investors Don’t Predict

I’ve been fascinated by the number of pundits who feel compelled to tell others what the stock market(s) will do next. Many have been predicting the end of the world since the Dow sat below 8000. They’ve screamed "Chicken Little" at 10000, 11000, 12000 and now 13000… and missed extraordinary gains.

Similarly, there are perma-bulls who prognosticate and pontificate about Dow 15000 before year’s end. Maybe… maybe not. Nevertheless, it still reminds me of the infamously inaccurate bestseller, Dow 40000.

Over the last 4 years, the perma-bulls have been far more successful. And yet, there will come a day when the pessimistic, short-selling bear will "call it correctly."

(What’s the expression? "Even a broken clock is right 2x a day." Or the other catchphrase, "Even the sun shines on a dog’s arse sometimes.")

What I’d like smart and balanced ETF investors to know is… you do not need to predict. Nor should you! Instead, use a simple approach for determining when to have more exposure or less exposure to equities.

For example, a trend-tracker might use the ubiquitous 200-day moving average; that is, when the price of the Vanguard Total Stock Market Index (VTI) falls below its 200-day trendline, one might lower his/her exposure to the domestic stock market.

Vti_200 The chart shows that one does not need to predict anything; rather, one would have a higher allocation to stocks since August of 2006 and experience unrealized gains of 20% in 8 1/2 months.

If technical charts aren’t "your thing," then perhaps your decision to lower your stock exposure could be based on a simple measure of contrarian investing. Historically, the 60-day put/call index is close to record highs, meaning that too many investors still expect stocks to go to heck in a hand-basket. Until everyday investors start piling into stock assets again, as a 60-day put/call index hitting new lows would indicate, an objective contrarian investor would continue to maintain a healthy allocation to stock assets.

Even a simple fundamental approach on a heavy or light exposure to stocks is worthy of consideration. For instance, the average price-to-earnings ratio (P/E) over 50 years for the S&P 500 is 16 and the average P/E over 20-years is 19. Today’s SPDR S&P 500 Index fund (SPY) has a P/E of 15, suggesting that stocks are still a bargain. However, if the P/E were to move out of a well-defined comfort range, you might then "lighten up."

For me, I participate in what the markets have to offer until the markets themselves present enough evidence for lowering exposure to stock assets. I use economic, historical, fundamental, technical and contrarian info to make decisions.

That said, I don’t predict. Other than bragging rights, there’s little financial benefit to "calling a top" or "predicting a bottom." Let simple market measures be your guide.

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

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