Diversifying…A Smart Move
In the cartoon above it jokes about being smart by diversifying. Diversification is very important when it comes to managing risk and your emotions around trading or investing.
There are many ways to diversify. You can buy various stocks and hope that a couple of superstars make up for the mediocre performance of some. Or you can buy a mutual fund like the masses and again hope for the best.
Since switching to Index ETF’s I have not looked back. The results I get in terms of ability to manage risk while not limiting my upside have dramatically improved since my switch to trading ETF’s over stocks. But not any old ETF’s. Index ETF’s that are naturally diversified and represent the market as a whole in terms of matching the performance of the S&P 500, the Nasdaq and the Dow Jones Industrials. Or in the case of my personal favourites, leveraged ETF’s that add even more juice to the upside.
The truth is, it’s very difficult to manage risks in stocks. It’s a lot easier to manage risk when you are trading the market as a whole in terms of a basket of securities. So, when one or two have a bad earnings report and sink like a stone, it doesn’t have a significant impact on the performance of the ETF as a whole.
For those that want to match the performance of the market, it pays to just buy an index fund or ETF like the SPY ETF, which tracks the performance of the S&P 500. By doing this alone you will outperform most money managers. Warren Buffet has being saying this for years to the common man, the little guy on the street. And more recently Tony Robbins in his book “Money Master the Game”.
Of course as a trader obsessed with finding tops and bottoms in the market it also pays to trade these instruments. Having just grabbed at another bottom with, in my opinion, a clear path to a new All-Time High, there is not safer, more relaxed way to trend trade than through the power of Index ETF’s. But then, I guess I am a little biased!
Market News:
U.S. stocks traded higher on Tuesday, relieved by signs of a coming resolution in the Greece-euro zone standoff.
The major indices traded in the black for the year, with the Nasdaq leading gains with a 1 percent year-to-date gain.
The Dow Jones Industrial Average recovered to trade more than 150 points higher after falling to single-digit gains on Tuesday morning reports that said the German Finance Minister would not agree to a new Greek debt program on Wednesday.
Jens Weidmann, head of Germany’s Bundesbank, held to an austerity line and told Reuters on Tuesday that Greece needed to make a credible effort to recover itself with tighter public finances and economic reforms.
Investors are watching closely for a possible Greek debt deal when the euro group of finance ministers meets in Brussels on Wednesday where Greece’s Finance Minister Yanis Varoufakis is expected to detail new reform proposals.
The Greek newspaper Ekathimerini reported late on Monday a preview from government officials for a proposal that would create a bridge program with creditors in September.
Futures touched session highs on speculation that the European Commission could be ready to table a compromise on Greece’s bailout program and propose a six-month extension to the country’s bailout which is due to end on February 28. The Athens stock exchange was trading up about 8 percent on Tuesday.
The German Finance Minister Wolfgang Schaeuble later said the speculation was “wrong,” Bloomberg reported.
Concerns over the Greek debt negotiations continue to weigh on market sentiment. Speaking from Washington, German Chancellor Angela Merkel said she was looking for a “viable recommendation” from Greece on Monday, after Prime Minister Alexis Tsipras reiterated his pledge to end Greece’s current bailout Sunday.
Greek concerns sent U.S. stocks lower to close in the red on Monday, despite oil settling higher. On Tuesday, stocks also broke a strict correlation to crude.
Crude oil futures settled down $2.84 at $50.02 a barrel on the New York Mercantile Exchange. Gold futures closed down $9.30, or about 0.50 percent, at $1,232.20 an ounce in Tuesday’s session.
Oil resumed its plunge on Tuesday as the International Energy Agency warned oil stocks could reach all-time highs this year. “Despite expectations of tightening balances by end-2015, downward market pressures may not have run their course just yet,” the IEA said in a monthly report.
Halliburton also confirmed Tuesday afternoon it would cut 6 to 8 percent of its workforce, citing the recent plunge in oil prices.
The National Federation of Independent Business reported that U.S. small business optimism fell 2.5 points to 97.9 in January amid worries over the near-term outlook, but a strengthening labor market should keep the economy on solid ground early in the year.
The decline reversed December’s gains, which had taken the index over the 100 threshold for the first time in eight years.
Wholesale Sales for December showed an increase in inventories by 0.1 percent, below expectations, and a decline in sales of 0.4 percent. The nearly flat figures are the latest suggestion, after the fourth-quarter greater-than-expected trade deficit, that fourth-quarter GDP could be revised lower.
Job openings in December rose above 5 million for the first time since January 2001, marginally higher than openings in November. The hiring rate improved to 3.5 percent, up from 3.3 percent in November.
The President of the Federal Reserve Bank of Richmond Jeffrey Lacker said Tuesday morning that June ‘looks like the attractive option’ for raising rates.
In an exclusive interview with the Financial Times on Tuesday, the President of the Federal Reserve Bank of San Francisco, John Williams, said rate hikes are “closer and closer.”
Both officials are voting members of the FOMC, with Lacker a hawk and Williams a moderate.
Wednesday:
Earnings: Mondelez Intl., PepsiCo, TimeWarner, Lorillard, Mosaic, Thomson Reuters, AOL, Generac, Baidu, Cisco Systems, MetLife, Applied Materials, CenturyLink, NetApp, Nvidia, Sun Life Financial, Tesla Motors, TripAdvisor, Whole Foods, Cheesecake Factory, FireEye, Panera Bread, Pilgrim’s Pride, Select Comfort
7:00 a.m.: Mortgage applications
8:00 a.m.: Fed’s Fischer speaks
10:30 a.m.: Oil inventories
1:00 p.m.: 10-year note auction
2:00 p.m.: Treasury budget
News Sources: CNN Money & CNBC