Know What You Want

08/20/2008 12:00 am EST

Focus: ETFS

Jim Farrish

Founder and CIO, Jim's Notes

ETFs are a wonderful tool for building positions within your portfolio. They allow you the investor to gain control of their portfolio by determining both risk and alpha. I wrote a seminar more than five years ago titled, “It’s Your Money—Manage IT!”. This has been a theme and pet peeve of mine for more than 20 years. We all know the old adage that no one cares more about your money than you do. Then why do we not take control of our money and manage it? Simply put—it takes time and energy. So like most things in America we try to find short cut. Thus, we hire an investment advisor so if something goes wrong we can blame them. We subscribe to a newsletter so we can blame them. And the list goes on… When in reality if we would just learn the basics of investing we would be much better off. Those basics would assist in knowing if we need an advisor and how to communicate effectively with one. It would teach us to understand the risk of a newsletter service and whether it fits our personality for investing. I have come to the conclusion after 25 years of teaching investors the number one reason they don’t succeed financially: They don’t know what they want, which leads to not managing their money according to an objective.  

Defining what you want from your money is the first step to success. I know what you’re thinking—I want to make money, that’s nice, put it in a CD you will make money. Okay, you want to make as much money as possible! That’s even better, how much is as much as possible? Oh, by the way, I want to make as much as possible without any risk of principle and please keep the taxes to a minimum. Sounds great! I wish I could make this stuff up! Do you understand you have a conflict here? In your mind you want to make money without risk. That is impossible to do. This conflict is one of the reason investors hold their losers too long and sell their winners too soon. We have failed to deal with the conflict on our belief windows of our minds. If you have conflict in what you want, you will have a very difficult time achieving it. I commonly referred to as a self-sabotaging. Until you decide what you want from your money, moving forward is going to be hit and miss with your portfolio.

A current example of this type investing is all the comments on buying energy, i.e. oil. XLE, iShare DJ Oil and Gas Index, broke support on July 3rd starting the current short term downtrend in the energy sector. From 7/3/08 – 8/15/08 the drop is 16.7%. We are seeing some support currently near the $70 mark. So again I ask why are we trying to make this an opportunity? Emotions, plain and simple. With so many investors owning energy related stocks over the last five years it is hard to let it go. We want to think it is going to come back with a vengeance as it has so many times in the past. In time it is likely to bounce and make it back to the 200- or even the 50-day moving average. But, attempting to catch a falling knife isn’t the best trading strategy to employ.

The point here is don’t force a trade just because the sector was a previous leader. Let the trades you take work in your favor and the relative risk/reward be in your favor. This all starts with knowing what you want. If you define your goals and objectives finding investments to meet those objectives become much easier. Each week I will be looking at the various sectors and ETFs that you can match to your portfolio goals. Click here to read this week’s Sector Spotlight on retail.

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