How to Spot Trouble Signs as the Index Turns
Index investing in ETFs doesn’t mean your portfolio can’t take a gut-shot dive, asserts Jackie Ann Patterson. Signs an index may be getting into trouble include narrowing breadth. She has more than 20 years of experience in the markets and has written several books.
World news and market commentary tend to dramatize current events. Why? Because as humans we’re attracted to stories, and a dramatic arc is the heart of story.
However, managing your investments with too much attention to the storyline–whether it’s the exhilarating heights, wretched lows, or ain’t-it-awful narrative – can result in buying into the highs and selling into the lows, which is a sure way to eat up your nest egg.
Investing in an Exchange Traded Fund (ETF) built on a stock index has become accepted as a way to drama-proof investing.
Index investing doesn’t mean your portfolio can’t take a gut-shot dive though. That’s the real test of confidence in passive investing, and sadly many individual’s emotions lead them to sell near the bottom.
It doesn’t have to be this way. We can watch our indices for signs of trouble and move to our funds to safety.
The key question is when. If we move out at every little dip, we run up transaction costs plus taxes, and often have to buy back higher. But we don’t want to wait so long that it feels like riding a plummeting comet.
Signs an index may be getting into trouble include narrowing breadth. There is a saying that a rising tide lifts all boats, and it is often the case that a strong rise early in a rally will enjoy broad support.