Discipline Key to Investing Success

12/06/2011 3:17 pm EST

Focus: STRATEGIES

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

Successful Investing’s Doug Fabian thinks individual investors must have discipline when it comes to the amount they are willing to allocate to stocks.

Let’s talk about the role of discipline and how important it is in a volatile market environment, like we’ve seen.

Well, it’s very important for investors, from a disciplined standpoint, to look at one simple statistic in their portfolio: their allocation to stocks. The volatility has been in the stock market…so what’s your overall allocation to stocks?

Recently, our newsletter gave a sell signal on equities, and so we advised investors to lower their equity exposure significantly. Now, I think this comes into play for individual investors, because most times people don’t have a sense as to when they would take the risk off the table.

The breaking of the 200-day moving average was what caused us to generate this sell signal. We have this methodology going back 34 years, and it’s served us well.

On the day that I gave the sell signal, I didn’t feel good about it. I didn’t want to sell, but I honored the discipline that my dad originally developed. Now looking back in hindsight, the market was significantly lower, so we feel pretty good, and feel in control to be able to buy back in the market when we get new opportunities.

With a profit.

Right.

Because, I mean, the sell off was dramatic. Where are you looking for value?

Well, I believe first we have to kind of figure out the economic winds. I’m a little concerned, obviously, with Europe, and then the contentious political environment that we’re in in Washington.

I want to see some of those things settle down. We’ll see that in the next couple of months.

Do you think?

But I think that the stock market is actually going to force some fiscal discipline into Washington, because it reflects the social mood of Americans, and they’re not feeling good.

So, I think in and around S&P 1,000 is where there is excellent value in the market. I’m not sure we’ll get that low, but that’s where I see excellent value, and if we get down to 1,050, I would be looking to start to add equity exposure in an environment like that.

Interesting that you say that the market is going to force some sort of reason in Washington, because I think I heard a statistic that this recent market sell-off has taken more money out of an individual’s pockets than a tax increase or spending cuts would have. That’s an interesting figure to look at.

It certainly is. Certainly, you have the general loss in wealth. Most people are passive with their 401(k)s, so they just look at their 401(k) accounts going down. They’re really not active investors with that money.

No one was really asking for, you know, revenue enhancement like next month. They could have put that into a ten-year plan and come up with something where we didn’t have the downgrade, and we would not be in this contentious market right now, I believe, if they would have done that.

So, I think that maybe this will force them to come to the table on both the revenue and the expense side, because I think both have to be there to come up with a deal.

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