By Sam Evans, Co-Founder & CEO

I am well known for my activity in day trading. For the better part of 10 years, this style of speculation has always been best for me. However, that does not mean that I neglect the longer-term movements in the markets. That’s why I’m here to talk ETFs.

Personally, I believe that everyone with an interest in the markets should consider trying all styles of trading and investing. At StockAbility, we feel that finding the style that is right for you, will lead to a better chance of success in the long run. We should all have controlled exposure in both long and short-term market movements if we follow a plan and manage our risk along the way.

Longer duration investments can end up being just as profitable as day trading and in some cases, even more so. The results you see really come down to the strategy, plan and rules you use. However, most investors limit their potential by making two common mistakes. First off, they Buy and Hold only, with little management. Secondly, they use the wrong assets and allocation to build their portfolio. Buying and holding for long durations can work very well but only if you are holding the right things and they are working in your favor!

Most financial advisors are trained to offer their clients a “cookie cut” selection of investments, which are geared more to generating commissions for them, rather than their clients. Mutual funds have for many years been the tool of choice for the average investor, promising steady performance (when the market goes up only), diversity and peace of mind. Or so they say.

Personally, I see little benefit in being invested in a vehicle like a mutual fund which only makes money when the market goes up, has higher fees attached to it and does not allow me to place risk control measures on it. Top that off with the fact that you can only buy or sell it at the market closing price each day. Hardly very efficient. Then there is the way we are told to diversify our portfolio. Walk into any well know investment advisor office and tell them you want to build a diversified portfolio. Their solution is to build an asset allocation portfolio like this:

At first glance this seems like a solid model, with some diversity in a few areas. However, upon deeper investigation we can see several issues:

  1. Four of the areas we are invested in are stock based. This is great when the markets are up but will enhance losses when the market goes down.
  2. A large chunk is based in bonds, which usually have an inverse relationship to stocks. Typically, this means when you stocks are rising, you will be losing on your bond assets, thus sacrificing overall profits.
  3. Real Estate Investment Trusts are a great way to invest in bricks and mortar, without the physical ownership and the higher entry costs. The issue is that real estate usually suffers when stocks enter longer term sell offs.
  4. There is no real way to benefit from the above model when the markets enter a bearish phase or sell off.

Anyone concerned by what we have just discussed should investigate the world of Exchange Traded Funds (ETFs). Unlike Mutual Funds, ETFs trade on the stock exchange during regular market hours. They are highly liquid, with millions of shares typically traded every day. You can buy and sell them when you like and use protective stop-loss orders and timed entries. Plus, they have exceptionally low fees, (sometimes just a commission charge depending on the duration of the trade) and we can use options on them to enhance safety and returns, with the added bonus of wide diversification too. There is a huge range of markets that have their own ETF products with just some of the areas including:

  1. Indexes
  2. Sectors
  3. Fixed Income (Bonds)
  4. Commodities
  5. International and Regional Markets
  6. Dividend Based
  7. Performance Based
  8. Real Estate
  9. Niche Based (Food, Gaming, Health etc.)
  10. Short Sale Based

Are you feeling the ability to get some real diversity in your portfolio yet? Would it not make more sense to build your longer-term portfolio out with a wider level of diversity based on actual market performance?

Our lead coach Ryan Watkins holds weekly “Wealth Wednesdays” in our ongoing Guided Trade Sessions. These live and interactive sessions are built for the active investor who wants to take control of their portfolio by using month-to-month asset allocation, based upon what the market is telling us, not a financial advisor. When assets in the portfolio are showing good profits, then we lock in those gains along the way. Then when they sell-off, we roll the profits into another vehicle which is primed to rally. Why hold bonds and stocks at the same time when one is losing money? To us, a sample portfolio using ETFs may look like this at any given time:

From our perspective, it is all about adapting to the environment. In our WealthAbilities course, this will be regularly rebalanced. Typically, for an active investor monthly and the more passive investor, quarterly. There may be a better opportunity for us to buy into short-term ETF like the Ultrapro Short QQQ Proshares during a mini-market correction and profit as the markets fall. This profit can then be rolled into a deep value sector which is primed to rally when the market takes its next leg up.

It is simply about switching money into the asset that is showing the best value at that time and protecting our gains in a sensible fashion. We believe that nobody cares about your money more than you. With the right knowledge and skill, you can also make the choices on your portfolio that are best for you as well. I hope this was helpful.

Be well,

-Sam Evans