We were reading an article on Yahoo Finance and happened to read the comment section. In there was a comment by a person who said they had been in cash for two years but WHEN the S&P hit 1500, they were going to finally invest and already had their investments picked out. TWO YEARS IN CASH!!! WHAT????
We then responded to it (we know we shouldn’t, it just makes us crazy) by saying: “What are you waiting for? You missed two years of returns! A little active management (buy low and sell high a couple times a year) would go a long ways to increasing a portfolio’s rate of return.” We received a number of responses basically saying “Yeah, how do you KNOW what the low or the high is? Who are you? Buffett? Why aren’t you on TV?”
So that got us thinking “Is the common investor THAT clueless about investing that they can’t figure out a ‘buy low, sell high’ pattern?” We don’t mean knowing the EXACT low or the EXACT high but how about if you were close and you avoided most of the roller coaster of volatility of the market?
Obviously using an index is better and less risky than using an individual stock. Why? Individual stocks are subject to number of types of risk such as commodity price risk, headline risk, rating risk, obsolescence risk, systematic (or market) risk and unsystematic risk.
A fund gets diversification, lessening much of the risks mentioned above. And you would want to the ability to trade quickly.
In short, if you are going to trade professionally, why not use a professional equity? In the same way that NASCAR or Formula 1 driver uses a vehicle that goes a whole lot faster than your standard sedan, why shouldn’t you use a “vehicle” that goes faster than an ordinary mutual fund as well?
Exchange Traded Funds (ETFs), while diversified like mutual funds, trade like stocks, giving the investor more liquidity as well as the ability to quickly respond to market conditions.
This enables the investor to use that volatility as a tool in their investment portfolio to achieve significant rates of return on a weekly, monthly and annual basis.
The ETF strategy then is successive and repetitive “buy low and sell high” trades. The intent is to hold every ETF position as short a time as possible to derive a pre-set profit (1 to 7%) per trade depending on the number of shares purchased.
It works. And you need never be in cash for two years ever again.