ETF/No Load Fund Investing: Do You Need Investment Insurance?

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You very likely have insurance for your most prized possessions such as life, health, car, property and a host of others. While you may not like paying the ever increasing premiums, you realize that you couldn’t do without it nor would you take that chance.

I was reminded of that, when I reviewed a portfolio with a client, a physician who is busy running his medical practice and not all that interested in day to day investment details. As we went over the sell stop discipline along with the trend tracking method, he said: “All we’re really doing is insuring ourselves against catastrophic loss in our portfolios.

He is right, although I never thought of it in those terms. In essence, when you have a methodical plan to get in and out of your investments, you simply try to insure yourself against too much risk to the downside. Those who did not do that, paid dearly during the last bear market.

We pay our premium from time to time in form of a whip-saw signal that may get us out of the market unscathed and soon thereafter back in as the downside risk has been reduced. Such was the case back in August (8/16/07) when a Sell signal moved us out of our international positions. Three weeks later (9/5/07), the trend reversed, and we moved back in.

These types of whip-saw signals can provide us with an opportunity to re-evaluate the various available fund/ETF choices and make adjustments by moving to a better performer. That was definitely the case in September when our then primary fund choice (WASYX) provided us with a superior return.

Whip-saws are a part of investing when following trends. If you look at them as insurance against portfolio disaster to the downside, you may be able to better accept them as a necessary evil.

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