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A Sound ETF Strategy for Putting Your All-Cash Portfolio Back to Work


Practicing patience and discipline will pay off handsomely with the market at all-time highs.

Often times investors find themselves in unique positions where they have an all-cash portfolio and aren't sure how to put the money back to work. Maybe you have recently rolled over a 401(k), inherited a large sum of money, just fired your previous investment advisor, or pared back your stock exposure into this most recent strength. However, the prospect of buying back into all-time highs can be quite daunting. No one wants to be "that person" who top-ticked the high in stocks only to watch their investment account dwindle by 10% in the blink of an eye.

The risk of a correction in stocks is probably higher than it has been in years. The percentage of S&P 500 (INDEXSP:.INX) stocks above their 200-day moving averages is back above 90%, bullish sentiment is very healthy, and the major indices continue to hit new highs with unchecked abandon. You may feel like you are missing out on profit opportunities, but remember that following the crowd late in the game can often lead to an untimely misstep.

So how do you put money to work in the market without exposing your nest egg to the whims of the next correction?

First of all, you must be patient. The market will ebb and flow just like the tides, and by picking your entry spots carefully, you can enhance your chances of success. The last thing you want to do is capitulate and throw caution to the wind by committing a significant sum of capital at a cost basis that you may later regret.

You should bide your time by building a watch list of investment themes that you believe will help you reach your goals. I have long been a fan of low volatility and dividend-focused strategies that emphasize total return. Some of the top dividend ETFs on my watch list include:

PowerShares S&P 500 Low Volatility Portfolio (NYSEARCA:SPLV)

iShares High Dividend ETF (NYSEARCA:HDV)

First Trust NASDAQ Technology Dividend Index (NASDAQ:TDIV)

iShares US Preferred Stock ETF (NYSEARCA:PFF)

First Trust Multi-Asset Diversified Income Index (NASDAQ:MDIV)

Each of these funds gives you access to a diversified mix of dividend-paying stocks that provide excellent opportunities for both capital appreciation and income. However, entering these positions with new money should be an exercise in cautious optimism.

One strategy that I often employ when I am looking to enter a new position is to select the total allocation that you want for that security and then divide it into three parts. Start by entering one-third of the trade on a modest 3-5% pullback and then use time and price to your advantage to enter into the remaining two-thirds of the total position size. That way, if the price moves lower, you can average your cost basis down. On the flip side, if your first purchase ends up being your best, you still have the advantage of getting exposure to the sector and can ride it higher.

Another strategy to consider is to seek out areas of the market that have sold off significantly and present more optimal risk-to-reward characteristics at current levels. I recently wrote about the divergence between stocks and bonds, which focused on the fact that while stocks may be the winning trade for the next decade, bonds most likely represent a better short-term value right now.

Almost no one will be able to perfectly time and execute a trading strategy that picks tops and bottoms. Even the best technical traders get it wrong from time to time. However, with some patience and discipline, you can increase your odds of a winning trade.

Keep in mind that once you have the position established, you should implement a sell discipline to define your risk. By taking the emotion out of trading with a predetermined sell point, you will be able to side-step the brunt of any future protracted downtrends and avoid big losses.

Read more from David Fabian, Managing Partner at Fabian Capital Management:

5 Defensive Funds to Guard Your Nest Egg

Gold: Prior Support Becomes Level of Resistance

Getting Ready to Retire? Don't Leave Your Portfolio on Autopilot

Twitter: @fabiancapital
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