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The ETFs to Buy in an Uncertain Market (And When Has It Been Otherwise?)


A bad event in a stock can make the stock immediately go down. ETFs can be volatile, but less so.

The stock market's advance has confounded pundits, investors, and observers, and brought a smile to those who are invested, and consternation to those who have pulled out or are waiting to get in. Many investors have been waiting to get into the market for some time. The market has climbed a wall of worry for years now, and gloom and doom commentators, many of whom were right in the past, keep forecasting a collapse. This might happen, the bears might eventually be right, but the risk of being on the sidelines has been costly, and the more the market moves into new high territory, the greater is the anxiety for those on the sidelines. Markets move to their own rhythms, and are impossible to talk down.

There were many who were better buyers than sellers in the dark days around the time of the Lehman Brothers collapse, including myself. I remember one of the times I was asked my opinion back then. I got a call from a long-time client who had been vacillating about staying in the market, fretting that the market would keep going down and she would lose her money. She told me to sell her out, which I did, and I told myself, "This is the market bottom." I had thought the market had bottomed before, but I was even more sure of it now. Not that I was smarter than anyone else, since there is no lack of smart people on the Street. I simply felt that people had to eat, that they had to find a way to make a living and, from the worker levels of CEOs to carpenters and laborers, people would adjust, work hard, and find a way to function and grow.

This is the American way, to work in a system that is relatively free, that is vibrant, and that is people-based, that is, people make the difference. Add to that that there is no economy to match the US, what with its global companies, many of them leaders in their field. This made it hard back then to be a seller of stocks, many of which had dropped to ridiculously low valuations.

If an investor had hung on back then, he would have his money back. The market is back around the old highs, judged by the S&P 500 Index (INDEXSP:.INX). It is true that we have real problems today, and it is always thus, but the benefits of our economic system are still there, people still have to eat, and equities are reasonably priced. Finding the equity classes that will outperform is harder now. Nevertheless, in spite of what we hear from the doomsayers, betting on America and the global economy makes sense if you can take the risk, especially when one of the few options is bonds, which are historically yielding very little.

This should be a good decade for stocks. In my book Investing with ETF Strategies (FT Press, 2012) I reviewed how stocks outperformed bonds in all 10-year periods since 1960 except for the 2000-2009 period. In that decade the performance is inverted and bonds outperformed stocks. A stock investor would have about broken even, and a bond investor would have made about 7.5% on average per year. In the last 100 years there have been short periods when bonds outperformed stocks, but over longer periods stocks have outperformed.

Almost every investment beat stocks over the last 10 years. Treasury bonds, silver, gold, platinum, oil, junk bonds – even the 10-year Treasury bill had a better return than the stock market. Investments have cycles and underperforming asset classes do not underperform indefinitely. Usually when people have given up on an asset class that is when the assets are selling the cheapest. History suggests it's time for the stock market to outperform.
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Positions in DEM and QQQ.
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