Is Parking Your $$ in a Mutual Fund the Right Strategy Today?

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While Mutual Funds may Work, There is a Better Alternative

One alternative worth serious consideration is "ETF's" Unlike mutual funds, it is easy to get in and out of Exchanged Traded Funds (ETF's). You can build your own diversified portfolio and enter and exit whenever you want. Swing Trading and Scalping may seem like risky strategies to the uniformed, but they are exactly the opposite.

Most active portfolio managers follow a value based investing program and I am all for that, but if you find yourself  “later in life” and don’t have the patience it takes to rebuild a portfolio wiped out by one or more market collapses, consider trading ETF's. 

Rebuild Your Portfolio yet Avoid the Market Crash

If your ultimate goal is to build your portfolio over time and you have the time to actively monitor the market, swing trading and scalping offer a very good alternative to active day trading and just riding the waves with the ups and downs of the market. I’ve never been one to simply “ride the waves” and prefer to have an active role in how my money is allocated and managed.

Trading in Exchange Traded Funds allow you to diversify and trade at the same time. It is a great vehicle for building wealth while protecting your downside risk.

Ideally, you want a strategy where your principle is never at risk and over the years, too many have learned the hard way that when a market collapses, it always does it “overnight.” The reality is markets usually signal their imminent collapse well in advance and the smart money moves to higher ground while the rest of us pour our money in hoping its not too late to cash in on the latest “bull market.”

If I could, I would NEVER leave my money in the stock market overnight. Unfortunately, there are times when I guess wrong and have to decide to either take my loss at the end of the day or “let it ride” for a few days. Even when I do “let it ride,” however, I ALWAYS place a stop order to hopefully limit my downside risk when the market collapses.

Mutual Funds a Default Conservative Strategy

Nearly every Financial Adviser in the world advises clients seeking to protect their nest egg and allow for conservative growth recommends putting a large percentage of their money into mutual funds.

They like it because it ties up your money, they don’t have to do anything except maybe “rebalance” it once a year and the institution they represent gets free use of your money all the while it is locked up in their coffers.

Good for them!  Bad for you!

Blindly Trusting Your Mutual Fund Manager NOT a Good Strategy

In a totally contrarian mood as I write this, I say tying your money up in Mutual Funds is NOT a good strategy. Although you can move the funds around and pretend that you are “managing your money,” you are in essence locked into someone else’s strategy and fund managers are historically lousy at trying to beat the market.

A recent Washington Post article says,  “ordinary investors  . . . aren’t doing any better than the stock market overall. In fact, research shows that the number of active mutual funds outperforming the market on a consistent basis isn’t just low, it’s zero.”

So if Fund Managers can’t even match the market as a whole, why would you want to give them your money?  Others advise putting your money into “Index Funds.” That’s like saying, we can’t beat the market, so let’s just ride the waves – up and DOWN!

Unfortunately, “ordinary investors” are nearly always sitting in the boat at the bottom of a huge swell and our boat capsizes when the water starts pouring in. So what is an ordinary investor to do? Is there any way to take advantage of the diversification that mutual funds provide but minimize the risk of being “all in” when the market tanks as it surely will do. Every market, no longer how long it runs, eventually collapse and the smart money is long gone before it happens.

Consider Trading ETF’s as a Viable Alternative

To be sure, there are plenty of times when simply parking your money in mutual funds is the right strategy and those investors who got back into this market early have done very well if they chose the right funds.

It may be time, however, to consider grabbing the gains and be “on the sidelines” when the market collapses.

Dry money in your hands is far better than wet money in someone else’s! Lock in your gains and live to fight another day by actively trading ETF’s.

Swing Trading and “Scalping” ETF’s

Here’s how it works. As always, do your research and decide what industries, sectors, regions or whatever you want to invest your hard money into. Now, rather than just putting the money into the fund, itself, open a trading account with the option to trade ETF’s and simply buy the ETF in the same way you would buy an individual stock.

Let’s say you have decided to put a portion of your portfolio into blue chips and you like the idea of a fund choosing which ones. Google “blue chip ETF’s” and you will find several lists of  suggested ETF’s.  Check the charts for the ETF’s on the target list, choose your entry point, put in the order and wait for it to fill.

Once it fills, expect it to go down for a little while (they always do!) and put it in a stop limit to reduce your potential loss. I usually put mine at least 15% below my buy price and am willing to take the loss on a GTC (Good til Cancelled) basis. If you picked correctly and it moves up, you decide what gain you want and sell it. 

In many cases, you can “scalp” decent gains with these quick “in and out” trades and you limit your downside risk for when the market collapses.

It’s not really all that complicated, but you are investing in a group of stocks rather than a single stock. Voila! The benefits of a mutual fund without the risk!

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