Here's an example of how great minds think alike when it comes to ETF strategies: Elliott says to sell a stock once it drops 7% to 8% below your purchase price. We couldn't agree more. That's why we closely follow the 200-day moving average of all our ETFs. If an ETF falls below it, or if it drops 8% off its high without going below its 200-day average, it’s sold. Below is a chart of SPY for the past year. As you can see, last summer it fell below its long-term trend line. Thus if we had owned it, we would have sold it.
Update: We often discuss the importance of having an exit strategy when investing in exchange traded funds (ETFs). Recently, we wrote about a disciplined ETF strategy, using the 200-day moving average. After writing about this, a reader came back with a great question,
"What is the strategy to buy back a stock [ETF] once it dips below its 200-day moving average and was sold?"
By establishing an exit strategy and selling an ETF, this helps protect gains as it appears the trend is changing. When we sell something, we look at the cash generated as a "free agent." In other words, it is free to be used for any investment where a trend is developing, be it an asset class, global region or sector. If no areas show an up trend or momentum, we keep the money in a money market fund.
As you manage your own portfolio, you might feel a need to always have a set amount of money designated to a certain investment (i.e. small-cap, China or commodity). If this is the case, then the cash can be held until that certain investment goes above its 200-day moving average or gains 5% from its recent low.
Thanks for the questions!
