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New investment kid

In these troubled financial times we, the ones trying to protect our retirement futures, all hear the same advice from those who either hold our investments or offer investment advice. "Stay the course, the market will turn up again and you'll be left behind when it does." This is the "Buy and Hold" nonsense that wants you to stand by while you go broke.


In these troubled financial times we, the ones trying to protect our retirement futures, all hear the same advice from those who either hold our investments or offer investment advice. "Stay the course, the market will turn up again and you'll be left behind when it does." This is the "Buy and Hold" nonsense that wants you to stand by while you go broke.

In previous downturns I've done that and learned my lesson. The lesson is this. When your investments continue to ratchet downward, set a loss goal beyond which selling out to lower but safer earnings is the way to go. In my case for my mutual funds I used exponential moving averages (EMA) of 30 and 100 days for warning signs. If the price moved below the 30-day, it was cause for concern. If the 30-day EMA crossed the 100-day and the price was approaching the 100-day line, I'd sell and transfer all to a cash fund, especially if the losses exceeded my limit usually 5 to 7 percent -- on the theory that I'd rather be making 5 percent in a cash fund than losing 10 percent in the market. (Big Charts.com will provide all the tools for moving averages and all kinds of technical analysis like MACD, RSI, Stochastics, etc.)

That was in the "old" investment days prior to this current calamity. Now, what does one invest in? Yes, there are the cash funds, but the interest is only 2 to 3 percent and, of course, not insured by the FDIC. The government, until April 18, 2009, will insure against share values going below the standard $1 per share, but only for those dollars in the cash funds on September 19, 2008. The 2 to 3 percent is still better than losing, however. Appreciating mutual funds are practically non-existent, and treasury bonds are safe but kick off even smaller interests. Regular stocks are very volatile and everything is in a downturn. But . . .

Cheer up; there is a new kid on the block. Who is it? More precisely, what is it? They've been on the market about five years. These are a new kind of mutual fund that trade like stocks and are called Exchange Traded Funds (ETFs). They usually have very low expense ratios and no front or back-end loads. Just standard brokerage fees.  

They are attractive in this down market because you can make money by betting on any sector of the market going down and since they are mutual funds you don't have to have a margin account. Look in the Wall Street Journal for them. My current favors are DTO or DDP for crude oil and DEE or AGA in commodities.

Some of these are explosive (err, volatile), but if 200 percent in three months (DTO) is too exciting, tone it down to say, 60 percent/mo. with DDP. These all bet on a down market in the sector to which they apply. DTO, for instance, appreciates at double the effects of their market. There are others that trade at normal and triple the market sector.

Make no mistake; these are not for the "Buy and Hold" mentality. They (depending on your risk tolerance) are to be tended like tender spring shoots; buy a little at a time (dollar cost averaging) if they are going with you but be prepared to jump ship if you start to miss your loss targets.

Potter lives in Waitsfield.
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