Building Your ‘Doom And Gloom’ Portfolio With ETFs

What exchange traded fund (ETF) investors and Wall Street analysts have suspected for awhile is officially confirmed: the United States is in a recession, and it’s been going on for one year. The question now is, where does an investor go from here?

Aaron Siegel for Investment News reports that the National Bureau of Economic Research Inc. confirmed that, numbers and indicators aside, we are in a recession. The classic indicator of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).

NBER, however, defines a recession as a “significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income and other indicators.”

The economy lost 240,000 jobs in October, as the unemployment rate rose to 6.5%, a 14-year high. A total loss of jobs in November is expected at 325,000. Declines are sharp in industrial production, manufacturing and retail sales - all classic recessionary signs.

It could be too soon for ETF investors to get back into the market at the moment, as volatility remains and most funds are sharply below their long-term trend lines. However, it is never too soon to start evaluating your investment plan and having a solid strategy set in place for the time when the opportunity presents itself.

The types of problems looming within the market besides the obvious recession, market volatility and housing fallout include much more serious loopholes like hyper-inflation. A strategy that includes foreign currency, gold, oil and food, plus country-specific stocks and bonds may be worth considering.

Those investors who are in cash right now may have some opportunity to make “safe money” in the markets with ETFs, however, there must be a plan or strategy in place should the market go further south.

1) Although there’s been a decline, it’s never too late to have an exit strategy. If you follow this, you’re not bailing entirely on your portfolio, you’re just taking steps to protect yourself in case the market continues lower:

• Sell one-third of your invested equity positions now.
• If the remaining two-thirds decline 5%, sell another third.

2) We’ve seen big moves in some areas - watch the 50-day moving average, as some areas have gotten close - at least until Monday’s big losses. But eventually, the markets will turn and investors will want to be ready to get back in. Don’t miss out on those opportunities when they present themselves.

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Comment by Donald W.

2008-12-03 19:46:52

Mr. Lydon,
It is always nice for the government to confirm these types of things.

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Comment by Bill M.

2008-12-11 15:01:27

Like always, the government is always late. How long has everyone been saying we were in a recession?

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