Several readers have emailed recently as to the best way to get started investing in the ETF model portfolios featured on my blog. Peter’s comment is very typical of the ones I received. This is what he had to say:
I would like to invest using one of your model portfolios. 1. Can I start now? 2. What percentage of my investment should I start with?
First, the “can I start now?” question has a come up on various occasions. Apparently, there has been some confusion in readers assuming that all portfolios are on hold due to my “Action” column in the Sell Stop tracking matrix indicating “Hold”.
To be clear, this “Hold” simply refers to the status of the respective ETF when it comes to its sell stop and NOT to the portfolio itself. In other words, as long as the domestic Trend Tracking Indexes (TTIs) are in “Buy” mode, meaning above their respective trend lines, you can set up a new portfolio at any time.
Even though you know exactly what your downside risk will be, provided you use my recommended sell stop discipline, you still need to be comfortable in this present market environment to enter into a new position. If you don’t like the current slipping and sliding, simply wait before deploying new money.
That brings us to Peter’s second question “how much should I start with?” In trend tracking, the percentage of available funds to be deployed depends on your risk profile.
Let’s say, you decide to go in 100%, and the market declines immediately, after your investments have been allocated, stopping you out with an average loss of 8%. At this point, you are facing the worst reality in this scenario. Knowing this upfront, you might decide that this OK and part of the chance you took going in 100% this late in the market cycle.
Or, you can decide that you are not that aggressive but more moderate and only want to allocate 50%. Given the same scenario, you now know that your worst possible outcome has been reduced to a loss of some 4%.
If that still does not fit your risk profile, then enter with only 33% of available assets, which makes your worst scenario a loss of about 2.6%.
In my advisor practice, if I enter with less than 100%, then I will increase those holdings, if the market rallies and a gain of 5% is realized. That tells me upward momentum has been regained.
By looking at the worst possible outcome, as shown above, you can easily determine your sensitivity to risk and make your plans accordingly. To be clear, this is not a question of right or wrong, it’s simply a matter of how you as an individual feel about risk and the markets.
Feel free to comment below, if this topic strikes a hot button with you.