How You Can Maintain Your Capital in the Face of the Falling Market

As I write today’s Weekly ETF Report, the Dow Jones Industrial Average is down more than 450 points, or 2.8%, and it now has fallen forcefully below the 16,000 level. The selling in the Dow isn’t unique, as we’ve seen big declines in nearly every major domestic market index, as well as in virtually every major equity market around the world.

With everyone seemingly packing up and rushing to get out of equity positions, things are getting rather crowded at the exits.

I’ve written and spoken at length for years about why I love exchange-traded funds (ETFs). Two key reasons why are that ETFs are both simple to understand and easy to use. It is the ease of use aspect of ETFs that I really love, especially when everyone is racing for the crowded exits.

Because ETFs allow you to sell at any time, and with just a few clicks of your mouse, they are much more efficient in terms of allowing you to get out of positions before any real damage is done.

It was this ability to buy and sell ETFs intraday that actually began my love affair with these versatile investment vehicles some 15 years ago. You see, back in 1999 we were in a roaring bull market, a bull market that I knew wouldn’t last much longer. At that time, mutual funds were all the rage, and greedy investors were blinded to the fact that the market was way overdue to come back down to earth.

Buying mutual funds, especially tech-stock mutual funds, was indeed a way to get rich in the late 1990s. But when the bull stumbled, and when the bubble burst in techs, the crash arrived in fast-and-furious fashion. Of course, mutual fund managers, Wall Street pundits and others with the prevailing “buy-and-hold” bias told investors to “stay the course” and keep pumping money into their tech mutual funds.

Well, we know how that advice turned out.

The crash came, and investors were stuck with tech mutual funds that were worth half of what they were at the top of the market.

I suspect that if ETFs played as big a role back during the tech wreck of the 1990s as they do today, many people would have been able to sidestep the big losses. The reason why is because all you have to do to get to the exits with ETFs is click on that aforementioned sell button.

With mutual funds, you have to call someone either at the mutual fund company, or at your brokerage firm, and talk the issue over. Of course, the fund company representatives and/or your broker have a vested interest in keeping you in these funds, so they are going to try to persuade you that everything is going to be okay and that you should be in stocks for the long haul.

Well, sometimes you shouldn’t be in stocks. Sometimes — like right now — you should be out of equities and watching the damage from the safety of a high cash position.

Using ETFs makes that task a lot easier, as you can get out of a position in a matter of seconds. You also can get back into the best market sectors as soon as the coast is clear, with the same ease as you got out.

The bottom line here is there is no easier way to get out of, or get back into, a market than with exchange-traded funds — so why would you ever want to invest using anything else?

A Major Trend Break Everywhere

Since the beginning of October, there has been a decisive trend break in equity markets around the globe.

Stocks in the Dow now have plunged well below their 200-day moving average, and the Industrials now are in negative territory for the year. The same can be said of much broader market indices such as emerging markets, world stock markets and broad U.S. markets.

The following three charts — the Dow, the Vanguard Emerging Markets VIPERs (VWO) and the Vanguard Total World Stock ETF (VT) — show the major trend break everywhere around the world.

As you can see, there’s no place to run, and no place to hide, from the selling taking place across the board.

Fortunately, if you are a subscriber to my Successful ETF Investing newsletter, you received your Fabian Plan sell bulletin last Thursday. That’s when our Fabian Domestic Plan indicated that it was time to step aside and seek shelter in cash.

Since that sell signal, the S&P 500 has plunged more than 5% in less than four trading sessions. Based on today’s market action, there is no sign yet that the worst is over.

If you’d like to know how to protect your assets from current and future downside in the equity markets, then I urge you to check out Successful ETF Investing today.

Jefferson’s Menacing Prediction

“A private central bank issuing the public currency is a greater menace to the liberties of the people than a standing army.”

–Thomas Jefferson

The idea that central bank intervention in the economy could be a problem is nothing new. In fact, Thomas Jefferson was a big opponent of central banks and the role they play in a nation’s economy. In this quote, you see just how dangerous Jefferson considered the “menace” of a state-issued currency to our liberty.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Weekly ETF Report readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Ask Doug.

In case you missed it, I encourage you to read my e-letter column from last week about how the IMF’s growth forecast impacts investors like you. I also invite you to comment in the space provided below.