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ETF World: Restructuring an ailing retail investor’s portfolio

Written By | Jul 19, 2018
stock buybacks, Trump is wrong

Is Mr. Moneybags the only dude making money in the stock market these days? (Vintage cartoon by Thomas Nast, public domain image.)

WASHINGTON. We promised ourselves and our readers some time ago that we’d update our moves, successes and failures. Our ultimate aim is to gradually restructure our investment portfolios. The concept we decided to employ, at least experimentally, is what we’ll call ETF Perestroika. It all unfolds in today’s investment climate, an environment we might best define as ETF World.

Looking back, we experienced a memorably excellent 2017 in our portfolios. The positive performance was largely the result of two major changes.

  • The GOP tax cuts; and
  • The Trump administration’s relentless evisceration of burdensome and counterproductive business and middle-class regulations imposed by the Obama administration.

The results in 2017: An amazing bull run in most stocks, way beyond anticipation. We called it the “Trump Rally.”

Under the new regime, and even before it, Wall Street took off like a rocket. Its magnificent bull run continued into early 2018. At that point, it suddenly fell into a hostile briar patch market. Part of the may stem from the market’s predictable tendency to correct as one way to contain the market’s overconfidence.

But the correction worsened. This was due in part to the increasingly obvious, ongoing and relentless Deep State / MSM coup attempts against President Trump. Such activities commenced even before Trump won the 2016 election.

Pounded daily by Democrats and their media lackeys, the fake “Russia collusion” fable works against the stock market’s growing confidence.  Like water dripping on a rock, the sheer relentlessness of this negativity instilled doubts about the  Trump Rally’s sustainability. Investors and institutions began to draw back.

Even worse, investors began to experience heart palpitations when discussion those U.S. tariffs. Would this radical-seeming attempt to bludgeon the international trading community with their own preferred tool actually work?

The President’s admirable goal was (and is) quite simple. Trump wishes to lessen the absurdly unfair trade practices and anti-American tariffs that work against America. His tactics involve hitting offending countries with a bit of their own protectionist medicine. His tariff regime gives our trading partners a taste of the protectionist medicine they routinely impose on U.S. products. But the blunt-force trauma tariffs can cause to international trading could take things in a very wrong direction.

But at the moment at least, the jury’s out on that one. As Q2 numbers trickle in during the latest earnings season, corporate earnings appear to be as robust, if not more so, than they were in Q1. Inflation remains at bay despite new Fed Chair’s absurdly hawkish views on interest rate hikes. Leading economic indicators were up once again in June. And America’s middle-class seems to be on the grow again for the first time since the Great Recession and the 8-year anti-business moratorium imposed by the previous administration.

But Q3 and Q4 may tell a different tale. That’s because these quarters may more fully reflect the increasing bite of the President’s tariffs on certain economic sectors here, most notably agriculture.

As a consequence of all these imponderables – and investor anxiety heightened by hysterical coverage of politics and economics by a nearly 100 percent partisan Democrat MSM – the direction of stocks in 2018, while bullish thus far, has tended to get hit by out-of-control selling at random intervals. This leaves many investments high and dry – or at least moderately negative, frustrating small investors in particular, since all they really want is a little better return on their money for kids’ college expense, for a new home, or, perhaps, for a more carefree retirement in old age.

If you pick the wrong stocks, your portfolio suddently disappears down a black hole. Opinions and advice seem to turn on a dime in this environment. The frequent results:

  • Just days or even hours after you dump that dog stock that’s killing your portfolio, it rallies like there’s no tomorrow. And you’re left holding the bag.
  • Contrariwise, if you try to fight this market tendency by holding on to your big loser – which, of course, has continued to post great numbers as it declines – it simply continues its never-ending decline. Soon, you find yourself holding the bag. (And the losing stock.)

In a market driven by machines that trade on often fake or misleading headlines, the days when careful analysis by small investors could produce a string of real investment winners seems to have passed. At least for now.

Unfortunately, our own moribund portfolios provide the perfect example of this market’s cynical mood. We’ve been range bound in 2018. Yes, this is largely because of the miserable performance of our oversized holding in the hapless drug giant Allergan (symbol: AGN). Our modest – but currently underwater – position in Chinese Internet giant Alibaba (BABA) isn’t helping either. The current U.S. / China tariff battle beats these share up nearly every day.

But our other individual stock picks – save, ironically, for a few preferred stocks that should be sinking due to the Fed’s Neanderthal interest rate policies – have almost universally been dogs.

Seeing this earlier in the year, we began to ramp up and more fully implement a change of direction in the way we invest. With great reluctance, we began a slow shift of our portfolios’ contents from individual stocks to a series of representative ETFs. We’ve at last become part of ETF World.

Welcome to ETF World

Increased volatility and high-frequency and supercomputer trading driven by headline risk currently blunts clear thinking. Individual investors’ ability to pick stock market winners clouds over. ETFs generally consist of a basket of stocks that represent broad-based stock indexes or narrower sector indexes. To track these indexes as accurately as possible, various ETFs must rebalance their portfolios every day to track their underlying indexes as closely as possible.

Given the sheer volume of ETFs trading today, this has increasingly meant that all stocks within a given index are tending to make the same relative moves. This has a tendency to render smaller stocks actually more volatile than natural. It also distorts the value and trading patterns of much larger company stocks. The entire universe of stocks now seems a mere subset of ETF World.

In turn, in at least a general way, in the new ecosystem of ETF World, ETFs – and broad-based index ETFs in particular – have become more stable than investing in individual stocks. The denizens of ETF World now dominate the market. In sheer volume, some ETFs may indeed dictate the entire trading scene.

These and other reasons made us finally start moving the bulk of our portfolios into ETFs (exchange-traded funds) and similar investments. Yes, we’ve chosen to stop fighting ETF World and join it instead. In our next column, we’ll explore this decision in greater detail.

Next: Our new rationale = Buying ETFs while cutting down on individual stocks to lessen risk and headline volatility.


Headline illustration: (Vintage cartoon of Mr. Moneybags by Thomas Nast. Public domain image.)


Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17