Market Developments Are Scaring Some Investors

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What's going on?

Investors pulled out over $6 billion dollars from stock-based exchange traded funds (ETFs -- defined and explained in the next section) during August, when stock market performance was very weak (-6% for the S&P 500). It’s an example of how investors tend to sell stocks when they are performing badly - which is often a terrible time to sell!

What does this mean?

An ETF trades like a stock on an exchange but tracks an underlying index. For example, an investor could buy an ETF that tracks the performance of the S&P 500 instead of having to go out and buy all 500 stocks in that index. The idea being that you can invest in the “overall market” more easily rather than just buying individual stocks.

Why should I care?

  1. It is a lot more profitable to buy low and sell high than to do the opposite. Reactionary investors that sell when there is a lot of negative news and stocks are falling (or buy when the opposite is true) often underperform the market.
  2. It can be better to use a weak market to ‘rebalance’ your portfolio so that you own the same percentage amount of stocks (in terms of value) in your portfolio as before the sell-off. That would necessitate buying stocks, and since you would be buying during the sell-off rather than selling, your long-term returns would likely be better.
Originally posted as part of the Finimize daily email.

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