It’s an interesting paradox that nearly five years into this bull market, fear of declines continues to be a top concern for most investors. Consider the following:
A Gallup poll conducted for Wells Fargo found that respondents were more worried about another crisis occurring during their retirement than they were about running out of money or working in retirement. (What We Learned From the Financial Crisis, WSJ, September 13, 2013)
I guess that is not all that surprising considering the psychological (and financial) damage inflicted on so many during the last two bear markets. At Dorsey Wright, risk management is a way of life. The long list of risk management tools that we provide includes Dynamic Asset Level Investing, the bullish percents, trend analysis, technical attributes, and many more.
Specifically as it relates to providing risk management to exposure to our four momentum ETFs, we recently introduced the Global Technical Leaders portfolio which allocates to our four ETFs (PDP, PIE, PIZ, and DWAS) and to cash, if cash is stronger from a relative strength perspective. The response that that model has been overwhelmingly positive.
Today, we wanted to introduce another idea for risk management that includes the PowerShares S&P 500 Downside Hedge Portfolio (PHDG). The description of PHDG is as follows:
The PowerShares S&P 500® Downside Hedged Portfolio (the Fund) is an actively managed exchange-traded fund (ETF) that seeks to achieve positive total returns in rising or falling markets that are not directly correlated to broad equity or fixed-income market returns. The Fund seeks to achieve its investment objective by using a quantitative, rules-based strategy designed to provide returns that correspond to the performance of the S&P 500® Dynamic VEQTOR Index (the Index). The Index provides investors with broad equity market exposure with an implied volatility hedge by dynamically allocating between equity, volatility and cash. The index allows investors to receive exposure to the equity and volatility of the S&P 500 Index in a dynamic framework.
Richard Ranck, Regional VP of PowerShares, and I recently did a webinar that presented some ideas for allocating to our momentum ETFs and PHDG. Click here to access that webinar.
I think Robert Wibbelsman had it right when he said:
The problem with the person who thinks he’s a long-term investor and impervious to short-term gyrations is that the emotion of fear and pain will eventually make him sell badly.
With no game plan for risk management, investors are setting themselves up to “sell badly.” However, with a reasonable game plan for risk management, advisors will significantly increase the odds that their clients will stay with them for the long-term and will minimize many of the negative consequences than can happen when investors sell in a panic.
**This article orginally appeared on the systematicrelativestrength.com blog.