Jim Morrison of The Doors sang, “This is the end, my only friend the end.”
Indeed, for investors predicting the market, finding the end can not only be a friend, but a profitable one at that. When a trend ends, it usually does so sharply. Whether on the upside or the downside, reversals tend to be dramatic. But knowing this can propel your portfolio higher and higher.
We have been witness to one of the greatest financial collapses since the great depression. The decimation in the banking and finance sector has been dramatic to say the least.
Those that got fat on profitable securitization of subprime mortgages paid the piper in a very big way. The massive write-downs of assets destroyed equity values of most companies in the sector.
The biggest shoe to drop was the dramatic fall of Bear Stearns (BSC). Too big to fail, resulted in a Federal Reserve bailout that changed the rules of the market.
Was it also a sign of a bottom? In hindsight, the answer appears to be yes.
Our own Tim Middleton, in his ETF Insider, took a position in the group via the Vanguard Financials ETF(VFH). This 5% allocation to his model portfolio is a risky bet indeed as many are predicting more downside in this volatile and unstable group.
And that is exactly the point.
The most money can be made in the immediate aftermath of a crisis. In this case, we have seen the worst crisis in decades followed by the near collapse of a venerable institution. Fear is at a peak.
Contrarians live for such conditions. Predicting against the flow and taking risk when others are risk-averse typically results in substantial outperformance.
If you have the stomach and profile to take such risk, now may be the perfect time to establish a position in the financial space. Dip your toe in the water. Go ahead. The water may feel a bit cool, but eventually it will warm. There is a good reason they call them clichés. The description here is very applicable!
Ultimately, the financial sector will recover just as your body does indeed adjust to cool water. You might shiver a bit during the acclimation process, but eventually you forget that it was ever cold to begin with.
That is how it works with stocks. Invest when the water is cold, and eventually higher prices make you forget the shivers and all that goes with it.
It may not work out that way during this particular crisis, but I think the odds are in our favor. The great thing about establishing a position with exchange traded funds is that we don’t have to pick one or two stocks.
If this is indeed the end, financial stocks and that 5% position in VFH may be just the ticket to higher returns. It seems like a Rational risk to me.
When you join Tim Middleton’s ETF Insider, you’ll put America’s leading ETF expert to work for you! Tim Middleton keeps it simple: what, why, where and how much. Find out which ETFs are set to launch and which ones are ready to implode with your RISK-FREE trial subscription to the ETF Insider today! You simply can’t afford to miss out!
