Selecting ETF Investments

At Pacific Park, we recognize the pros and cons of a wide variety of information sources. We take different types of data into account to increase the probability of a successful investing outcome.

For instance, in March of 2003, investor faith in stock assets had been decimated by three years of the ”dot-com tech bubble.” Not only had major benchmarks fallen in 2000, 2001 and 2002, but the White House had been preparing plans to invade Iraq.

We then turned our attention to a variety of data sources:

1. Historical. Stocks tend to bounce 10% at the start of U.S. military conflict — win, lose or draw.
2. Technical. Relative strength/momentum appeared in energy companies and aerospace/defense corporations.
3. Fundamental. Price-to-earnings ratios were “cheap” in both the energy sector and the defense industry.
4. Economic. The 2001-2002 recession had ended and significant employment gains were lowering the unemployment rate.
5. Contrarian. Survey after survey showed that most folks were scared to death of stocks.   

Where did this wealth of knowledge lead? It led to an interest in Select Sector Energy SPDR (XLE) and Fidelity Select Aerospace and Defense (FSDAX). Not so surprisingly, over the next 3 years, XLE rocketed 144% while FSDAX surged 128%.

Are any of the data types superior when deciding which ETF or fund to use? The answer is, “No.” There is fundamental analysis, which looks at things like corporate earnings, cash flow, revenue growth and “P/E ratios.” There is technical analysis, which looks at things like chart patterns, relative strength as well as trendlines.

There are contrarian indicators to assist investors identify when others are too fearful or too greedy, including the put-call ratio, bull-bear sentiment and CBOE Volatility Index (VIX). There are historical assessments of seasonal shifts, previous bear markets, panics and bubbles. And there is the study of economics, which investigates things such as tax rates, commodity demand, money supply, manufacturing growth, currency fluctuations and unemployment.

At Pacific Park, we consider the gamut of information types to increase the likelihood of your success. In the same vein, we understand that the only method for securing a successful outcome is to actively protect against the big loss.

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