If you own overpriced, do-nothing mutual funds, then ETFs are definitely a smarter way to invest.
But the product you invest in is just half the battle in achieving good results for your portfolio. You also need a proper blueprint for mixing stocks, bonds and maybe cash, and you need the discipline to stick to your plan as the markets rise and fall. The latest stats on ETF asset flows suggests some people are having trouble with the discipline part of the equation.
As you may recall, December was a rotten month for stocks. The S&P/TSX composite index fell 5.4 per cent on total return basis, which means changes in share price plus dividends. If ETF investors were truly smart, they would have added new money to their holdings as stocks plunged. Instead, they kind of panicked.
Stats from ETFGI.com show there was a net $28-million net outflow of money from ETFs that hold stocks in January, 2019, compared with net inflows of $761-million 12 months earlier. We could fall back on investing clichés to highlight the mistake made by people selling equity ETFs in December – buy low, sell high; be greedy when others are fearful; the time of greatest pessimism is the best time to buy. A better way to make the point about fleeing markets after a nasty decline is to simply look at what happened in the stock market in January.
The S&P/TSX composite index surged by 8.7 per cent during the month on a total return basis, and February has been solid so far. From today’s vantage point, the stock-market decline last fall turned out to be a buying opportunity. If you bailed out, you lost out.
The stock market could well plunge again sometime soon as a result of global trade tensions, weakening economic growth or something we haven’t yet considered. But the quick market turnaround this year still offers a lesson. Smart investors don’t exit the market when stocks fall – they use the opportunity to add to their holdings at reduced prices.
You can automate the process of buying low by using dollar-cost averaging, which means regular purchases of funds on a monthly or quarterly basis. Or you can use a strategy of adding money to your funds on days when the market is down sharply, say 1 per cent to 2 per cent or more. No one expects you to enjoy a down market, but you can turn it to your advantage.