The stock market turbulence of the last year has not cut down shares evenly—many of the hot tech startups and IPOs have been hammered, while energy sector companies have increased in value in many cases. What can investors do to protect against the uneven returns in the market?
The best strategy continues to be holding a large amount of one’s stock investments in passive index fund ETFs like VOO (reflecting the performance of the S&P 500) and QQQM (tracks the NASDAQ 100 index). A portfolio consisting of these shares would be down considerably right now over the last six months, but the downside risk is limited to overall market risk rather than to the sector and specific risks that individual companies are vulnerable to.
For example, an investment in Tesla (TSLA) shares made six months ago would be down a little more than 30%, while the QQQM has fallen a little more than 20% and the VOO is down around 10%. Chasing the high returns that stocks like Tesla had in the heat of the bull market during times like this can be risky.
Aside from the VOO and QQQM, notable index-based ETFs include IWM for the Russell 2000 and the MDY for the S&P Mid-Cap 400. A basket with these four ETFs could make up a strong, stable core of a portfolio. Chasing higher returns with other interesting stocks is worthwhile, but only to the extent that you can stand to hold on to most or all of those shares during down times—the ETFs add a stability that makes that easier to do.
Disclosure: Through personal holdings that I control and through investment LLCs in which I am a partner, I buy, hold, and sell stocks, bonds, ETFs, options, and cryptocurrencies, not limited to but including some of those discussed in this newsletter.