Importantly, as prices decline it will trigger margin calls which will induce more indiscriminate selling. The forced redemption cycle will cause catastrophic spreads between the current bid and ask pricing for ETF’s. As investors are forced to dump positions to meet margin calls, the lack of buyers will form a vacuum causing rapid price declines which leave investors helpless on the sidelines watching years of capital appreciation vanish in moments.
If you don’t believe…just go look at what happened on September 15th, 2008.
It happened then.
It will happen again.
But I get it. The markets seem to be in an “unstoppable” bull market. This time certainly “seems different” with ongoing Central Bank interventions. Besides, with interest rates so low, “there is no alternative” for investors to put money.
Therefore, why not fire your advisor, buy a low cost index and just ride the market? Because, things like “Robo-advisors” and “ETF herding” are symptomatic of a lengthy bull market advance where the pain of previous losses has finally been erased.
Client’s don’t pay a fee to chase markets. They pay a fee to employ an investment discipline, trading rules, portfolio hedges and management practices that have been proven to reduce the probability a serious and irreparable impairment to their hard earned savings.
Unfortunately, the rules are REALLY hard to follow. If they were easy, then everyone would be wealthy from investing. They aren’t because investing without a discipline and a strategy tends to have horrid consequences.
What’s your plan for the second-half of the full market cycle?
There are two other problems underlying the chase for ETF’s. While investors have been chasing returns in the “can’t lose” market, they have also been piling on leverage in order to increase their return. Negative free cash balances are now at their highest levels in market history.
Full Essay from Lance Roberts HERE