Mom and pop are making a classic mistake in investing at this time. The purpose of this article is to show the average investor that there is a better way.
Last year when The Arora Report laid out a scenario for Dow 30,000 (see here), I got a fair bit of hate mail. Gurus who are now tripping over themselves to raise their targets were incredulous of that call. To be fair, the number of hateful emails was small compared to those I received when I gave a signal to sell gold (in the trading ETF GLD, +0.13% ) at $1,904 an ounce and simultaneously a signal to short-sell gold. At that time, everybody was bullish on gold. Subsequently, gold fell to under $1,100.
Before discussing the classic mistake and a better way forward, let us explore the market with a chart.
The chart shows the measured target for the Dow is 32,000. Be aware that the first strong support is the level from which the market broke out that is shown on the chart. This level is about 8,000 points below. This indicates that although the bullish case for the market remains intact, there is also high risk from a technical perspective.
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100%-200% return for 2018?
Fortuitously, the fundamental case for Dow 30,000 that I described about a year ago is still intact. To see the details of the fundamental case, please see a prior article by clicking here.
If the current trend continues, 2018 will show a return of 100% to 200%. How? If you multiply the average gain per day so far in 2018 by the number of trading days in the year, that’s what you get. However, that scenario is unlikely.
The classic mistake
There is anecdotal evidence that mom and pop are getting excited and making the classic mistake of an “all or none” decision. Some investors were putting all their money into bitcoin when the cryptocurrency was approaching a high. They’re now sitting on 40%-plus losses.
Many investors who have sat out this bull market, or are underinvested, are now putting all of their money in the stock market in one shot. A lot of this money is going into either FAANG stocks or into index ETFs or index mutual funds. At least those who are putting money in index funds are diversified compared to those going into the FAANGs.
A better way
Investing does not have to be an “all or none” decision.
A better way is to scale in with small tranches. At The Arora Report, we provide complete guidelines for scaling in. Further, investors ought to be looking at investing in sectors that are likely to do well in 2018 but are still relatively inexpensive.
Examples are emerging market stocks, represented by the ETF EEM, -0.40%Investors can do even better by picking individual countries. The Arora Report service ZYX Emerging Markets covers 15 emerging markets in depth. Investors ought to also be looking at Europe and Japan. When looking at Europe and Japan, investors ought to be mindful that their gains can be wiped out by currency fluctuations. For this reason, proper ETF selection is important.
Furthermore, investors ought to look for special situations that are likely to outperform the market if the market stays bullish but are likely to fall less if the market turns down. As an example, 132 stocks in The Arora Report portfolios have been bought out or have gained significantly from M&A, producing tremendous gains for investors. Another example of a special situation is General ElectricGE, -3.27% but only if it dips further into our buy zone.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. All recommended positions are reviewed daily at The Arora Report.
Nigam Arora is an investor, engineer and nuclear physicist by background, has founded two Inc. 500 fastest-growing companies, is the developer of the adaptive ZYX Global Multi Asset Allocation Model and the ZYX Change Method to profit from change in trading and investing. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.