How to Avoid Scandalous Stock Moves

by ETF Base on July 23, 2012

There are some lessons to be learned for investors from the various scandals breaking seemingly monthly.  Of late, we had LIBOR and various other mortgage and trading scandals and the large financials and just this week, we had the bombshell sanctions against Penn State for their terrible handling and coverup of the most severe allegations.  While you might think NCAA sanctions don’t have anything to do with investing, think again. Coverups, scandals and general mismanagement abound and no matter how much time elapses, the result is often the same.  I’ve been reading about huge settlements with pharma and biotechs for marketing practices from years back.  In the UK, there’s an entire initiative with the likes of looking to educate Brits on the improper sale of payment protection insurance. And then it’s been ominously quiet on the tobacco stock front of late (you know, those REALLY high yielding stocks that seem to print cash no matter how high the taxes are that politicians enact?).  The take home here is that many businesses that are possibly in your portfolio now are sitting time bombs just waiting to go off.

Anything Suspicious?

In watching the price action of various stocks and sectors, when the first prospect of a problem arises, there is normally a slow and steady selloff.  While we’re taught to avoid the herd mentality and ignore the news as long-term investors, should we always?  I mean, in an efficient market, perhaps the first sign of fire should be a for-sale signal.  After all, there are plenty of alternative stocks and sectors to trade that probably meet the same investment criteria.

How To Avoid Scandalous Stocks

While some entire sectors end up being impacted by scandals (often financials of late!), it’s usually relegated to an individual stock.  That’s why I like to focus on sector ETFs, country ETFs and asset class ETFs for diversification.  The only time I’ve been buying individual stocks is when I feel I have to partake in a phenomena (like the Apple halo, Chipotle Mexican Grill and more recently, 3D Printing Technologies) because ETFs are not adequately representative of what a ground-breaking stock is doing.  Not only does holding an ETF protect you from individual stock gyrations, but chances are you’re like to incur lower trading costs as well since ETF and mutual fund investors tend to hold their positions much longer than individual stock traders.  Markets are pretty efficient and save for that rare exceptional stock theme, ETFs are usually your best move.

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