The Easiest Way to Get to the Exits

As I write today’s Weekly ETF Report, the Dow Jones Industrial Average is down more than 450 points, or 2.8%, and it now has fallen forcefully below the 16,000 level. The selling in the Dow isn’t unique, as we’ve seen big declines in nearly every major domestic market index, as well as in virtually every major equity market around the world.

With everyone seemingly packing up and rushing to get out of equity positions, things are getting rather crowded at the exits.

I’ve written and spoken at length for years about why I love exchange-traded funds (ETFs). Two key reasons why are that ETFs are both simple to understand and easy to use. It is the ease of use aspect of ETFs that I really love, especially when everyone is racing for the crowded exits.

Because ETFs allow you to sell at any time, and with just a few clicks of your mouse, they are much more efficient in terms of allowing you to get out of positions before any real damage is done.

It was this ability to buy and sell ETFs intraday that actually began my love affair with these versatile investment vehicles some 15 years ago. You see, back in 1999 we were in a roaring bull market, a bull market that I knew wouldn’t last much longer. At that time, mutual funds were all the rage, and greedy investors were blinded to the fact that the market was way overdue to come back down to earth.

Buying mutual funds, especially tech-stock mutual funds, was indeed a way to get rich in the late 1990s. But when the bull stumbled, and when the bubble burst in techs, the crash arrived in fast-and-furious fashion. Of course, mutual fund managers, Wall Street pundits and others with the prevailing “buy-and-hold” bias told investors to “stay the course” and keep pumping money into their tech mutual funds.

Well, we know how that advice turned out.

The crash came, and investors were stuck with tech mutual funds that were worth half of what they were at the top of the market.

I suspect that if ETFs played as big a role back during the tech wreck of the 1990s as they do today, many people would have been able to sidestep the big losses. The reason why is because all you have to do to get to the exits with ETFs is click on that aforementioned sell button.

With mutual funds, you have to call someone either at the mutual fund company, or at your brokerage firm, and talk the issue over. Of course, the fund company representatives and/or your broker have a vested interest in keeping you in these funds, so they are going to try to persuade you that everything is going to be okay and that you should be in stocks for the long haul.

Well, sometimes you shouldn’t be in stocks. Sometimes — like right now — you should be out of equities and watching the damage from the safety of a high cash position.

Using ETFs makes that task a lot easier, as you can get out of a position in a matter of seconds. You also can get back into the best market sectors as soon as the coast is clear, with the same ease as you got out.

The bottom line here is there is no easier way to get out of, or get back into, a market than with exchange-traded funds — so why would you ever want to invest using anything else?