Table Of ContentBuy—DON’T Hold
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Buy—DON’T Hold
Investing with ETFs Using Relative
Strength to Increase Returns
with Less Risk
Leslie N. Masonson
Vice President, Publisher: Tim Moore
Associate Publisher and Director of Marketing: Amy Neidlinger
Executive Editor: Jim Boyd
Editorial Assistant: Pamela Boland
Development Editor: Russ Hall
Operations Manager: Gina Kanouse
Senior Marketing Manager: Julie Phifer
Publicity Manager: Laura Czaja
Assistant Marketing Manager: Megan Colvin
Cover Designer: Chuti Prasertsith
Managing Editor: Kristy Hart
Project Editor: Betsy Harris
Copy Editor: Cheri Clark
Proofreader: Williams Woods Publishing Services
Indexer: WordWise Publishing Services
Compositor: Nonie Ratcliff
Manufacturing Buyer: Dan Uhrig
© 2010 Leslie N. Masonson
Published by Pearson Education, Inc.
Publishing as FT Press
Upper Saddle River, New Jersey 07458
This book is sold with the understanding that neither the author nor the publisher is
engaged in rendering legal, accounting, or other professional services or advice by
publishing this book. Each individual situation is unique. Thus, if legal or financial
advice or other expert assistance is required in a specific situation, the services of a
competent professional should be sought to ensure that the situation has been evalu-
ated carefully and appropriately. The author and the publisher disclaim any liability,
loss, or risk resulting directly or indirectly, from the use or application of any of the
contents of this book.
FT Press offers excellent discounts on this book when ordered in quantity for bulk purchases
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All rights reserved. No part of this book may be reproduced, in any form or by any means,
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Printed in the United States of America
First Printing April 2010
ISBN-10: 0-13-704532-8
ISBN-13: 978-0-13-704532-7
Pearson Education LTD.
Pearson Education Australia PTY, Limited
Pearson Education Singapore, Pte. Ltd.
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Library of Congress Cataloging-in-Publication Data
Masonson, Leslie N.
Buy—don’t hold : investing with ETFs using relative strength to increase returns with less
risk / Leslie N. Masonson.
p. cm.
ISBN 978-0-13-704532-7 (hardback : alk. paper) 1. Exchange traded funds. 2. Portfolio
management. I. Title.
HG6043.M37 2010
332.63’27—dc22
2009048632
To my loving and supportive wife Marilyn.
To my wonderful children Dan and his wife Laurie,
Amy and her husband Seth,
and my precious and beautiful grandchildren—
Brooke, Andie, Matthew, and Katie—who
have enriched our lives.
And to investors looking for a better way
to invest their hard-earned money.
May you all enjoy a profitable ride
on the stock market roller coaster.
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Contents
Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . xiii
Acknowledgments . . . . . . . . . . . . . . . . . . . xvi
About the Author . . . . . . . . . . . . . . . . . . . xviii
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . 1
My Early Beginnings in the Stock Market. . . . . . . 1
My Investment Experience Spans
Over 50 Years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Purpose of This Book. . . . . . . . . . . . . . . . . . . 3
Why I Wrote This Book Now . . . . . . . . . . . . . . . .5
Managing Your Financial Affairs Is Critical. . . . . . 8
Benefits of Managing Your Own Investments . . .9
Chapter 1 The Stock Market Roller Coaster . . . . . . . 13
Secular Bull and Bear Markets . . . . . . . . . . . . . . 14
Latest Bear Market . . . . . . . . . . . . . . . . . . . . . . .15
Bear Markets Have a Long Recovery Time . . . .16
Historical Market Returns Are Not
a Forecast of Future Returns. . . . . . . . . . . . . . . . 17
Forget About Relying on Investment
Books with Outrageous Titles. . . . . . . . . . . . . . . . 18
Stock Market Facts. . . . . . . . . . . . . . . . . . . . . . . . 18
Arguments For and Against
Buy-and-Hold (BAH) . . . . . . . . . . . . . . . . . . . . . . 21
Ten Arguments for BAH . . . . . . . . . . . . . . . . . . .21
Seven Arguments Against BAH . . . . . . . . . . . . .23
Mutual Fund Managers Do Not
Practice Buy-and-Hold. . . . . . . . . . . . . . . . . . . . . 24
Wall Street’s Objective Is to Keep Your
Money Under Management . . . . . . . . . . . . . . . .26
In the Stock Market Expect the Unexpected. . . . 27
Three Reasons for Corrections, Crashes,
and Bear Markets . . . . . . . . . . . . . . . . . . . . . . . .27
viii BUY—DON’T HOLD
Market Crashes Are Devastating . . . . . . . . . . . .28
Time to Break Even After Bear
Market Debacle . . . . . . . . . . . . . . . . . . . . . . . . . .29
Secular Bear Markets Are Not That Rare . . . . .30
Investing in the Stock Market Is a Very
Risky Proposition. . . . . . . . . . . . . . . . . . . . . . . . . . 31
Preservation of Capital Is Paramount . . . . . . . .33
Chapter 2 Understanding the Concept of Risk . . . . . 37
Risk Tolerance Questionnaires Have
Major Shortcomings . . . . . . . . . . . . . . . . . . . . . . . 38
Typical Risk Tolerance Questions . . . . . . . . . . . .39
New Risk Tolerance Questionnaires . . . . . . . . .40
FinaMetrica Questionnaires . . . . . . . . . . . . . . . .41
Recent Market Decline Has Brought
Risk to the Forefront. . . . . . . . . . . . . . . . . . . . . . . 42
Market and Individual Stock Risk . . . . . . . . . . .43
Diversification Risk . . . . . . . . . . . . . . . . . . . . . . .45
Inflation Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
Protecting Your Principal Is Paramount . . . . . . . 49
Use Stop Orders to Protect Profits
and Minimize Losses . . . . . . . . . . . . . . . . . . . . . .49
Final Point. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Chapter 3 Personal Investing Plan: Six-Step Road
Map to Success . . . . . . . . . . . . . . . . . . . . . . 55
Step 1: Determine Your Current Risk Level. . . . 57
Step 2: Review Your Existing Investment
Portfolios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Step 3: Assess the Stock Market’s Condition. . . . 58
Step 4: Invest in a Selected Universe of ETFs . . 59
Step 5: Select Top-Ranked ETFs Based
on Relative Strength Analysis. . . . . . . . . . . . . . . . 60
Step 6: Protect Your Portfolio Using Stops . . . . . 61
Investing for Retirement. . . . . . . . . . . . . . . . . . . . 62
The Bear Market Impact Is Devastating . . . . . .62
Retirement Accounts Offer Tax Advantages
and Compounding of Principal . . . . . . . . . . . . . .63
CONTENTS ix
Investment Choices Vary by Plan . . . . . . . . . . . .64
No Capital Losses Are Available in
Retirement Accounts . . . . . . . . . . . . . . . . . . . . .65
Retirement Investing Using Our
Action Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66
Chapter 4 Exchange-Traded Funds—The Most
Suitable Investment Vehicles . . . . . . . . . . . 67
Investing in Actively Managed Mutual
Funds Is Not Recommended. . . . . . . . . . . . . . . . 68
Majority of Active Fund Managers Have
a Poor Track Record . . . . . . . . . . . . . . . . . . . . . .68
Index Funds Have Garnered Most of
New Equity Mutual Fund Money . . . . . . . . . . .70
ETFs Are the Preferred Investment Vehicle. . . . 71
Comparison of ETFs to Mutual Funds . . . . . . .71
Exchange-Traded Fund (ETF) Basics . . . . . . . .74
ETF Benefits Are Extensive. . . . . . . . . . . . . . . . . 83
ETF Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Leveraged ETFs Are Very Risky and
Dangerous in the Wrong Hands . . . . . . . . . . . . .84
ETF Allocation for Different Investor Types. . . . 86
Recommended ETFs . . . . . . . . . . . . . . . . . . . . . . 88
Appendix 4.1: Discount and Full-Service
Brokerage Firms . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Appendix 4.2: ETF Resources . . . . . . . . . . . . . . . 93
Recommended ETF Books . . . . . . . . . . . . . . . .93
ETF Web Sites . . . . . . . . . . . . . . . . . . . . . . . . . .94
Chapter 5 The Stock Market Dashboard—Key Stock
Market Indicators to Gauge the Market’s
Direction . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Pay No Attention to Wall Street Experts. . . . . . . 97
Introducing the Stock Market Dashboard. . . . . 100
Three Market Entry Strategies to Consider . .101
Sell All Positions on a Dashboard
Sell Signal . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102
Introduction to Dashboard Components . . . . .103
