Don’t panic.
One week ago, Elon Musk’s SpaceX launched Falcon Heavy, catapulting the billionaire’s Tesla Roadster into space. On the dashboard were two words made famous by Douglas Adams’s Hitchhiker’s Guide to the Galaxy: “Don’t Panic.”
(Read on and I’ll tell you why you should make these two words your mantra these days; how the “smart money” is playing the selloff; and reveal the one investment you need to—calmly—sell now.)
How to Keep Your Cool When Others Lose Theirs
As Musk’s Roadster orbited above, markets on earth were freaking out.
In a matter of days, the 7% gains stocks racked up in less than a month were gone. At one point, the market was down 10% from its highest point for the year.
How can you not panic at a time like that?
The sudden selloff had plenty of folks wondering if they should start cashing out their 401ks and IRAs. That also happened in late 2008 and early 2009. Sellers who jumped out then did so as the market as crashing.
…and were sitting in cash when the market started its multi-year bull run.
The timeline is shorter today, but I fear that many investors will do the same thing. If they panic and sell when the market’s down, they’ll lock in their losses. If they ignore the short-term declines and stay long, they’ll benefit from the recovery.
In other words: don’t panic.
The Smart Money Weighs In
There are many indicators telling me the best move is to stay in stocks. As I wrote on February 8, earnings and employment look so strong that there’s plenty of reason to be upbeat about the market.
The smart money agrees: hedge funds have doubled down. One of the most famous hedge fund billionaires, Ray Dalio of Bridgewater Associates, which manages $119 billion, says people holding cash will “feel pretty stupid.” BlackRock CEO Larry Fink agrees, more recently saying that sitting in cash will lower returns.
Which brings me to the one “ticking time bomb” asset class this selloff has revealed. If you’re holding any of these dangerous pretenders, sell now.
The Simple Mistake That Locked in a 96% Loss
I’m talking about exchange-traded notes, or ETNs.
I’m sure you’ve heard of exchange-traded funds. There are many good ETFs out there, but I worry about ETNs, which are so often lumped in with ETFs that investors usually don’t know that they’re different.
Take ETF.com, one of the most popular websites dedicated to ETFs. Except, well, it’s not. You can go on ETF.com and search for the iPath S&P 500 VIX Short-Term Futures ETN and get a lot of data on this product.
But it’s not an ETF.
It’s an ETN! If you see “ETN” in gray, you’ll know that this is a wolf in sheep’s clothing. But how many people will look? And how many who do will know what this means?
Not many—and that’s the problem.
This opens the door to devastating mistakes, such as if, in this case, you bought an ETN that’s related to VXX but with one crucial difference: while both ETNs bet on the VIX, which is a measure of volatility in the S&P 500, the VelocityShares Daily Inverse VIX Short-Term ETN is a Credit Suisse–issued ETN that bets against the VIX and was beating the S&P 500 so badly that many people bought XIV instead of an index fund.
And this was a great idea—until it wasn’t.
Credit Suisse is shutting the fund down. They can do this because it’s an ETN and not an ETF, and an ETN doesn’t hold the assets it’s betting against. The ETN was a credit product—essentially, shareholders of XIV were giving Credit Suisse a loan, and the value of that loan was based on a theoretical but nonexistent basket of VIX futures the ETN didn’t actually hold.
When the VIX spiked in early February, those futures became worthless, so Credit Suisse shut the ETN down, locking in investors’ 96% losses.
Yes, they can do that—it was a clause buried in the XIV’s disclaimers. How many holders read that clause? Probably not many. Was that clause easy to find on ETF.com or other websites touting ETNs as if they’re ETFs? No.
But Don’t Panic
If you’ve avoided complex ETNs that are mismarketed, you’re fine. Already we’re seeing the S&P 500 recover.
If you hold ETFs and avoid risky things like ETNs, you’re also fine. And your portfolio will grow in value if you’re holding ETFs that own solid, cash-producing companies.
And that’s why the best advice anyone can give you now is this: don’t panic.
Disclosure: none
