“Robservations” (by Rob Isbitts)
It’s a short week, and I want to use this opportunity to write more in this top (free) section of The Weekly ROAR. Because I think it is too important a strategic development in markets to not explain it to anyone who will listen.
The drumbeat for simpler and effective portfolios containing as few as 2 ETFs is now too loud to ignore. As a result, I think investors can take some healthy shortcuts.
I see it every day in how markets move in sync, to a degree I’ve never witnessed. I’ve written here often about why I think that has evolved. The short answers: indexation and algorithmic trading. Yet much of Wall Street ignores it.
Because when so many of the products offered move with each other, up and down, because they are treated as a “package” by the biggest investors, the last thing a product provider would want is to let that cat out of the bag. Not good for business! Oh, there’s varying degrees of volatility. But volatility is risk to earn return, not return itself.
I think we’ve reached the point where many investors can create nearly any reward/risk tradeoff with as few as 2 ETFs. More on that below.
As I’ve discussed from several angles here and elsewhere over the past year or so, I am witnessing a significant change in the way markets work. Or, to put it in more blunt terms, how markets move around the value of our hard-earned wealth.
I can’t say I like it or dislike it, because that’s not really the issue. What is? What to do about it. Because its like that old Great Depression Era line about “how did you go broke?” Answer: slowly, then all at once.
Going broke is not what I expect the result to be if investors ignore what’s happening. But I do see many “going for broke,” and those might be a different situation. Hey, didn’t Bitcoin just lose 1/3 of its value, and Ethereum nearly half of its price, all in a matter of weeks? I’ll cover that below, but it is not the main issue here.
How to hit the reset button
The priority as I see it is a much-needed investor reset. I wrote here last week about market correlation. It is too high to make diversification as effective as it once was. I don’t know if the idea of spreading assets around is due for a major haircut in effectiveness. But I do think many investors can benefit from doing more with less. Or, with fewer if you will.
Fewer what? Fewer directions, fewer ETFs. The bottom line on all of this:
Investing in 2025 and going forward likely favors those who have 3 things worked out:
1. How they will play offense (pursue gains in up markets)
2. How they will play defense (pursue gains in down markets, and hedge up markets)
3. A method of determining how to rotate between offense and defense. Note that I did not say offense OR defense. I am not advocating some sort of on/off switch approach to investing and trading.
For me, and writing to you as well as running our subscription service here, the conclusion I’ve reached is this:
Many investors will benefit greatly from focusing on a simpler approach, whereby they pair up 1 offense and 1 defense ETF for their portfolio, or a part of their portfolio. SPY-BIL is the one I write about here each week. I’ll be sending a post soon which summarizes the performance of the live portfolio I’ve run for nearly 4 years, using just those 2 ETFs. I think you will see how I came to the conclusion that among the thousands of ETFs and stocks, it doesn’t take much.
In addition to the 12 ETFs I focus a lot of my coverage on as a way to help subscribers build and manage their own portfolios, I will be devoting a lot of attention into the new year on helping them understand the simple yet very elegant route to managing their money...because they might only need 1, 2 or 3 pairs of ETFs to do it.
Now, on to this week’s summary
Indexes: small caps are rebounding, and I think I know why. The reason is so silly to me, but it is a great example of how markets work so mechanically now. So much for all of that stuff I learned in college and MBA school decades ago!
ETFs: bonds are going to be a much bigger opportunity in the ETF space. However, that doesn’t mean a lot of investors will take advantage of that. I explain.
Stocks: the Mag-7 seem to be taking turns being the star of the show. Sort of like when we had “camper of the week” at summer camp last century. That creates nice headlines, but also a sort of quicksand situation for the broader stock market. Below, we’ll look at a few of them so you see what I mean.
Other timely stuff: of all my “macro” and strategic investing observations of 2025, the one that led of this week’s issue might be the most critical to understand and take to heart. Because those who don’t come to recognize it will likely spend the next several years not with a well-functioning portfolio, but with a “collection of investments.” That’s a waste of time and money.
Plus, my latest thoughts on markets and the latest update to the ROAR Score. Here’s the Weekly ROAR!