Emotional decision-making ranks high on the list of obstacles that often prevent investors from achieving their financial goals and objectives. The fear of incurring losses evokes a desire to sell after prices have dropped, while the fear of missing out on gains evokes a desire to buy after prices have risen. Volatility acts as a catalyst to evoke emotional decision-making by creating a sense of urgency; investors may feel that decisions must be made in the heat of the moment, because prices are moving quickly!
In our opinion, emotional decision-making has been a root cause of many investor decisions to sell equity exchange-traded funds (ETFs) in 2016, as volatility has returned to the equity markets, accompanied by negative returns. During the month of January, net outflows for US equity and sector ETFs totaled $14.1 billion1, as the average level of the CBOE Volatility Index surged to 23.7 (compared to an average of 16.7 in 2015)2, and the S&P 500 Index declined by 5%.
Such environments present a fresh opportunity to highlight the virtue of strategies designed to provide less volatile exposure to stocks, such as the First Trust Value Line® Dividend Index Fund (FVD). In the context of a diversified3 investment portfolio, we believe this strategy may help investors "stay the course" and avoid making counterproductive emotional decisions.
FVD is an ETF that seeks to track the Value Line® Dividend Index. This strategy builds upon the Value Line® SafetyTM Ranking System to select a portfolio of stocks traded on US exchanges with low volatility, strong balance sheets, and above average dividend yields. The portfolio is equally weighted and rebalanced monthly.
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3While diversification is intended to spread risk among a greater number of holdings, this strategy does not guarantee a profit or protect against potential losses.