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The need for perspective comes up virtually every day in the life of a successful investor. That’s because your daily experience helps to mould your view of the world. It gives you an idea, right or wrong, about how current events will affect your investments. When you lack perspective, it’s easy to jump to mistaken conclusions and make costly investing errors. This came to mind on Friday, when the Dow slumped more than 200 points. The drop was at least partly a response to the Paris terrorist attacks. Some investors undoubtedly sold stocks in panic, out of fear that similar attacks would break out throughout the west....

Q: Pat: Can you suggest some U.S. ETFs that are set up to move in the opposite direction of particular stock indexes, rather than in the same direction? Regards. A: U.S.-based ProShares offers a range of exchange traded funds for U.S. stock indexes. The company offers three types of ETFs: 1) ProShares Short ETFs are designed to move in the opposite direction of the underlying index. For example, ProShares Short S&P500, $20.77, symbol SH on New York, aims to move in the opposite direction of the daily performance of the S&P 500 Index. This ETF has a 0.90% MER....

ISHARES CANADIAN SELECT DIVIDEND INDEX ETF $22.48 (Toronto symbol XDV; buy or sell through brokers; ca.ishares.com) holds 30 of the highestyielding Canadian stocks. Its selections are based on dividend growth, yield and payout ratio. The weight of any one stock is limited to 10% of the ETF’s assets. The fund’s MER is 0.55%, and it yields 4.3%.

The fund’s top holdings are CIBC, 9.7%; Bank of Montreal, 6.8%; Royal Bank, 6.5%; BCE, 5.8%; Bank of Nova Scotia, 5.5%; Laurentian Bank of Canada, 5.0%; Rogers Communications, 4.5%; Manitoba Telecom, 4.4%; TD Bank, 4.4%; National Bank, 4.1%; IGM Financial, 4.0%; and Emera Inc., 3.8%.

The ETF holds 53.7% of its assets in financial stocks. The top Canadian finance stocks have sound prospects, but if you invest in this ETF, be sure to adjust the rest of your portfolio so it won’t be overly concentrated in the financial sector.

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Investors can use special ETFs called bear funds to hedge their positions in a market downturn.

Exchange traded funds (ETFs) are set up to mirror the performance of a stock market index or subindex. They hold a more or less fixed selection of securities that represent the holdings that go into the calculation of the index or sub-index. ETFs trade on stock exchanges, just like stocks. That’s different from mutual funds, which you can only buy at the end of the day at a price that reflects the fund’s value at the close of trading. Prices of ETFs are quoted in newspaper stock tables and online. You pay brokerage commissions to buy and sell them, but their low management fees give them a cost advantage over most mutual funds....

Here’s the text of the quarterly letter I recently sent to our Portfolio Management clients:

“The subject of interest rates comes up regularly these days, in the news and in investor conversations. U.S. Federal Reserve Board members see a need for rates to move up. Prior to the recent market downturn, they were still undecided on ‘how soon’ and ‘how much’.

If stocks remain weak into the fall months, the Fed is likely to leave interest rates unchanged. However, now is still a good time to review the role of bonds as an alternative to stocks.

Bonds have been rising for 35 years

Interest rates have generally been going down, and bond prices have been going up, since 1980. That year, the yield on 10-year U.S. government bonds peaked at around 16%. Currently they yield around 2%.

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John Templeton, one of history’s most successful investors, played a big role in my investment education. One of Templeton’s most valuable investing guidelines is, “Invest at the point of maximum pessimism”. It’s also among the easiest Templeton quotes to misunderstand, and one that’s often misapplied. Note that Templeton didn’t say, “Invest only at the point of maximum pessimism”. Yet many investors take this quote to mean that you should hold your funds in T-bills or a bank account until you see “blood running in the streets” (a quote from another famed investor). That would be problematic to say the least. Pessimism is an open-ended condition. Pessimism never gets so bad that it can’t get worse. Maximum pessimism is easiest to spot in retrospect, since you can then measure it against subsequent events. One good example occurred in February 2009. A prominent Toronto investment figure, known for strong long-time views on stocks (bearish) and gold (bullish), convened a meeting in a downtown Toronto theatre. Some of the most prominent economic pessimists on the continent came to deliver bad news on the outlook....

The drop in the stock market in the past few weeks is spurring renewed interest in market timing—the practice of trying to predict future trends and turning points in stock prices. For most people, this is wasted if not harmful effort. Random events tend to occur in bunches. Market timing generates a lot of random buy and sell signals, and some are bound to work out well. But few work out well enough to offset losses on the inevitable erroneous signals, and leave a decent profit besides. Instead of trying to master market timing, you are far better off to study the earmarks of successful investments. Your long-term investment results will improve a great deal if you simply learn to spot and recognize these earmarks, and understand how they differ from the common risk factors in unsuccessful investments....

Our advice is keep it simple when you invest in ETFs. Three “plain vanilla” ETFs give you an efficient way of investing in U.S. stocks.

SPDR S&P 500 ETF $204.53 (New York symbol SPY; buy or sell through brokers; www.spdrs.com) holds the stocks in the S&P 500 Index, which consists of 500 major U.S. companies that are chosen based on their market cap, liquidity and industry group.

The index’s highest-weighted stocks are Apple, ExxonMobil, Microsoft, Procter & Gamble, Johnson & Johnson, J.P. Morgan Chase, Pfizer, General Electric, Berkshire Hathaway and Wells Fargo & Co. The fund’s MER is just 0.10% and it yields 2.0%.

If you want exposure to the S&P 500 Index, the SPDR S&P 500 ETF is a buy.

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