Mar

11

Why Use Trend Following When Investing?

Posted In: Investing Tips

The importance of having patience with market timing is not nearly as prevalent as with just simply buying and holding one asset class. This is one of the tennents of market timing that can be very beneficial to investors in most timeframes, in much shorter timeframes than the buy and hold investing strategy. Buy and hold historically has worked for those investors that have at least 30 years of time in front of them. So even if they go through a period like we saw with the NASDAQ from 2000 to 2002, or if we see a drop like we saw in 1973 and 1974, or if we see a drop like we saw in 2008, or 1929, then the investor has the 30 years to get back to recover. However, for the rest of us that would like to see our account values almost always be higher than it was two years ago, and for the rest of us that want to have a whole lot more money at retirement than those that just stick it in the stock market and ignore it, what we do is we try to follow the trends, all trends.

And that is one important investing strategy that I am using in my clients portfolios. [True Diversification is the other.] Every type of investment has and follows trends and these trends are often times created by what the government does. These trends are created in just a simple change in sentiment that goes in waves; they can last decades or can last months. Just the way that a President is running a country can create an investment trend with those people out there that have their money in these different asset classes.

What we are doing and what I am doing for my clients is that I am making an effort to put my clients in all possible trends and that way we don’t miss any opportunities. Many times as I put my clients and move their assets into particular asset classes or an investment, we realize that there we are going to miss it and it is going to be a trend that is a loosing one. In those situations we will cut our losses quickly by selling before riding the investment down further. However, history has shown us throughout all the disasters and things that have happened in this country over the last 100 years, the things that the government has done, and not just in this country but other countries and all these things that have been done we have seen that typically the U.S. stock market is trending about 75 percent of the time. So 25 percent of the time the market is going to be flat and that is not going to be beneficial for us. However, we also know that 75 percent of the time the market is going to be trending and that is where we will be able to take advantage of investing and have profits more often than we have losses and again, when we do have losses they will be cut short. The biggest advantage to market timing or trend following is not riding a gain higher, but avoiding the big huge crashes that all asset classes experience at some point.

Thomas Cloud, Jr., CFP(R)
www.eleventwofm.com

Article Source: Why Use Trend Following When Investing?