Trend Following

I am an advocate of trend-following. I follow trends, I go where the money is. My SimpleVesting strategy is based on trend-following. It allows an investor to bow out and move to cash when markets turn downward, such as in December 2007 when I exited stocks completely and moved to cash and bonds.

Before going further I need to stress one thing: Trend-following is not the same as market timing

Market Timing is defined on wikipedia.com as “The strategy of making buy or sell decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis”

Trend-Following is defined on wikipedia.com as “an investment strategy that tries to take advantage of long-term moves that seem to play out in various markets. Traders who subscribe to a trend following strategy do not aim to forecast or predict markets or price levels; they simply jump on the trend and ride it.”

Notice the 2nd sentence. A trend-follower does not try to predict markets.

Trend-following involves reacting to market movements as they happen. It does NOT involve gut feel, economic analysis, or prediction.

The chief advantage of trend-following, and therefore SimpleVesting, is that you don’t have your wealth completely exposed to the risk of the market all the time. I typically spend ~30% of the time at least partially in money-market funds, which are virtually risk-free.

If you are retired and living off your investments, a major risk is that your portfolio might drop sharply. For this reason, retirees should be especially interested in a trend-following strategy like SimpleVesting.

Young investors should also consider a trend-following strategy like SimpleVesting. Especially if they do not wish to open their account statements to see that their retirement savings have been cut in half the way many were in 2008.

I will write more about trend-following in upcoming posts. Meanwhile, what questions do you have about trend-following? Post them in the comments.

photo by Marion Ardana