If you are like most people on the planet, you covet your positive investment returns and are scared to death that you might give up those returns in this tough market climate. I believe this is why a majority of individual investors missed some or all of the recent stock market ascent off the March 2009 lows and 60%+ move higher.
I think this is why a November 2009 survey of high net worth investors by Investment News, showed that only a slim portion of the wealthy feel in control of their financial lives, an even smaller number (fewer than 9%) enjoy thinking about financial matters and only about a quarter feel successful in investing.
So what is the secret to feeling better about your investments and protecting your portfolio from Mr. Market’s bears? The answer is to have a plan to identify and hedge your portfolio when market conditions clearly show a change in market direction may be coming.
This is where trend following shines. Trend following strategies don’t try to predict market or stock movements, instead they capitalizes on the market’s movements wherever or whenever they occur. Trend followers respond to what is happening rather than anticipating what might happen.
The goal of the trend follower is to let a new trend develop and then invest with that trend. The trend follower then holds that position until there is a reversal. The smart trend follower does not invest at the exact bottom because he/she wants confirmation that a turn (reversal) has occurred. Likewise the trend follower will generally not sell at the exact top (which is more easily identified after the fact). They sell after a clearly identified change in trend (reversal). Therefore, the trend follower is able to capture the “meat” of the trend.
Another very important point is that the trend follower is indifferent as to whether the trend is going up or down to capture his/her return…as long as there is a trend they can make money.
So how can trend following be used to protect your portfolio from the bears? Simple, in your manager allocation include a trend following manager in your allocation. During times of sustained market distress, this manager’s positive returns in a bear environment will help to hedge or offset losses elsewhere in your investment portfolio.
The amount you allocate to the trend follower then becomes a question of how much of the remainder of your portfolio do you want to hedge or protect. Best of all this strategy is not insurance or options, which you may pay for and never use (sunk costs). These managers can make money, as long as there are trends to follow, in both up and down markets. They therefore are a perfect compliment to other managers and styles in a well diversified stable of managers.
An author, Certified Public Accountant and Personal Financial Specialist, Jeff Diercks has helped high net worth and institutional investors grow their investment assets in both up and down markets for over a decade. Mr. Diercks is regularly featured in the mainstream media as a specialist in trend following investment strategies. For a powerful guide to investing called “Make the Trend Your Friend”, visit http://www.intrustadvisors.com.