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Herd mentality, fear-and-greed—call it what you will, but the perils of attempting to time the stock market and chase performance are thoroughly documented.Indeed, research and consulting firm DALBAR found in its 2003 Quantitative Analysis of Investor Behavior that the S&P 500 returned 12.2 percent annually in the roughly two decades between 1984 and 2002, one of the longest bull markets in U.S. history. In contrast, the average mutual fund investor earned 2.6 percent annually during the same period.
Why such a high disparity in performance? Investors are their own worst enemy; by trying to capitalize on the “hot, new thing” the average investor is too often left holding the bag.
Enter trend following, an investing concept that—far from enabling the self-defeating behavior that sabotages even the best-laid investment plans—seeks to minimize the emotions that lead to poor decisions. Relying on technical analysis of market direction and certain pre-determined signals, financial practitioners of the strategy make buy and sell decisions based on what they see; for instance, “when a 50-day moving stock market average crosses the 200-day moving average.” While it might sound foreign to the average investor, it’s something trend following professionals immediately grasp.
The strategy isn’t new, existing in one form or another for almost as long as market trading itself. How it’s implemented varies depending on the financial professional’s system. It’s also a strategy that’s constantly evolving, driven by the increased volatility and hyper-connectivity markets are experiencing.
While not new, it’s nonetheless timely, as baby boomers, the largest generation in United States history, head for retirement. The Social Security Administration reports that 10,000 baby boomers retire every day, averaging one every 8.6 seconds. What happens if these pre- and post-retirees get it wrong?
It’s not an irrational fear. The recent Allianz Life Insurance Company “Generations Apart” study found that two-thirds (67%) of both Gen X and baby boomer respondents said they still feel the impact of the 2008 market crash on how they live, work, save, and spend.
“Investors in general do see that a buy-and-hold approach will give them the gains of the market, but it will also put them through some really challenging periods,” said Nino Pavan, President of Financial Designs Corporation, a financial advisory firm in Claremont, California that implements trend following strategies. The firm has been around since 1981, and the trend following strategy they’ve developed was implemented in 2000, proving its worth in multiple investing cycles since.
Part of the discussion he’s having with his retired clients is that, while they may have been able to absorb a market shock while working and adding to their retirement accounts (often with a company match to boot), they’re now spending down accumulated assets, a situation that’s often exacerbated in market downturns.
“The money simply won’t be there in the recovery, because it was withdrawn for day-to-day living expenses,” Pavan added. “In retirement, ensuring the money lasts becomes as high of a priority as getting a good return.”
Trend following means not only identifying what might be happening in the stock market at a given point in time and reacting appropriately, but also why it’s happening, something Pavan concedes.
“If the reasoning behind what’s seen in the market is something that’s short-term, it’s best not to act,” he explained. “However, if it looks like something that has some sustainability and legs, either on the upside or downside, then it will cause trend-following investors to take action.”
“Take action” might mean moving clients out of the market completely if the situation is dire enough, and he’s willing to risk sacrificing some of the market’s upside potential to ensure against its downside danger.
It’s no doubt controversial in some financial circles, but again, for those tempted to dismiss such a strategy as a glorified attempt to time the market, consider the following: During the financial crisis, Financial Designs’ trend following signals told them to exit the market in August 2008 and to re-enter in April of 2009, which subsequent events proved to be about as good as it gets.
“It’s not about helping investors to get rich quick, it’s about keeping them from becoming poor,” he diplomatically stated. “The strategy is a systematic, disciplined approach that’s not trying to guess the bottom of the market. It’s about protecting what they’ve worked hard to save over the last 30 or 40 years. Yes, there are going to be good times, but there will also be times when protection is needed. A good offense is great, but a great defense is needed as well.”
Contact Info:
Name: Nino G. Pavan, JD, CFP®, President
Email: Send Email
Organization: Financial Designs Corporation
Phone: (909) 626-1642
Website: http://www.financialdesignscorp.com/
Source URL: http://councilofeliteadvisors.com/liftmedia
Release ID: 103029
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