The Merits of an ETF Trend Following Strategy
March 18th 2010 at 1:00pm by Tom Lydon
The market’s meltdown in 2008 has reignited a ferocious debate about the merits of buy-and-hold investing vs. timing the market. When using exchange traded funds (ETFs) as part of your strategy, you do have a third option.
The buy-and-hold side is saying that no one can beat the market over time so sticking to a long-term plan is the way to go. Proponents of the buy-and-hold strategy argue that predicting short market bursts is basically impossible, and they believe that long-term investing provides better numbers. Even considering the recent market downturn, people who invested a long time ago are still significantly up from when they first started investing.
The “market timing” side simply points to the fact that those who held onto their investments are probably regretting it, remarks Silicon Valley Blogger for Wise Bread. This part may be true; many investors lost 40%, 50% or even more during the financial crisis. Some of those investors have had to delay or call off retirement entirely. Making up that lost ground could take years.
Using technical indicators and other economic data, market timers and stock traders utilize online stock trading to make short-term investments and try to capitalize on small day-to-day stock price changes. [Trend Following in Today's Economy.]
For the average retail investor, buy-and-hold investing along with regular portfolio rebalancing strategy has proved to be a successful combination. Institutional traders or people with large bank accounts do better with stock market timing since they are able to hire professionals, obtain top resources and use advanced strategies. Of course, an investor may have a long-term investment egg and dabble in the markets with some of loose pocket change.
Market timing and buying-and-holding are two extremes. You do have a third option: trend following.
We use the 200-day moving average to determine when we’re in and when we’re out. When a position is above its 200-day, it’s a buy signal. When it drops below or 8% off the recent high, it’s a sell signal. Having such a strategy has you in a position in time for any potential long-term uptrend, while having a point at which you sell puts a cap on your losses.
But most importantly, having a simple strategy minimizes the chances that your emotions will enter into the equation. Getting too exuberant or too frightened about events in the market has led many investors astray. [New Year, New ETF Strategy.]
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.