Where does that leave us?
While being diversified is important, this only strengthens the argument for trend following. Strategies in which investors use the signals of the market to determine when they buy and sell, instead of relying on strategies such as asset allocation and buy and hold alone, is proving to be more prudent. Investors can no longer bank on the markets being stable and rational, and it’s time for them to take a more active role in their portfolios to protect themselves.
By using the 200-day moving average as a signal to buy, you can give yourself the chance to get in and take advantage of a potential long-term uptrend. On the flip side, having an 8% stop loss or exiting when a position drops below its long-term trend line has you out before you’ve potentially ridden it all the way to the floor.
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Max Chen contributed to this article.