Long-term buy-and-hold investors don’t seem too happy, especially after the recent market crash. With major averages flat or negative over the last decade, who can blame them? If you are a discouraged buy-and-holder, it may be time to consider using another strategy in conjunction with exchange traded funds (ETFs).
Many investors have given up the buy-and-hold strategy, but that has only prompted some contrarians to declare that now is the right time to be a buy-and-hold investor, reports Aaron Task for Yahoo! Finance. What gives?
Lakshman Achuthan, managing director of the Economic Cycle Research Institute (ECRI), doesn’t believe “buy and hold” is necessarily a bad thing, “unless you’re having more frequent recessions.” The problem? The Economic Cycle Research Institute (ECRI) predicts just that in the coming decade.
Achuthan commented that successive recoveries after the WWII recessions were weaker and weaker “on every count,” including growth, sales, employment and production. Furthermore, volatility in the economy is increasing. Just look at the last couple of years, which saw large swings in late 2008 and early 2009, followed by the surge in recent months.
Achuthan argues that we are in a period of “more ‘boom and bust’-type cycles,” and that the period of a more normal business cycle is coming to an end. [New Year, New ETF Strategy.]
In today’s climate, hanging on for dear life can result not only in lost money, but lost time. There are lots of uptrends out there and it’s just a matter of learning to spot them and, most importantly, acting on them.
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. [Merits of an ETF Trend Following Strategy.]
While trend following can be used with nearly any financial instrument, it’s best suited to ETFs. Stocks can be more volatile, which leads to frequent trades and increased costs. Mutual funds don’t possess intraday liquidity and many of them feature early redemption fees or investment minimums. [5 Reasons ETFs Are Better Than Mutual Funds.]
For more information on trend following, visit our trend following category. Or take a look at The ETF Trend Following Playbook.
Max Chen contributed to this article.