If you’ve been watching the markets lately, you might have noticed a bit of a lack of direction. Trendless markets are among the most challenging environments for exchange traded fund (ETF) investors. How can you cope with it?
If you’ve committed to following a trend following strategy, you’re a successful investor. That’s because by following it, you’re effectively saying that you’re not getting caught up in all the hype of buying and holding. [7 ETF Rules to Mind.]
The fact is that buy and hold doesn’t work; there’s an entire generation of investors who are 10 years older without anything to show for it. Look at this chart of the S&P 500 and you’ll see that it’s below where it was just a decade ago:
This lost time is in part what has led this generation of investors to seek out ETFs and take their portfolios back into their own hands. ETFs are the vehicle of choice for these investors because they’re liquid, transparent, easy to use and, on average, cheaper than mutual funds.
That being said, 2010 has so far been lousy for trend followers.
If you are following the 200-day moving average with a stop loss of 8%, you’ve noticed that most indexes have moved 8% up or down and crossed their 200-day moving averages multiple times so far this year. This is the worst type of market for trend followers. [ETF Investing: How to Beat the Herd Mentality.]
When the markets are heading down in a rational, reasonable way it’s easier to just sell and wait it out, avoiding further losses. An example of this is in the latter half of 2008 and the first half of 2009, when the markets plummeted. On the flip side, trend following in the second half of 2009 would have allowed you to enjoy most of the upside. [Volatility in the Markets: Two ETF Approaches.]
What’s an investor to do?
1. Remember that you’re not alone. In trendless markets, virtually no one is making any money.
2. If you’re trend following, you’ve had to do lots of buying and selling and you’re not making any progress. Keep in mind that these markets don’t last forever. Eventually, some major asset class will develop a clear long-term trend, and trend following will give you an opportunity to take advantage. [5 ETF Trading Rules to Follow.]
There are almost no areas with trends right now. But stick with it. The temptation may be to give up on the plan or tweak it a little. But just when you look to abandon a long-term investment discipline because of a short-term period of being unsuccessful, it usually starts to pay off and your persistence is rewarded.
Now, more than ever, it’s important to watch the trends. You can do so easily with the new tools we’ve launched, too. Our revamped ETF Analyzer will tell you which ETFs are above and below their trendlines. Premium members can do things like create watch lists to see when ETFs they want to invest in move above their trendlines and set up alerts, which sends an email when a position crosses a key trading signal. Watch the video tour and then compare the different tools and membership levels now!
To learn more about trend following, The ETF Trend Following Playbook will tell you everything you need to know to get started.
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.