ETF Trends
ETF Trends

While there are no clear-cut answers to investing success, having a strategy in place when putting money into investment vehicles like exchange traded funds (ETFs) will help create a more efficient portfolio for your clients. But what are you supposed to do in the middle of one of the most frustrating types of markets: the trendless market?

Trendless markets (also called sideways markets) are easily identified in that they lack a trend in either direction. A few good days are followed by a few bad days that result in increased buying and selling, making investing a hair-pulling experience.

If you’re tactically managing your clients’ portfolios, then you know what a frustrating year it’s been for those who take a more hands-on approach to investing.

For example, if you are following the 200-day moving average with a stop loss of 8%, you’ve no doubt 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.

What can you do?

1. Remember that you’re not alone. In trendless markets, virtually no one is making any money.

2. If you’re using any kind of trend following strategy – whether it’s the 200-day, the 50-day or something else – you’ve had to do lots of buying and selling and you’re not making any progress. Don’t let that get you down: It’s exactly at that point that you should remember that these types of markets don’t last forever. Eventually, some major asset classes will develop a clear, long-term trend. A trend following strategy will give you the opportunity to take advantage.

Unfortunately, many of those trends have a tendency to develop just when your confidence in the market is at its lowest. But if you look back to past recessions and recoveries, you’ll see something clear: there were areas that led the way out of the downturn, and they wound up outperforming all other asset classes. Often, these are areas such as small-caps (which are more nimble and quick to react to shifts in economic conditions) and asset classes or sectors that were especially beaten-up in the downturn (in this case, that would be real estate and financials).

The most important thing to remember is to stick with your plan, whatever it is. You may be tempted to throw in the towel or tweak it some. But just when you look to abandon your long-term investment discipline because of some short-term problems, that’s when the plan begins to pay off.

As a pro member of ETF Trends, you have access to our alert tools. When you set alerts, you’ll have notifications of trading opportunities sent directly to your inbox.

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.