ETF Trend Following: The Alternative to the Herd | ETF Trends

Most investors have learned this lesson: perfectly timing markets in any form, be it stocks or exchange traded funds (ETFs), is next to impossible. So why are people still following the herd? There has to be a better way.

According to TrimTabs Investment Research, regular investors have lost around $39 billions more than was necessary in the stock markets as a result of buying during booms and selling during market panics, writes Brett Arends for Yahoo! Finance. Vincent Deluard of TrimTab remarked that “it cost [investors]about 20% to buy high and sell low.” Yikes. [The Ideal Length of Time to Hold ETFs.]

TrimTabs’ data reveals that over the past decade, investors who bought when everyone else was selling and sold when everyone else was buying were the ones who came out on top. It sounds simple enough, but it isn’t easy. Human instincts are hard-wired to follow the herd, since there is safety in numbers. But this evolutionary quirk doesn’t serve us so well in the markets. [An Optimistic View of the Markets and ETFs.]

Putting feelings and emotion before cool logic does more harm than good. It’s best to have a plan and a strategy in place. We use a simple trend following strategy, which uses the 200-day moving average as a buying and selling guide. It helps minimize the emotional impact you can have on your investments and provides a sell strategy to help protect you on the downside. [How to Follow the Trends.]

For more information on following the trends, visit our trend following category. To read more about the trend following discipline, check out The ETF Trend Following Playbook.

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.