The set-and-forget, buy-and-hold strategy may be very easy and hassle free, but the average investor would have barely eked out any returns over the past two decades. Instead, exchange traded fund investors should implement a trend following strategy to help navigate the changing tides.
Financial market research firm DALBAR found that the average investor earned 2.1% over the 20 years ended Dec. 31 2011, reports Michael Maye for TheStreet. [Seasonal Trends May Weigh on Stock ETFs]
In contrast, the S&P 500 rose 7.8% and the Barclays Capital U.S. Aggregate Bond Index gained 6.5% over the same period. A straight 50/50 allocation of the two indices would have provided an annualized return of 7.2%.
Additionally, if you factor in inflation, the average investor would have realized a real return of negative 0.4% in the last 20 years, given a 2.5% annualized CPI rate over the period.
Instead of blindly holding a selection of investments and hoping for the best, investors should implement some form of strategy in approaching the markets methodically and without letting emotions dictate trades.
First, investors should have an asset alloccation strategy based on their time horizon and risk tolerance – hold more fixed-income and less equities for a conservative portfolio or lean toward equities in a risk tolerant portfolio.
Moreover, an ETF investor may also follow an investment’s trend lines to help guide when one is in or out of a position. For example, we utilize the 200-day exponential moving average. If an ETF moves above its trend line, it is a buy signal, and if it drops below, it is time to let go. [An ETF Trend-Following Plan for All Seasons]
For more information on market trends, visit our trend following category.
Max Chen contributed to this article.