This past week’s and year-to-date market activity was enough to cause major frustrations among investors and advisors alike. According to my Trend Tracking Indicators (TTIs), we’re now officially in bear market territory. However, markets can change and, as we’ve seen in the recent past, whipsaws can occur at anytime just about when you thought you had the trend figured out.
When that happens, as it does to me, you need to remember the fact that when you are applying an investment method such as Trend Tracking, that it has its weak points during times of uncertainty. That generally includes two market conditions:
1. When markets move sideways and
2. When markets transition from a major up trend to a major down trend and vice versa
In other words, when markets are not trending, trend tracking will not generate any profits. It will however, alert you to directional changes so that you can adjust your portfolio. During those times, you need to keep the big picture in mind, meaning that “trend-less” conditions are a temporary inconvenience we simply have to accept and live with. Sooner or later, the markets will break out of this pattern and new trends will be established.
Random Roger wrote a nice piece titled “You Said It Was A Bear Market, I Didn’t Say That,” in which he describes how he looks at this type of market and how it affects his mood. Here’s a portion:
It is natural for people to derive stress from their stock investments. One of the themes to my writing is that you should train yourself remove emotion from the equation.
Someone who takes the time to read stock market blogs, like you, is closer to their portfolio than most folks. One hand this could mean you are more in tune with the cyclical nature of the stock market so managing emotions is easier but on the other hand you see the ups and downs of your balance more frequently you might be more prone to emotion.
If you have been reading this site for a while you have hopefully noticed that my mood is not impacted by the stock market. As opposed to what they say on TV a down day in the market is not terrible it just is. I don’t sweat bear markets because they are a normal part of the cycle, we know they will come. As an investment manager I don’t sweat lagging the market. Part of the job, assuming you aren’t the single dumbest participant, is that there will be years where you beat the market and years where you lag. I know there will be years I lag so there is no point in stressing out about it.
If you are having trouble, remember there is more to life than watching your account tick up and down. Hopefully you can train yourself to remove emotion from what you do but if you can’t you should either spend less time on your portfolio (and more time exercising, balance right?) or make some strategic changes.
His view pretty much mirrors my opinion in that there will be times where you look like hero and times where you will simply lag in performance. To maintain the view of the big picture is crucial provided you are comfortable with and have faith in the investment methodology employed.
If you’re not, find an approach that matches your emotional make up; just be sure to stay away from the mindless Buy & Hold, as that is the surest way to watch your portfolio get destroyed if this bear continues to be in charge. Remember 2000 – 2002?