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?
Comments 2
This morning I’ve been looking over the stat sheets, some of my own charts, and charts of the broader indexes and one idea really stands out in my mind today.
That is, since I’ve been following along with the TTI methodology (I first came across successful-invesment.com in 2003) there have been a few occasions where I have found myself questioning the overall long term benefit of making buy and sell decisions based upon the messages that “Mr. Market” sends out to the investing public. I believe that this is quite natural and can be expected of anyone who wasn’t following the TTI during the boom and bust of 2000 and the two year long bear market that followed and didn’t realize the full benefit at that time of protecting their portfolio.
I’ll admit, at times I’ve been frustrated by what you might call “the boy crying wolf” scenario whereby I/we have had to sell both domestic and foreign funds (Summer ‘2006) and foreign funds (Spring 2007) only to find that we’ve had to re-enter the market and suffer a small loss by not staying fully invested and had to incur increased transaction costs of selling and buying ETFs.
All along I have been fully cognizant of the idea that Ulli has made reference to on several occasions, namely, that we must at times suffer what he calls a “safety premium” in order to protect ourselves from the inevitable bear market and it’s associated losses.
Well, now you can count me in to the group of investors who have learned, and not the hard way either, that paying those small safety premiums has tremendous long-term benefits. We are seeing that idea being played out many times over in recent weeks. Any costs associated or any small losses incurred during 2006 and 2007 are now being returned many times over as we see this current market head off down into the abyss and we are not participating in the losses.
Regardless of where the market goes next week, next month, or next year, I’m confident that we will be on the right side of it regardless of what the latest bubble vision spin tries to push on the investing public and regardless of whatever Wall St. voodoo is being practiced behind closed doors.
It’s already been a very happy new year,
G.H.
G.H.
Thanks for adding your thoughts and personal experiences. I am sure this will help many readers to better understand the reasoning when at times it may seem counter productive. I am sure many people will finally get it after they lose their shirt in a bear market.
Best,
Ulli…