Never Forget To Look At The Big Picture

In case you missed it, Reader Paul posted a comment last week that he was a little discouraged with his investment results. He had this to say:

Your post “Absolute Returns” really helped me emotionally. Yesterday, I was a little disappointed when I compared my 2009 returns to my benchmark returns. After reading your post today, I decided to combine my 2008 and 2009 returns. I discovered that I am much better off by using a trend following strategy!

Still following the trends…

This brings up an important issue. Once you decide to use an investment discipline, such as trend tracking, you need to be aware of its strengths and weaknesses by looking at the big picture when evaluating its results.

It’s an unfortunate fact that investors have very short memories and seem to live by the mantra “what have you done for me lately?” Of course, the media supports this type of thinking, which is why the focus of investment returns has been the rebound of 2009 while the effect of the market disaster of 2008 (or the decade for this matter) has been shoved on the back burner.

To evaluate your returns, you need to combine the good with the bad as Paul has done and not just focus on one exceptionally positive or negative period. That is what I mean by keeping the big picture in mind.

There are some investors who got caught in between. They decided to switch gears late in 2008, after the market drop, and adopted trend tracking. Obviously, their main motive was to make up losses, which may not have worked out to their satisfaction.

The reason is that, once a severe market drop occurs, Trend Tracking lags before it gets us back in the market as we’ve see last year. Our domestic TTI not signal a buy until 6/3/09. While it simply takes time for long-term trends to re-establish themselves, I realize that it did not help those with the urge to quickly regain what was lost in 2008.

Everyone else, who got out in June of 2008, had no problem patiently waiting until a new buy was generated. If you are in the camp that would have liked to have done better in 2009, combine your returns of 2008 and 2009 and you may find, as reader Paul did, that you are ahead in the game compared to simply having held on through the past two roller coaster years.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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