a revolution in do-it-yourself investing

« « This Market Should Go Lower!| What Gives With Gold? » »

Get Rid of Your Investment Worries Once and For All!

I know it is a bold claim, but it is true!  Today, I am going to give you the secret to getting rid of your investment worries once and for all.

But first, let me start with a little background before I start down this road.  If you are reading this post, you have probably been on the Stock-Signal.com site and seen that we provide signals that tell the subscriber when to buy and when to sell any combination of seven major stock indexes.

You have probably even asked yourself how we provide these?

The simple answer is that we use trend following models to provide these signals.  Wikipedia provides the following definition of trend following:

Trend following is an investment strategy that tries to take advantage of long-term moves that seem to play out in various markets. The system aims to work on the market trend mechanism and take benefit from both sides of the market enjoying the profits from the ups and downs of the stock market.

Now that my kids are heading back to school tomorrow, I promise in future weeks to shed a little more light on trend following.  However, for the moment it is basically a system of indicators that signal trending price movements after they have started and signal an end to that movement after price has turned down and vice a versa for downward trends.  It does not forecast price movements it reacts!

The key takeaway is that this method works well with up and downward trends.  This means the strategy tends to do very well in bear markets and by virtue of the fact that you are capturing price movements after they have already begun, underperform somewhat in a bull market.  I call this underperformance the cost of insurance which then pays off in the bear market for a market or index that the trend follower trades.

This ability to do well when other strategies are doing poorly means, in general, that trend following strategies have a low correlation or even a negative correlation to indexes such as the S&P 500.

So now where is the secret to getting rid of investment worries?

Well I alluded to this in our last post, entitled “This Market Should Go Lower.”  It is when you combine trend following with other unrelated investment strategies, such as buy and hold or deep value investing.

Check out this chart though the end of 2012.  image

Note how the multi-disciplined portfolio has a smoother return stream (reddish graph).  Annual returns for this portfolio over purely holding the S&P 500 Price Index are far superior at 7.31% vs. just .59% for the former strategy.  Obviously, just trend following delivered the best returns at 12.67% per annum over this 12 year period.

However, do you notice the trend follower return stream from 2009-2012.  I can tell you from personal experience it has been tough to be a trend follower during this period.

Also part of getting rid of your investment worries means lowering volatility in your investment accounts.

Just buying and holding the S&P 500 has the highest volatility over this period of 17.55%.  While the IASG Trend Following Strategy Index had a standard deviation (a measure of volatility) of 13.02%.  The clear winner was the 50%/50% portfolio with a standard deviation of just 7.76%.  This portfolio had less than half the volatility of the S&P 500 index and just about half that of the stand alone IASG Trend Following Strategy Index.

So you make the call, which portfolio would you rather own? For my money and my stomach ulcer, I would want the Multi-Discipline Portfolio.  It truly helps me get rid of my investment worries once and for all!

Now some disclosures:

No representation, warranty, or undertaking, express or implied, is given as to the accuracy or completeness of the information contained in this material by any person; no reliance may be placed for any purpose on such information; and no liability is accepted by any person for the accuracy and completeness of any such information.

Past performance is not an indication of future performance and there can be no assurance that the strategy will achieve results in line with those presented in this performance summary. This document is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

The S&P 500 is a capitalization weighted index of the 500 leading companies from leading industries of the U.S. economy. It represents a broad cross-section of the U.S. equity market, including stocks traded on the NYSE, Amex and NASDAQ.

IASG Trend Following Strategy Index: For the purposes of this index, established CTAs are defined as having a minimum 3 year documented performance history. The index is not weighted and new managers are added when they reach the 3 year performance requirement. The IASG Index does not represent an actual portfolio which could be invested in, and therefore the index performance results should be deemed hypothetical in nature and for comparative purposes only.

MD or Multi-Disciplined Portfolio is a hypothetical portfolio meant to show the impact of mixing trend following strategies, like those used by the managers in the IASG Trend Following Strategy Index, with more traditional strategies like buying and holding the S&P 500 Index. This portfolio has not been adjusted for management fees, commissions or slippage.

About The Author Jeff Diercks


Mr. Diercks is the managing partner of Stock-Signal.com. He is also Managing Director of InTrust Advisors, Inc., a Tampa, Florida based registered investment advisor.

Sign up for our periodic blog posts and get a copy of our most popular report. FREE.
Get our free report - 7 Reasons Trend Following Can Improve Your Returns

Comments are closed.