Investment Methodologies: Market Timing vs. Trend Tracking

Most of the time, any attempt of investing in the market other than via Buy & Hold (Asset Allocation) is immediately labeled with the by now dirty word “timing.” MSN had an article about that called “Does market timing ever work?”

The story starts with the fact that “rapid, short-term trading drives up costs” for other mutual fund investors. If that’s what timing is, I can agree with that. It goes on to state that that most investors lose money and buy closer to the top than at the bottom. I’ve heard that too.

From the experience in my advisor practice, I have found that most investors’ problem is not the rapid in and out trading as this article describes. Far from it. When I look at portfolios from prospective clients, I am amazed (more often than not) of how well they have selected their mutual funds and ETFs.

However, I’ve always found the same problem.

While the investor may have made great fund selections, he never sold and held them through bull and bear markets alike. The end result was that his returns were mediocre at best. If that has happened to you, trend tracking can help you alleviate that problem.

How?

By having a definite plan in place the moment you purchase your investments. If you do nothing else but employ a trailing stop loss method, you will avoid giving back most of your unrealized gains in the event of a trend reversal or worse, a slide into bear market territory. Yesterday’s post on EUROX clearly demonstrates that a fund, which had provided superior profit opportunities over a 2-year period, turned in a far lesser performance that it could have.

Trend Tracking as opposed to market timing attempts to be a conservative long-term approach with its main goal being the avoidance of a bear market. It has nothing to do with rapid trading but everything with using some common sense to better deal with the irrationalities of the market place.

Original article here.