In real estate, it’s: “Location, location, location!”
In stock investing, it’s: “The market, the market, the market!”
We know that even the best of stock portfolios will likely perform poorly when the stock market performs poorly. We all remember the devastation on portfolios from the crashes of 2000-2002 and 2007-2009.
The key, then, is to be WISE about the stock market’s TREND and proactively move to the sidelines when the market’s trend turns negative.
Being TREND WISE has several essential benefits:
- It instills discipline in your investing, instead of following hunches or reacting emotionally to the news of the day.
- When the market trend is down, you may want to consider moving completely out of stocks.
- While the market trend is up, you may want to consider participating.
Being TREND WISE is very different than the typical “Buy and Hold” strategy. Most “Buy and Hold” portfolios are well diversified (this is good) and include periodic rebalancing (also good), and they may even dial your stock exposure up or down a few percentage points from time to time. But they rarely move completely out of the market. The S&P 500 dropped 55% in the 2007-2009 crash; NASDAQ dropped 78% in 2000-2002. Such losses can completely derail your financial plan.
Being TREND WISE implies you have a market trend model you can follow. My suggestions for such a model would include:
- Base it on direct market data, such as price or volume. I have not found indirect factors, such as PE multiples or interest rates or GDP, to provide actionable signals.
- Longer term. You don’t want to be in and out all the time. The trend I use has averaged one exit every year and a half.
- It’s trend-following. No model can predict the market. The best we can hope for is a model that tells us—after the fact—that the trend has changed.
I’ve written a white paper on this topic that you can read at WestlakeIA.com/writings.
Robert A. “Rocky” Mills is president of Westlake Investment Advisors in Westlake Village. He can be reached at 805.277.7300 or online: WestlakeIA.com.
He is a registered representative with and securities offered through LPL Financial, Member FINRA/SIPC.
Investment advice offered through Westlake Investment Advisors, a registered investment advisor and separate entity from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risks including loss of principal.