If I had to choose one trading strategy…
If I had to choose one trading strategy it would be without hesitation – trend following. To be more specific, long side trend following using individual stocks.
A variety of reasons.
In my view it’s the easiest way to generate a positive expectancy, specifically the ability to allow winners to get bigger, yet keep losers as small as possible.
It’s also a very robust method. Markets, and specifically individual stocks, manifest themselves in trends. While trends do not exist in all stocks all the time, they do exist in most stocks some of the time. And directional price momentum tends to persist long enough to exploit and profit from.
There is no real mathematical or programming skills required. No heavy research lifting to be done. It doesn’t require a huge amount of time – sometimes just minutes per month. Slippage and commissions both tend to be minor drags on growth, and dividends tend to work in your favour.
As such the strategy is accessible to everyone.
Now consider the following chart^ showing the value of a $1000 investment in the S&P 500 using a Dollar Cost Average (DCA) method.
Rather than look at the return, look closely at the underlying story.
The clear and long term upward bias of the stock market.
Over the last 120 years there are broad sideways periods where wealth can be destroyed if not managed correctly. We only need to go back to the recent 2008 crisis to better understand the consequences.
However, a smart trend following strategy can keep you out of most of these periods. Imagine growing your wealth during the long expansion periods, yet not giving it back during the bear markets?
Also consider that the expansion periods, or secular bull markets, typically last 16-years or more.
To finish up, historically the longest bear markets were followed by the longest secular bull markets.
The US has just had it’s ‘lost decade’.
Meaning that if history repeats, the upside move we’re currently enjoying still has another 10+ years to run. That’s a huge wealth building opportunity right at our fingertips.
That’s why I have 80% of my investing assets allocated to trend style strategies across Australia and the US..