I currently have a 40 minute commute to work each way, so I have been burning through some podcasts at 1.5x speed (my brain doesn’t work fast enough to listen at 2x speed). The podcasts I listen to are usually about investing, personal finance, financial independence, or the financial planning industry. Lately, it feels like cryptocurrency discussions have quieted down some, while discussions on momentum and trend investing are all the rage right now.
If you haven’t heard of momentum or trend (they’re used interchangeably in most cases), no worries, that is not what this post is about. But for context, momentum is a market timing strategy where a specific investment (let’s use the S&P 500 in this example) is analyzed for how it has done over a historical period which is usually less than a year. Simply put, if the investment has been trending up, then history says there is a good chance it will continue, while if an investment has been trending down, history says there is a good chance it continues. Many people like this strategy because it can sometimes lead to being out of the market during large bear markets, however it also may miss out on parts of bull markets.
Most data shows that for equity investments, the momentum strategy yields similar to slightly lower returns than being 100% invested in the market at all times, but with much less volatility. Basically it helps smooth the ride. For an emotional investor, this can be a huge value add.
I’ve probably spent way too many hours in the past couple months reading up on momentum and trend studies, wondering if I should implement a similar strategy. Then, I was listening to a podcast interview of Paul Merriman who helped make things clear for me. Paul Merriman is now a financial educator who is looking to spread the good word about simple index investing to the masses, and previously he ran a very successful investment advisory firm for a number of years. In the interview, he noted that he employs a trend strategy on 50% of his portfolio, mainly so he can protect his emotions if there was a large draw-down in equity markets. Following that comment he said one thing that caught my ear (paraphrased), “young people, specifically those in their 20’s, should not even consider a trend strategy.” This is because people in their 20’s could have a ~70 plus year investment horizon. The main thing people in their 20’s should be concentrating on is trying to increase their savings and starting a simple investment strategy that they can stick with. They should not waste their time with a more complex strategy, like trend, that won’t yield excess returns.
This just clicked for me. While I’m not longer in my 20’s (I’m 30 now…), I like to stick to the “keep it simple, stupid” investment philosophy. This phrase was coined by folks in the Navy years ago, and means that things work better when they’re kept simple and not over complicated. There is nothing wrong with my portfolio of a few low-cost index funds that I plan to hold for decades.
For some, a simple trend strategy in a piece of their portfolio might not be a terrible idea. For others like myself who prefer to set it and forget it (cue 90’s TV infomercial), it can complicate things when otherwise simple will get the job done. Just because others are doing more than you with their investments, doesn’t mean they’ll have exceptional results. Investing is rare in that more effort does not directly correlate to better outcomes.