2. How do market trends affect investors?
The chances of our investments making money has more to do with the overall trend of the stock market than it does our skill (or luck) in picking great stocks or mutual funds. Money managers know this, financial advisors know this and professional traders know this. Here’s why:
> About 70% of all stocks move in the same direction as the overall market. If the overall market is in an uptrend, we don’t have to be stock-picking geniuses to make money - our investments are likely moving higher anyway! The rising tide lifts all (most) boats!
> On the other hand, if the overall market is falling, there’s a 70% chance our investments are falling, too. That is, unless we are stock-picking geniuses. That receding tide drops all (most) boats, too!
That’s the beauty of trend following: we don’t have to be experts to be good investors. All we have to do is know what trend or cycle the market is in (we’ll show you a very simple way we do that in the “Charts” section) and make our investment decisions accordingly. Tie off our boats correctly and we don’t have to worry about the tides.
Major market trends and cycles usually last for months, but can sometimes last for years (2003 to 2007 was a 4 year Valid Uptrend!). Once a major trend is identified, we adjust our portfolios and simply ride out the remainder of that trend.
With very few exceptions, we rarely do more than take a peek at the markets and our investments every week or so unless/until the cycle or trend changes. In fact, once you get the hang of trend following, you’ll be able to check the markets and your portfolio in less time than it takes to drink a cup of coffee on a Sunday morning!