Trend Following Is the GPS of Investing

In many areas of life, stories are king: sales, marketing, children’s bedtime routines, and raucous dinner parties. And analogies, in particular, can be a powerful ingredient of good stories.

I recently discovered perhaps one of the best analogies that might help explain how trend following may assist investors.

The Analogy: GPS & Trend Following

One way to view trend following is equivalent to an investment GPS because, in our opinion, it:

• Uses algorithms (i.e., rules) to get you from point A to point B in an efficient way
• It is indifferent to which road (i.e., asset) it uses to get there and at times avoids the herd (i.e., traffic)
• Offers multiple paths to get there (i.e., multiple timeframes)
• Can be used whether you drive fast (i.e., aggressive) or slow (i.e., conservative)
• Can be modified to fit your preferences (i.e., using things like ETFs, individual stocks, or derivatives…or avoiding tolls)
• Re-routes you if you get off track (i.e., cuts losses quickly)

Trend following can also be compared to a GPS in that it is not perfect.

Just as accidents and traffic can occur on highways, markets can be unpredictable. As a result, others may have questions and second guesses.

With that said, it does an excellent job of getting you to your destination efficiently, without the headache of wondering whether you took a wrong turn or having to pull over and ask for directions.

Boring is Beautiful

For some, it is more fun/exciting/praiseworthy to figure it out on your own. Fundamental research, uncovering hidden gems, and making predictions all have a certain appeal to human nature.

We do not disagree with the appeal. However, we are not in the business of financial planning and wealth management for fun, excitement, nor praise. We are here to help our clients reach their desired destination as on time and as safely as possible – and we seek to do so every single time. We are in it to win. Our goal is to help our clients achieve their objectives.

The challenge with these exciting aspects of investing is that they generally carry a high failure rate for most investors. Their typical alternative is a mostly passive approach, which may perform well for large stretches, but can struggle when a financial crisis comes around. We believe a systematic, trend-following approach bridges these two extremes and is the most effective way to manage portfolios.

As a result, we will continue to embark on journeys with our clients. We will continue to happily keep following the GPS and stay focused on arriving on time.