Wall Street has been all giddy last week over the nice 2nd half-of-the-year rebound rally, after the heart stopping pullback during May/June 06.
With the S + P 500 having managed to gain almost 14%, the question is being asked how a Trend Tracking approach to investing in the market has fared. Well, in my practice, on average, we gained some 2% less than the S+P.
The main reason is that we paid what I call the “Safety Premium.” It simply is a reduction in the overall return for this year due to the fact that we controlled the risk by being on the sidelines when the markets collapsed during mid year. At that time, a return to bear market territory was a distinct possibility, although that fact seems to have been long forgotten.
When the markets returned to rally mode, we inched back into it taking advantage of the upward momentum.
It is a common occurrence in Trend Tracking that there are periods where we will not outperform the S + P 500 – and it is not necessary to do so. Long term we will have the edge, as many investors celebrated this year as finally having recovered their last bear market losses while we had moved ahead by leaps and bounds.
You can’t have it both, the highest returns along with the greatest amount of safety. There will always be a trade off and you have to make that decision as to which is more important.
Having avoided most of the last bear market, I gladly pay the “Safety Premium” to have peace of mind along with a good night’s sleep.