Back on February 12th, I wrote a blog post titled "Beware the Raging Bull?" which laid out the case for an upcoming correction or bear market. Fast forward a month and a half and global stock markets have entered bear market territory. Based on my trend trading methodology, the Natural Selection stock and ETF portfolios began selling positions in late February and were fully in cash by early March. I didn't do anything extraordinary to accomplish this. I simply sold off my ageing trends as they began to break down and crossed below my predetermined stop-losses. This was the second time in the last two years that the portfolios were moved to cash and both times this strategy protected them from large losses (late 2018 was the other).
At the same time as I began selling portfolio positions, I hedged the remaining long positions with an inverse ETF (short the S&P 500), which I finally sold a few days after closing the last long position. That position earned 20% in both portfolios in a little over a weeks time. By the time the portfolios were fully in cash, the stock portfolio remained within 4% of its all-time high reached in mid February, while the ETF portfolio was just 7% below its all-time high.
This hedging strategy is described in the Managing a Bull to Bear Transition section of the risk management page of my website. To quote from that page..
In cases of general market weakness, my strategy is to tighten stop losses on open positions, hold a higher ratio of cash (including 100% cash if warranted), and invest in inverse index ETFs, which allows me to capture any further upside in my long holdings, while simultaneously benefiting from the broader market weakness. If the market were to experience a full-scale crash, the inverse position would partially offset any losses in my long positions and give me time to liquidate my remaining longs. So, while buy and holders are stuck watching all of their holdings trapped in a bear market, natural selection investors are safely on the sidelines looking for their next opportunity.
The point of highlighting this is not to gloat but rather to point out that a) trend trading strategies effectively manage risk because they naturally force investors to close long positions as they break down; and b) hedging strategies that utilize inverse ETFs are an effective risk management tool to protect remaining long positions and potentially even prosper during a bear market.
Many mainstream financial planners are now telling their clients that they should ride it out because it will eventually pay off. While it is possible that this correction is all finished, it is equally possible that the selling will resume as the full economic consequences of Covid-19 become realized in the coming months. As I explain on the buy and hold page of my website, making assumptions about market direction can be extremely costly in terms of lost capital today but also with respect to reaching one's investment objectives over time. Our investment lifespans are finite and every year really does matter.
Natural Selection Self-Investing employs a simple trend trading strategy that provides self-directed investors a way to earn exceptional returns, avoid losses or even prosper during bear markets, all while avoiding the high fees. My model portfolios, watch-lists, and portfolio builder instructions provide subscribers with a framework to build and monitor their own portfolios with minimal effort. Now is a great time to subscribe to the service because both portfolios are currently in cash and I will be looking to re-establish positions in the coming weeks and months, giving subscribers an opportunity to see how portfolio building occurs in real-time. To learn more, please visit www.investthetrend.com