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All Investment Strategies are Hard

There are myriad investment strategies that investors can use, and some are quite complex while others are very simple. But even if the execution of an investment strategy is straightforward (i.e., simple), all investment strategies are hard from a behavioral perspective. No investment strategy always has superior performance, and this can make it rather difficult for us as human beings to stick with any strategy at times.

Below, I contrast the behavioral difficulties with the two predominant investment strategies, buy-and-hold and trend following.


Likely the most common investment strategy is buy-and-hold, where investors buy an investment and hold it for the long-term.

The 'fear of missing out' can make buy-and-hold difficult at times. It can be very tempting to abandon one's existing investments in favor of others that have been performing much better. In recent years, we've seen many investors put lots of money into assets like cryptocurrencies and 'hot' funds like ARKK that had been zooming upward for what seemed like quite a while. (And in both of these cases, prices went on to fall precipitously.)

Virtually any broad asset class can have poor performance for a long time. For instance, U.S. stocks trailed inflation in one 20 year period. From 1999-2009, U.S. stocks cumulatively had negative real returns. The broad bond market had real returns of about -1.6% annually from 1941-1981. Holding on to an asset class that goes nowhere or even backwards for many years is not easy.

But likely the biggest behavioral issue with the buy-and-hold strategy is deep drawdowns, which are virtually inevitable. It can be incredibly hard to do nothing in the face of big losses that don't seem to stop. Many investors who had extensive experience with stocks were at the very least highly concerned with the 50% decline in stocks that occurred during the Great Financial Crisis of 2008-2009. And many of them bailed on stocks completely and either waited years before they bought back into stocks, well after much of the recovery had already happened, or never bought back in at all.

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Trend Following

A trend following strategy, broadly speaking, is one that changes the investment allocation based on market conditions. An example would be the 200 day moving average strategy, where an asset class is only held if its price is above its 200 day moving average.

Since trend following strategies buy and sell assets at various points in time, it's an inevitability that there will be times when an asset is sold for a lower price than it is later purchased at, which is referred to as a whipsaw. Whipsaws can be emotionally taxing on the investor, especially if there are a number of them that occur in a fairly short period of time.

Of likely the greatest concern to most investors, there can be long periods of time where a trend following strategy can substantially lag the performance of a buy-and-hold strategy. For instance, from 2009-2022, a 200 day moving average of the S&P 500 and where cash was used as the 'out of market' asset had a real annualized return of 5.3%, whereas the S&P 500 had real returns of 10.24% over the same period. Such underperformance can easily result in the same 'fear of missing out' that buy-and-hold investors can experience at times and result in investors abandoning their strategy at an inopportune time.

What to Do?

In terms of portfolio performance, all investment strategies are difficult to stick with at times. But there are means of reducing the behavioral risks of one's chosen investment strategy.

Buy-and-hold investors would likely benefit from simply not paying attention to what's happening with their portfolio's performance, especially during market downturns. This is a situation where more information is actually more likely to lead to a bad outcome. It's easier to implement this tactic with 'all in one' funds like target date funds or fixed allocation funds, and the potentially higher expense ratios of such funds may be dwarfed by their behavioral advantages.

Trend following investors should keep in mind that their strategy, whatever the details might be, will underperform the broad market at some point and potentially for a long time. Note that this is true of any deviation from simply holding 'the market'. They should also remember that whipsaws, which certainly will happen, have been part of the 'price' to be paid for the downside protection the strategy has likely provided.

Regardless of which strategy investors use, it's crucial that they have both a long-term focus and a healthy measure of conviction in their strategy's ability to help them reach their investment goals.

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