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Weekend Investor
July 16, 2010, 2:02 p.m. EDT · Recommend (2) · Post:
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By Sam Mamudi, MarketWatch
NEW YORK (MarketWatch) -- Volatile stock markets have left investor confidence in tatters. Now some say it's time to accept the turmoil and adopt more dynamic trading strategies.
Proponents of so-called trend investing -- buying and selling stocks depending on technical analysis of the market's direction -- say the tactic not only enables investors to navigate unstable markets, but also prevents big losses when prices fall.
The proactive stance is winning converts at a time when concern about the strength of the U.S. economic recovery and the future of consumer spending is running high. See related story.
Despite a tough market, investors can make money, says Kurt Brouwer, financial adviser and editor of MarketWatch's Fundmastery blog. He tells Jonathan Burton that one of his current favorites is a mutual fund that buys mortgage-backed securities.
Yet this technique is controversial, as it counters conventional wisdom that time in the market, not market-timing, offers individual investors their best chance for success.
To trend followers, the notion of buy-and-hold investing -- picking stocks based on fundamentals and keeping the investments for months or years -- has no place in today's market and in fact is a recipe for defeat.
"You have to understand the game you're playing -- you're playing with sharks," said Kenny Landgraf, president of Austin, Texas-based, Kenjol Capital Management. "You may believe in buy-and-hold, but there are large players out there that don't."
Kenjol uses a proprietary formula to decide when to invest, and approaches the market using exchange-traded funds. As of this week, the firm was fully invested, having jumped back into the market mid-June.
The main advantage of trend investing is protection from heavy losses, Landgraf said.
"[After starting fully invested] you're constantly moving to a more defensive position until you just get out," he said.
The strategy has shown it can work under the most difficult circumstances. Landgraf took clients in his Sector Rotation portfolio -- his firm's all-U.S. stock offering -- out of the market in August 2008, and after "one or two false starts" didn't venture back until March 12, 2009.
This approach gave the portfolio an annualized gain of 1.53% for the two years from 2008 to 2009 -- by contrast the Standard & Poor's 500 Index /quotes/comstock/21z!i1:in\x (SPX 1,065, -31.60, -2.88%) was down 10.7% over that period, and data from investment researcher Morningstar Inc. shows that less than 3% of stock mutual funds -- just 63 out of 2,301 -- were in the black.
Trend investing underpins a few specialized stock mutual-funds.
Stadion Managed Portfolio /quotes/comstock/10r!etffx (ETFFX 9.63, 0.00, 0.00%) , for example, lost just 5.8% in 2008, according to Morningstar. The fund, which invests in an array of exchange-traded funds, pulled out its money of the market in November 2007 and didn't fully recommit until mid-April 2009. Nowadays it's completely out of the market, and has been since the beginning of May.
Stadion's approach offers investors "a much more comfortable ride" said Brad Thompson, chief investment officer at Stadion Money Management.
Apple Inc.'s response to the iPhone 4 reception issue was not really the response that its toughest critics had been hoping for, writes Therese Poletti.
4:08 p.m. July 16, 2010 | Comments: 62
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