Market anomalies are part of the investment journey, but ignore them – or, worse, misjudge them – at your peril. To weather market downturns and sail forward on the up, your investments must work for you even in unstable times. You can protect your capital from market downturns through tactical asset allocation. This style of investing doesn’t try to ignore market anomalies, instead it uses them to boost your profits and cut your overall risk.
Work with market anomalies such as momentum, trend, and mean-reversion to gain a healthy investment strategy. Here’s how it all works.
Protecting Your Investments With Momentum
Momentum investing as a trading strategy uses the system of buying securities when they are rising and making a sale as they have peaked, or look to have peaked. Momentum investment has its advantages and disadvantages, and it can look counterproductive to the untrained eye. But the overall goal of working alongside the market’s volatility to find those lucrative buys, and then selling them as the momentum wanes, is a sound one. With cash available at the peak of the trend, you can spot the next uptrend and buy into the process once again.
The risk is that the investor moves into the position at too early a stage, or they close too late. This is usually a result of missing the key indicators in the market that point to how it will deviate. It is a skill to be able to know when to enter and how long to hold. But competent investors understand the importance of paying attention to the market and also monitoring selloffs or short-term spikes.
Basics of Momentum Investing
The overriding philosophy behind the momentum investing trading strategy and Dual Momentum investing seems to fly in the face of traditional Wall Street operations. It is more “buy high, sell higher” than buy low and gain when the market reprices the stocks higher. Stocks that don’t perform get sold while those that fly gain profit.
The basic tactic of momentum trading for protecting your investments from market downturns is to take advantage of the volatility. You take a short-term position and buy a stock going up, then sell as soon as it displays signs of dropping. This takes discipline. You then immediately move your capital into another position. Your goal is to rise up with the stock and bail before the wave hits the floor.
How Can This Work For Me?
Momentum investing takes skill. You need a solid knowledge of which equities to pick, a sense of timing in opening and closing, and a consistent overview of your exit points. Choose a strategy that suits your style of investing – there are options that combine the strengths of momentum while aiming to minimize the weaknesses.
The Dual Momentum strategy that was pioneered by Gary Antonacci in the book “Dual Momentum Investing” (2015) represents an approach for higher returns coupled with lower risk. This type of portfolio follows more gains through fewer losses. It generates passive portfolios during market downturns, which makes it more stable in these uncertain times. Dual momentum investing is a good option to weather recessions and problematic markets. Choose a portfolio that is consistently diversified across asset classes in order to weather the market downturns. If you are looking to protect during these times, a conservative tactic coupled with diversification is key.
Momentum strategies should be tracked over the full cycle of the investment, to gauge the true success of the model. As always, investment carries risk. Use your strategies wisely to take advantage of upturns while providing a solid protective base against downturns.