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Does trend trading perform better than buy-and-hold strategy?

|Includes: DIA, SPDR S&P 500 Trust ETF (SPY)

“Buy and hold” investing strategy does not seem to work well over the past 15 years. A “buy and hold” investor of the S&P500 index will incur a 7% loss from end of 1997 to 2008 while a trader that follows the major trends will make about 560% return or about 19% annual return during the same period!


 

Figure 1-1: S&P 500 Index chart

As you can see from the Figure 1-1, the S&P 500 index had undergone two major bull and bear markets from 1997 to 2008. In our example, the long term investor who bought the index in 1997 will only breakeven in 2009!

However, assuming if you are to carry out the trend following trades during this period as described in Figure 1-2, your $10,000 will turn into $66,350 compared to $9400 if you are to employ “buy and hold” strategy. That is equivalent to multiplying your money more than 5.6 times or almost 19% per annum! Of course, you might not be able to time the tops and bottoms so accurately, but if you master trend trading, you will definitely perform much better than just employing a “buy-and-hold” strategy in this instance.

Entry Date

Index

Order

Return1

Exit Value

31 Dec 1997

970.43

Buy

57.4%

$15,700

24 Mar 2000

1527.46

Short Sell

49.1%

$23,410

9 Oct 2002

776.76

Buy

99.9%

$46,790

19 Jul 2007

1553.08

Short Sell

41.8%

$66,350

31 Dec 20082

903.25

Close Short

NA

 

1: Extracted from "Fast And Simple Steps To Profit From Trend Trading", trendtradingsignalsystem.com
2. Content in table above excludes dividends earned or paid.
2. Exit on 31 Dec 2008 for 19 Jul 07 short sell order is used for simplicity, if you hold till 9 Mar 2009 when S&P 500 is at 676, you would have made more.
 

Figure 1-2: Returns from trend trading S&P 500 Index from 31 Dec 1997 to 31 Dec 2008

You might think 19% annual return is not exciting but if you compound 19% over a period of 30 years, your $10,000 will grow to $1.85 million in 30 years time! That is 185 times your initial capital! A record that even Warren Buffet will be proud of. And this is just the S&P 500 index!

Contrary to popular belief, Warren Buffet is not just a “buy and hold” investor. Buffet started out as perhaps one of the most sophisticated securities trader and hedge fund manager in the world. For example he practiced highly sophisticated arbitrage trading. Buffet did mention that he kept his personal investments and trading apart from Berkshire. One of the key reasons Buffet held a large part of Berkshire’s investments for a long time in the later part of his career is because Berkshire owns huge stakes in its portfolio companies and it simply cannot trade their shares in the markets like most of us do.

Hence, whatever your trading or investment philosophy is, trend trading is an important and powerful tool that you should include in your repertoire of skills.

For more on Trend Trading, you can visit www.trendtradingsignalsystem.com.



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.