Thursday, September 9, 2010

The Trend Is Our Friend

I don't often look at monthly charts, so when I saw this one, I was completely taken by the simplicity of what I was seeing. This is a chart of the iShares TSX 60 Index ETF (XIU) from the bottom in 2003 until today. If you look closely at it, (click on it for a better view) you can see the brown line that roughly follows the price bars. It is something close to the 40-week moving average, or 200-day moving average as it is usually referred to.

I wish I had a nickel for every time I have heard how we cannot time the markets. With three buys, and 3 sells over the period of approximately eight years, the average annual return comes to at least 13%, assuming we only participate in the up legs. Today, we have inverse ETF's which would allow us to play the down legs, making the average annual return approximately 17%. Yet, it gets even better than that. If we used the leveraged ETF's when they were introduced by Horizons a couple of years ago, the returns come to a whopping average annual return of 22%.

People will say, "Yes, but that is in hindsight." That is why I drew the trend lines in red. There is no hindsight required. Stick to the trend until it breaks, then either wait for the next uptrend, or follow the ensuing downtrend.

I am intrigued by those who have adopted a passive investing style in order to minimize trading expenses. Doing so will give a return very close to those of the market. I prefer the simple method shown here instead, for one major reason. I believe we are entering a period of higher volatility, with very little overall return in the long run. I think we should be able to make even better returns, relative to the market, than what this basic method demonstrates. Still, it is a powerful example of why I don't believe we should be happy with market returns, let alone less than market returns. I am not saying we should expect these kinds of returns going forward. I just want to outperform the market.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.