The Great Debate: Trend Tracking vs. Buy & Hold in the Modern Market

Is passive investing still the ultimate strategy, or is discipline and timing the real path to profit?

The Broker's Punchline and Today's Reality

A recent observation—"I did learn something from my broker...how to diversify my investment losses"—sadly carries an element of truth, especially judging by the financial anxieties prevalent today. The prolonged periods of volatility and sharp downturns witnessed in the early 2000s and, more recently, during the 2022 market corrections, have exposed the vulnerabilities inherent in purely passive investment approaches for many non-millionaire investors.

Challenging the Passive Investment Dogma

I advocate for a methodical, disciplined approach to investing, typically utilizing no-load mutual funds and Exchange Traded Funds (ETFs), guided by **trend-tracking methodologies**. This strategy aims to keep us invested during strong upward trends and move us to the sidelines during significant downturns. It was this precise discipline that allowed us to successfully navigate the dot-com crash in 2000 and the subsequent bounce-back, much like it helped investors mitigate damage during the major market corrections of 2022.

This perspective often meets resistance, particularly from those deeply entrenched in the traditional financial sector who remain adamant about the virtues of **Buy & Hold** and **Dollar Cost Averaging (DCA)**. It is incomprehensible to me how, after witnessing multiple financial crises and the severe losses sustained by the average investor, these theories are still presented as the undisputed, one-size-fits-all solution.

Deconstructing the Buy & Hold Argument

A proponent of the traditional method recently presented three common counter-arguments:

1. "There is no real feasible way to know whether the market is going to be up or down and when exactly to invest."
2. "The only logical way for an investor to make money is through the buy and hold approach, exemplified by investors like Warren Buffett."
3. "Dollar cost averaging helps to hedge against market volatility, and investors should have been buying during recent downturns."

I agree with the first point: there is no way to "know" or "predict" the market's future movements. However, this highlights a fundamental misunderstanding of trend tracking. We do not need to predict; we simply need to follow. Trend tracking methodologies, often based on composite technical indicators, remove speculation and emotion, providing objective signals for entry and exit points.

The Buffett Factor: Resources vs. Reality

Citing Warren Buffett's success as proof that Buy & Hold works for everyone is a gross oversimplification. While Buffett is legendary, his wealth was largely amassed during prolonged bull markets. More importantly, he operates with a vast infrastructure and access to non-public resources that the average retail investor simply lacks. Furthermore, even his firm, Berkshire Hathaway, has sustained major, high-profile losses in various holdings when stubbornly adhering to the "hold" strategy during periods of prolonged sector disruption or decline.

The crucial question is: **Do you fit into the Buffett category?** How many non-millionaire investors have the spare capital to continually buy, hold, and buy some more as their portfolio drops 30% or 40%? How long can they truly afford to wait for the eventual upswing when their retirement timeline is limited? For those nearing retirement, time is the most precious commodity, and the math of recovering steep losses quickly is daunting. Relying solely on the market eventually turning up is a massive gamble for personal financial security.

The Dollar Cost Averaging Dilemma

The idea of Dollar Cost Averaging (DCA) has become an almost religious belief. Yet, countless individuals have been led astray by financial advisors who preach DCA during prolonged bear markets, leading to retirees having to re-enter the workforce simply because they were told, "the market can't go any lower."

To me, in a bear market, Dollar Cost Averaging simply becomes a method to spread the financial pain over a longer duration, masking the obvious necessity of risk mitigation with the hope of an imminent rebound. It requires an indefinite amount of capital and an indefinite amount of time—luxuries the average investor, particularly those preparing for retirement, cannot afford.

Discipline Over Luck

Our decision to move to cash in late 2000 and re-enter in 2003 was not luck, nor intuition. It was a purely disciplined response to signals provided by objective indicators. We adhered to our philosophy, keeping emotions—fear, greed, or speculation—completely out of the process. This disciplined approach is what I advocate, and it continues to guide timely, profitable decisions, such as identifying key growth sectors for investment following recent market corrections.

Ultimately, a disciplined, trend-aware strategy empowers the individual investor to take control, rather than passively accepting the market's swings based on outdated dogmas and hoping for the best.

What is your investing philosophy? Do you follow trends or stick to Buy & Hold? Share your thoughts and experiences in the comments below!