Trend-Followers Live Above the Fray

More than one investor bailed out at the worst possible time after the market took a major nose dive, losing 50% to 70% of their investments. Five years later, the Nasdaq is still 54% below its peak in 2000, and those who stayed in with buy-and-hold are only just now beginning to see some recovery in their portfolios.

At best, they are back where they started. At worst, they suffered untold stress watching the ups and downs and possibly gave up investing for good.

Why do traders end up reacting to the emotions of the day? It's the result of more than just the psychology of the markets. It comes down, say behavioral psychologists, to the internal motivation of the individual investor.

Many might say they are seeking financial security, but perhaps they don't want to be left behind when everyone else is profiting, or they don't want to admit they made a mistake when they chose a stock that's heading south. They buy the propaganda issued through daily news and stock picks and are molded by group emotions about one index fund or another. They follow their emotions without even realizing it.

Regardless of whatever psychological forces are at work, evidence points clearly to the fact that emotional investing results in bad decisions. People often don't have the courage to hold out when an investment is falling, and they end up selling at the worst possible time.

If you want to escape the emotional roller coaster, you must be able to:

• Look past what's being said.
• Ignore the headlines.
• Even turn a deaf ear to your own gut instincts.

Trend-followers simply follow market patterns and enjoy watching the daily ups and downs of the market, knowing that they don't have to respond until the numbers tell them to do so. They can more easily extract real market cycles from the noise.

It's a concept, they say, that is inherently less risky than a buy-and-hold strategy over the long term, because it offers protection against a down market. With buy-and-hold in a bear market, it can take many years to merely get back to your starting point. With trend-following, at a minimum, you can step aside or, more actively, sell short to profit from a downtrend.

Trend-followers enjoy all the ups and downs of the stock market by successfully managing the emotions that sooner or later undermine other investors. Yes, it's good ice cream.