Trend Following For
Dividend Investors

Trend following is a component of technical analysis and it prevents large losses to your portfolio. It’s as simple as that. Read this entire article before writing me off as crazy. It costs you nothing to read.

Before going any farther, let’s cover the first rule of investing:

Don’t lose money.

As a dividend investor you are probably someone who understands fundamental analysis and you buy stocks based on its financial merits then holds the stock regardless of price trends.

I suspect that most dividend investors do not believe in what I used to call technical analysis voodoo logic.

I mean who can seriously consider an investment strategy that uses terms like “Bearish Abandoned Baby”, “Bullish Homing Pigeon,” “Bullish Harami,” and “Death Cross”?

Reasons To Take Technical Analysis Seriously

1. Stock market participants are sometimes irrational.

   The momentum of this irrationality will overcome you regardless of how right you are.

2. The buy and hold strategy assumes that the market will eventually recover to its previous highs and continue climbing.

   Investors assume this simply because the market has historically always done this…over the long term. There are several periods of 10-years or more (including the most recent decade) where this has not happened.

   Additionally, history is a one-time event. Just because the market always eventually rebounds doesn’t mean it always will. Just look at the Nikkei 225 index.

   Too many unknown events exist that could prove the assumption false. I do not believe that even the smartest financial experts understand the complexities to today’s global financial markets.

3. There are enough investors, some of them very large investors, who do use trend following to make investment decisions.

   Therefore, an individual investor who ignores it could be naïvely holding to principles at the expense of his portfolio.

4. The losses incurred by falling stock prices quickly overwhelm any dividend you receive.

   The stock price can take a long time to recover. Worse, the stock price may never recover locking you in to a permanent loss regardless of dividends. In fact, significant drops in stock prices for dividend stocks are often the result of cuts to the stock’s dividend.

5. The falling price may be a signal that there is news or information about the company that may not yet be public knowledge.
6. I have actually developed and use a very successful strategy using a simple, well-known trend following technical signal to hedge my portfolio against stock market losses. CLICK HERE to learn more (link opens in a new window).

You could use any number of technical analysis strategies. Some are more complex than others. Those that are complex may require subscribing to a data service or service that provides buy and sell signals.

I have done quite a bit of analysis on free technical indicators to determine which are the best ones to use. You'd be surprised at what I discovered as to what the most effective free technical indicators are. You can find out in my eBook. CLICK HERE to learn more about my eBook (link opens in a new window).

My eBook also talks about what I learned from subscribing to several expensive subscriptions services that claim to have a predictive ability to discern future stock market market performance.

Plus I’ll show you how it would have worked if used with the S&P 500 index over this past decade.

I have an unfortunate current example of how trend following would have avoided significant losses here. This example reinforces the reasons to consider trend following inyour investing strategy.

“The stock market can remain irrational longer than you can remain solvent”

Remember this quote.

It describes the unflappable fundamental investor who sells a stock because it is (by his calculation) overvalued as the stock continues to climb.

More importantly, it describes the investor who continues to buy stock in a company because he believes it is undervalued as the price continues to fall. The investor does not understand why the market doesn’t see the company’s value, and eventually takes a huge loss in his portfolio.

The moral of the story is that regardless of what you think of a company, the price of its stock is determined by the stock market. You cannot ignore the market’s sentiment.

How To Avoid Stock Market Loses Using Trend Following

The hedging strategy I developed uses put options to provide protection if the stock market falls while allowing a portfolio to continue growing if the stock market continues to go up. You can learn the details in my eBook.

Learn about the actual performance of my strategy using a real portfolio by clicking on the link below. Get more information about my eBook

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