Trend Following is based upon the knowledge that valid quantitative analysis combined with disciplined money management can be used very successfully when applied to certain asset classes. High-yield bond funds have characteristics that allow more reliable, accurate and repeatable identification of price trends using a quantitative approach… creating the opportunity for capital gains and low drawdown. These characteristics include smoothed price changes, homogeneous price trends, good statistical predictability and high dividend yields.
A Timely Investment Approach
Major market corrections do major damage to the wealth of investors. Risk management via diversification can be inadequate to protect against an avalanche of selling which causes almost all asset classes to correlate to the downside. Unprecedented government market intervention has lowered real short term interest rates to negative values, and government deficit spending is marching to all time highs. While this helped investment markets to recover fairly quickly from the last correction, equity values are historically high, and bond yields are so low it may be difficult for retirees to live off the income. International markets are skittish, the US recovery is weak and the Federal Reserve has few, if any, tools left to use when the next wave of forced selling hits… as it will, eventually. Participation in a major correction followed by an extended drawdown recovery may severely impact your plans. The incentive to avoid drawdown is rising.
A sensible response to the current investment climate is to switch your reliance on buying and holding diversified assets to a trend following approach that can keep you invested while there is money to be made, yet protect your nest egg when the next major downside correction arrives.