What is Trend Investing? With Ryan Kirlin – Alpha Architect

Trend investing is buying and selling investments, based on their current trend. Here at One Degree Advisors, we call this Tactical. Today we’re talking with Ryan Kirlin of Alpha Architect on what trend investing is all about.


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Show Notes:

Full transcript:


Alex Okugawa 0:00
Trend investing is buying and selling investments based upon their current trend. Here at One Degree Advisors, we call this strategy, tactical.

Today we’re talking with Ryan Kirlin of Alpha Architect on why trend investing can be an excellent component of a long-term investment strategy.

If you’re interested in taking your investment game to the next level, or simply understanding this philosophy better, stay tuned.

Alex Okugawa 0:35
Alright, Ryan, well, thank you for joining us today, we’re gonna dive right into it. And if you can tell us. What is trend investing?

Ryan Kirlin 0:45
So trends are all around us. And they’re particularly easy to notice. If you look back at old photos of yourself, of yourself from different decades, right?

Maybe you had platform shoes in the 70s, shoulder pads, and neon colors in the 80s? I don’t know. But so trends come and then then they come to an end too.

So you’re not wearing the same styles today that you were wearing, you know, a decade ago, two decades ago.

So in investing, trends exist too and trend investing is simply owning a certain asset when it’s performing well. And then you’re looking at certain signals. So when you get out when it’s no longer performing well.

Anthony Saffer 1:34
So Ryan, when does trend investing tend to work well? Is there a certain market environment?

Ryan Kirlin 1:39
Yes. So trend investing works well when asset classes are trending well. So either they’re consistently trending up or down, their trend following works well when markets are trending down, as well, for extended periods.

You know, on the upside, people may refer to it as climbing the wall of worry, right?

Stock prices keep moving higher. And you’re going to hear all the time. Yeah, we’re at it. This is the top. The market’s a bubble. And then you know, you look back at your stock portfolio three months later, you know, and markets have gone even higher, right.

So things are trending well over an extended period. And that can be scary in and of itself. And then the reverse is also true. You can have long, extended drawdowns in the market, like the 2008 time period, where the market steadily marched down for months.

And then you know, it kept being like wow is now the time to get in the market. And then it just kept going down. So if you just follow the trend, and it’s a consistent trend, that’s when trend following does well.

Alex Okugawa 2:54
So what market environments tend to be difficult for trend investing?

Ryan Kirlin 3:01
So then the opposite, choppy markets, right? If you have a market that has sharp reversals. Just meaning simply the get out of the market goes down fast and then goes up just as fast. We would call that getting whipsawed.

And getting whipsawed is when trend investing doesn’t do well. And exactly what is a whipsaw? Well, okay, the market goes down, let’s say fairly fast. And then you get out because the trend is now saying hey, this, this trends, no good.

We want to get out of this market. And then as soon as you get out, the market goes up. That is getting whipsawed. The way we think about it, though, is we like to think about trend following like, paying your health insurance. So each month you pay your health insurance premiums. You don’t think man I lost money this month.

You know, I didn’t get in a car accident or I didn’t have some major health issue. And I paid that health insurance premium. You know, I didn’t need it this month. I wish I didn’t pay you don’t you know you don’t think like that.

You’re like, Hey, I’m very grateful that I had no health issues and I had health insurance for this month. You’re paying those health insurance premiums for times when you need it that one time when you need your health insurance for whatever it may be right and there’s an enormous medical bill.

Man, you look back you’re like, Man, I’m happy I paid all those little premiums along the way that you know, they may not be so little in the moment, right? You’re paying a few $100 a month you could have gone spent that somewhere else.

That’s kind of what the whipsaws like how we view getting whipsawed in the market.

There’s got to be a cost. There’s no such thing as a free lunch so you get one whipsaw, which does happen. That’s when trend following is not working well. But that’s kind of the premium you pay to hopefully get out for the really big drawdowns.

Anthony Saffer 5:13
So Ryan, how might an investor use trend within an overall investment strategy?

Ryan Kirlin 5:19
Yes. So it’s the old Charlie Munger saying, you always want to invert the problem. So I think it’s an interesting question is how do you want to use trend following?

Well, then, we can look at it the other way, right? There was Michelangelo who was asked when he was making the statue of David, like, how did you make the statue of David? It’s one of the most beautiful pieces of art of all time. And he just said, it’s simple. I just removed everything that wasn’t David.

Well, that’s pretty easy. So with trend following, let’s think about it. When won’t we use trend following?

We won’t use it if, well, let’s just say trend following is a form of risk management, right? So we won’t use it. If we’re trying to get the absolute highest return you can get. Because there is no such thing as a free lunch.

So because we’re adding something on in terms of risk management, we don’t expect that a trend following portfolio is going to get you the absolute highest return. So if that’s your goal, probably not going to use trend follow. If we want to move closely with what you see in the financial media, on any given day, we don’t want to use trend following because those whipsaws are going to create times where we’re just gonna be different from the market.

Sometimes that difference can be fun. Sometimes, you know, hey, we save money, because we got out and the market kept going down that’s a good one. But sometimes they’re not fun, right?

The whipsaws, you got out and then the market goes up and you’re stuck kind of in neutral. But so if you want to track what’s, you’re seeing on TV or whatever, probably not great to use trend following. So when do you use trend following then you use it if you’re okay being a little bit different from the market?

You’re okay with not having the absolute highest returns. But you want some form of protection in a falling market, and you’re willing to pay those insurance premiums along the way with the whipsaws.

Alex Okugawa 7:34
Awesome. Well, thank you, Ryan, for being with us. I mean, this is super, super helpful information about trend following. I know Alpha Architect has a lot of information on this subject. And you guys also do a lot of education. for investors, where can people go to learn more?

Ryan Kirlin 7:52
Yeah, the best place to go is just alphaarchitect.com Alpha A-L-P-H-A and architect like the like somebody who designed your house, Alphaarchitect.com.

Alex Okugawa 8:06
And we’ve also described how we utilize this trend following strategy. We call it tactical, but this trend following strategy within our investment philosophy, so we’ll link both to your website as well as the link to our investment philosophy. Well, awesome. Thank you so much, Ryan, for being with us. We appreciate it.

Talk with us about your portfolio or financial plan here: Talk with an advisor

More Reading: What is Momentum Investing? With Jack Vogel Ph.D – Alpha Architect

This does not constitute an investment recommendation. Investing involves risk. Past performance is no guarantee of future results. Consult your financial advisor for what is appropriate for you. See our website at onedegreeadvisors.com for full disclosures.

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