Why Should You Add Trend Following to Your Investment Portfolio?

Trend following is an investment strategy that aims to profit from market trends, whether they're going up or down. It works on the idea that markets sometimes move in clear directions, creating trends that can be used to make money. When prices rise, trend-followers buy; when prices fall, they sell.

With markets becoming more unpredictable and traditional investments no longer adhering to predictable norms, having a strategy that can deliver returns in different market environments is essential. Here are five compelling reasons to consider adding trend following to your investment portfolio.

1. Profit in Both Bull and Bear Markets

Trend following has the unique ability to generate profits in both rising and falling markets. For example, during the 2008 Global Financial Crisis, the more recent COVID-19 crisis or when inflation returned during 2022, traditional markets suffered major losses, but trend followers made profits. But it’s not just during crisis that trend followers can help. For example, when equity markets and commodities like cocoa surged in early 2024, trend followers were able to capture this positive momentum an deliver strong returns for their clients. By leveraging both upward and downward trends, trend following helps keep your portfolio resilient in different market conditions.

2. Enhance Portfolio Diversification

Diversification is a key component of a strong portfolio, and trend following enhances this by having a low correlation to traditional assets. Highly correlated investments tend to move in the same direction, leading to significant losses during market downturns. By adding trend following to your mix of equities and bonds, you introduce a new dynamic that offers better protection against correlated risks.

3. Invest Across Multiple Geographies and Markets

Trend following allows you to invest globally, beyond the confines of a single market or country. Whether it's the cocoa fields of Ghana, the wheat farms of the Midwest, or the copper mines of Chile, the opportunities are vast. Through highly liquid exchange traded futures markets, the global reach of a trend following strategy gives you the flexibility to tap into emerging, and sometimes surprising, trends worldwide, maximizing growth and profit potential.

4. Manage Risk with Liquidity

Liquidity, the ease of buying or selling assets without affecting their price, is crucial in trend following. Trend followers typically trade in highly liquid markets on regulated futures exchanges, allowing them to quickly exit positions when needed and enter new trades when opportunities arise. This agility helps manage risk effectively and limit losses in volatile markets.

5. Avoid Emotional Investing

Emotional decisions can lead to costly mistakes in investing. Trend following relies on pre-defined rules implemented via mechanical and systematic techniques, removing emotional biases from the investment process. Instead of being swayed by fear or trying to predict what the markets are going to do, trend followers stay focused on long-term goals and ignore market noise. This disciplined approach leads to more rational and effective investing.

Conclusion

The allure of trend following lies in its ability not just to weather market storms but to thrive amidst chaos. By offering unmatched diversification and access to global markets, trend following instills robustness and confidence in your portfolio during uncertain times. As an investor, you can rest assured that your portfolio is supported by time-tested principles and driven by steadfast discipline. So, why wait? Give it a try!

For a deeper understanding of why trend following is essential for any portfolio, check out our FREE eBook, "Ten Reasons to Add Trend Following to Your Portfolio." It provides detailed, evidence-based insights into the value of trend following for enhancing your portfolio and ensuring long-term success.

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