Trend-Following: A Decade Of Underperformance

Everyone in finance remembers 2008–the Global Financial Crisis.

Yes, I know, the final downward movement in the stock market was in early 2009. However, many remember 2008 as the year of the crisis.

So now we are 10 years removed from the crisis.

Why do I mention this?

After the crisis, some began to question the logic/benefits of B&H investing. After all, a ~50% cut in the value of stocks can be painful. Yes, diversification matters; however, some of us are humans and tend to focus on individual pieces of the portfolio.

While there are many ways to deal with potential drawdowns (including asset class diversification), a popular and simple approach is to use trend-following within each asset class.

So below, I wanted to generate the returns to both B&H and Trend-Following for a variety of asset classes over the past decade.

Bottom line: Trend-following rules have caused a decade of absolute underperformance.

The Sample and Trend-Following Rules

To examine the results, I examined six common asset classes:

  1. U.S. Stocks — SP500
  2. Developed Int’l Stocks — EAFE
  3. Emerging Market Stocks — EEM
  4. Real Estate — REITs
  5. U.S. Gov’t Bonds — U.S. Treasuries, 7-10 year
  6. Commodities — GSCI

In addition, I plot the returns to Cash within the U.S., by the total return to 1-3 month Treasury Bills. All returns are total returns and include dividends, when applicable.

Below are the Compound Annual Growth Rates (CAGRs) to the B&H assets, from 1/1/2009 – 12/31/2018, gross of any fees or transaction costs:

(Click on image to enlarge)

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index.

As you can see, U.S. stocks were the place to invest over the past 10 years. U.S. Real Estate was also a good bet, while Commodities were negative and International stocks (Developed and Emerging) lagged the U.S. market.

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