Momentum Investing: How to Not End Up Old and Broke!

My kids will never be farmers. They won’t be ranchers either. And I doubt they’ll ever own an industrial-sized chicken coop (what a mess!). Like most everyone else, I presume my children will be urban professionals their entire working lives, hustling for promotions and bigger paychecks.

This is a problem for me. And, chances are, it’s a problem for you as well.

For centuries people by and large grew their own food, were self-sufficient, and took in aging relatives. It was a hard living, but it was still a living. For older folks, it meant knowing where they would end up when they could no longer work.

Those days are gone. Now everyone keeps their own household until they move to assisted living, enter a nursing home, or die.

I don’t know when I’m going to pass. I imagine my wife and I will live most of our days on our own. Eventually we’ll end up in a facility of some sort. It’s something I’m not excited about, and I’m especially not looking forward to paying for it.

But unless I want to end up broke in my old age, I have to plan for this path, which means slogging through financial data ad nauseam, developing and implementing investment approaches that I believe will help me reach my goal.

I know I’m not alone in this. We all work on growing our wealth to finance retirement. And we all worry about it, because if we come up short, it means suffering with a lower standard of living when we’re too old to rejoin the workforce.

To reach our goals, we’ve got to make saving and investing personal. We can’t rely on averages. None of us are average because we each have our own set of circumstances. Long-term portfolio calculations based on average returns won’t pay the bills.

We need concrete action plans that make sense and limit risk. That’s why we have such a strong emphasis on momentum here at Dent Research, along with an eye toward hedging. The objectives: speed, and safety.

Our overriding theme is still demographics, and our main body of work will continue to follow economic and financial trends around the world.

The trick is putting research into action.

From Adam O’Dell’s Cycle 9 and Max Profit alerts, to my recently launched Triple Play Strategy, our goal is to provide readers with the tools necessary to ride current market trends, but then stand aside when the markets start to break apart. We follow the momentum, then hedge and get out of the way.

This is not what the mainstream financial press would recommend, which I’ve always found a bit odd.

To suggest that investors simply buy and hold is to suggest that markets are efficient. It implies that stock prices reflect everything that we could possibly know about the markets, and that people who are bearish balance out those who are bullish.

Even though this “efficient market hypothesis” has been the ruling thought in the mainstream investing world for decades, I don’t buy it. Even one of the architects of this hypothesis, Eugene Fama, noted that momentum investing poses a serious challenge to the theory.

Momentum investors use very recent trend data to identify the best sectors for investment. Over the long term, investment returns of individual stocks are somewhat random. But in the short term, stocks with a lot of momentum tend to outperform other equities.

The idea is to ride the short-term trends as much as possible, banking gains and moving on to other winners when current holdings slow down or change direction.

This active investment approach also allows investors to move to cash when too many equities turn lower. Instead of holding their investments through a downturn, they can sit on the sidelines, protect their gains, and wait for a better opportunity.

This might sound like a lot of work, but it doesn’t have to be. Many momentum approaches require just a few minutes of work a day or week. My own strategy brings that down to ten minutes a month.

The main point is that we are all responsible for our own financial well-being, so we need to do better than just following the averages, hoping things turn out in our best interest. We need to build our portfolios to capture as much of the upside as possible, while actively taking steps to limit risk.

While this method of investing takes more effort than it does to simply buy and hold, there’s no doubt that the long-term goal of a comfortable retirement is worth it.

Rodney Johnson

Rodney

Follow me on Twitter @RJHSDent

Why Winners Keep Winning (And Losers Keep Losing)

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Categories: Retirement

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.