What is your biggest fear of investing? Are you afraid of
- Choosing the wrong investment and losing money?
- Missing the opportunities which were right in front of you?
Those used to be my struggles too, until I found a systematic way to invest.
To be fair, there are many ways of investing which could work for you, but momentum investing is one of the simplest and most practical strategies which you can use to build your wealth quickly.
The gist of momentum investing is to follow where the crowd goes. This seems to contradict what many “financial experts” advocate and is definitely a big no-no for value investors. But that is what we humans naturally do. Therefore, it is one of the easier ways.
If you adopt a momentum investing strategy, the toughest thing is to identify the market trends. In this article, I will help you understand one simple way to identify the stock market trends. Let’s start with the basics of momentum investing.
Recognize momentum investing is not speculating
You may have heard of momentum trading and associate it with high risk and speculation in the markets, but momentum investing is not the same. The idea is not to trade in and out, but you merely want to be on the right side.
Think about this, how do you find the best chicken rice in a hawker centre?
You probably have a better chance if you join the one with the longest queue. Would you be able to get a good meal from a stall where nobody visits during rush hours? Maybe… but I think the chance is rather slim.
My point is, being a contrarian and still reaping gains is theoretically possible. But you must ask yourself whether you have the guts, time and money to do the work.
Rely on a system to identify the market trend
Many people, myself included, started investing by randomly following the news or stock tips and trying to predict the market direction. But if you have tried that before, you know it hardly works.
The stock market is a chaotic and confusing world. One day it is full of good news and optimism and the next day the same market can plunge and wipe out your wealth.
A system, no matter which one you use, can help you filter down the noises. It is like the GPS in your car to keep you on track.
If your purpose of investing is for your retirement, you have more to lose if you do not have a system. This is because you have a very long time horizon and anything (especially the bad things) can happen along the way.
If anything can go wrong, it will. – Murphy’s Law
When you invest your retirement savings and you lose control, you will suffer some irrevocable losses. It is not only the financial loss but time loss too. Because time has only one direction, once it is lost, it is permanent.
Position yourself without knowing the future
We all know we cannot predict the future, but we often lie to ourselves as if we have a crystal ball.
He who predicts the future lies, even if he tells the truth. – Arab Proverb
Think about the lies we create for ourselves every day.
- Today is going to be a rainy day.
- The government will pull out the property cooling measures before the election.
- The stock market is going to rebound.
- The price of stock A will go to $2.35.
- I am smarter than 90% of the investors if I just buy and hold some low-cost ETFs.
If we tell enough lies to ourselves, some of them will become true eventually by sheer randomness. But you can be sure that there are enough lies that do not come true and hurt your own pockets.
A good system will help you position yourself without knowing the future, it will help you make money without taking unnecessary risks and achieve asymmetrical returns.
Savvy investors do not predict the unknown future, neither do they manipulate the historical data to justify their past mistakes. Rather, they take actions and manage the risks with current and available information. – Ivan Guan
The way I look at investing may be very different from what you used to hear. You can choose to discard this and continue to believe your retirement planning is set by topping up $500 a month into an STI ETF, or you can think about this from a different perspective.
The rich may hold ETFs, but they do not get rich by holding ETFs. – Ivan Guan
Additional Reading: ETF Investing: 3 myths busted.
“Smart money” always leverages resources which the men on the street can hardly imagine. For most of us, if we can acquire a slice of such information, we will be able to make a handsome profit. Therefore, I am not going to “predict” whether there will be an interest rate hike, whether the Singapore economy will do well or how much the Straits Times Index is going to be. I just follow the smart money.
Identify the market trends by following the money flow
One way to monitor what the smart money is doing is by tracking the money flow. Let me give you an example.
In 2016, many people claimed the January crash of the stock market caught investors off guard.
Is that true?
We can unveil the secrets in the chart below. This chart shows where the $24 trillion institutional investment funds put their money at that time.
There are two obvious things shown above:
- Big money flew out of stocks: the dark blue line shows that money was already flowing out of stocks globally before the January stock market crash and it has continued for half a year. What were retail investors doing? They either held their stocks as a “paper loss” or continued buying when the institutions were dumping their holdings.
- Bond inflows surpassed stocks: the light blue line shows that the money was poured into bonds since February this year. This shows the institutional investors are using bonds as a safe haven
With this knowledge, you have a choice, would you want to get on the train which already started running, or do you want to stand right in front of it?
Get started to follow the market trends
If you are a reader of this blog, you know I created a Global Momentum Compass (GMC). It was built on two core investment philosophies.
- You should always aim to achieve asymmetrical returns.
- You must have a rigorous system to manage your risk exposure.
I am not here to argue what the best investment strategy is, neither do I think my investment philosophy is always suitable for you. But if you think what I said makes sense to you, you can start to monitor the market trends by paying attention to money flows.
You can either choose to implement the momentum investing strategy by yourself or you can engage my investment management services for help.
If you are interested in finding out more about how I work with my clients, you can request a non-obligatory investment discovery meeting using the form below.
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