Last week’s blog post discussed the merits of investing in gold on grounds that the price of gold has been in an uptrend over the past several months. The price of gold has been subject to extreme moves over the past four decades, and investors would do well to participate in a gold bull market to some degree.
More generally, I noted that a big part of successful investing often involves managing extreme events over time. This week, we definitely saw an extreme event. The equity indexes plunged more than 10% and remarkably did so within days of achieving all-time highs.
Among extreme events, this past week included one of the more extreme. Last week involved the fastest 10% correction in market history, and only 2007 saw such a drop so close in time to all-time highs. Of course, we know what happened to the markets the following year—the worst bear market since at least the 1970s occurred.
Most all investors suffered from last week and did so in direct proportion to their exposure to the equity markets. But many momentum and trend-following investors, including Stillpoint investors, were only partially exposed to the equity markets. Furthermore, Stillpoint investors had exposure to alternative assets that were themselves trending up, including gold and long-term treasuries.
While gold prices spiked up initially and then plunged late last week, gold outperformed equities by a substantial amount last week and finished the month roughly flat. By contrast, the S&P500 equity index finished the month down about 8% on a total return basis. Long-term treasuries performed much better, gaining nearly 5% on the week and well over 6% on the month.
It should be plain that momentum and trend-following investors can enjoy the benefits of diversification just as buy-and-hold investors can. Momentum and trends can be found with any asset class.
The studies show that equity prices will likely bounce over the next few months, even if the equity markets do enter a bear market later. But whatever occurs, momentum and trend-following investors will be in a position to remain invested if the bull market continues or to cut losses short if a bear market emerges and look to alternative investments that are enjoying a positive trend.