Stock Strategist (ETF Edition): Trend-Following Can Cut Risk

[Morningstar Logo]( [Company Site]( [Company News]( [Membership]( [Portfolio]( [Stocks]( [Options]( [Funds]( [ETFs]( [Markets]( [Tools]( [Personal Finance]( [Discuss]( Stock Strategist (ETF Edition) Trend-Following Can Cut Risk Bad performance tends to cluster. [tab_bar] by Alex Bryan, CFA | 6/19/2019 6:00:00 AM Over the long haul, the stock market has been a great investment, and it will likely continue to be. But its path is far from smooth. At times, it can be downright scary. Gut-wrenching volatility and ominous headlines can cause even seasoned investors to abandon stocks, which can derail a well-thought-out investment plan. That's why it's important to plan for the market's inevitable downturns before they happen. The most effective way to reduce investment risk is to adopt a more conservative asset allocation. But many investors have a more aggressive asset allocation than they should (given their risk tolerance) because the stock market's returns are too tempting to give up, and it's easy to overestimate comfort with risk in an extended bull market. A disciplined trend-following strategy can help investors who bite off more risk than they can chew. Trend-following is a momentum strategy that can be used to time exposure to an investment, based on the idea that an investment's (recent) past returns can help predict its (near-term) future returns. For example, a simple trend-following strategy may hold a stock index fund when its return over the past year is positive and sell it when its return is negative. Trend-following can help cut risk while capturing most of the market's returns. That seems too good to be true, particularly for a market-timing strategy, but it has been undeniably effective. To read more, click [here](. Sponsored Links [Buy a Link Now]( New: ETF Managed Portfolios Center On [MorningstarAdvisor.com]( Tap into the industry's best source of information on ETF strategies for financial advisors. See key performance data, screen for specific strategy attributes, and learn more about this fast-growing area of the investment marketplace. [Click to get started](. Free Issue | Morningstar's Stock Newsletter >> Morningstar StockInvestor is celebrating more than 10 successful years of high-quality stock investing. Its two real-money portfolios have outperformed the S&P 500 since 2001. [Get new ideas for the core of your stock portfolio]( ). Search Most Recent Articles [How Morningstar's Fund Ratings Have Performed]( [3 Keys to an Emerging Company’s Success]( [After a Strong Start to Year, U.S. Fund Flows Take a Dive]( Latest Analyst Reports [Fidelity Advisor® Emerging Asia A]( [Fidelity® Emerging Asia]( [PIMCO Em Mkts Ccy and S/T Invsmt Instl]( [PIMCO Emerging Mkts Lcl Ccy and Bd Instl]( [PIMCO Emerging Markets Bond Instl]( ABOUT OUR EMAIL TO UNSUBSCRIBE this email address to the Stock Strategist newsletter, please click "reply" and then click "send." This will unsubscribe only this email address to this specific newsletter. All subscription changes will take effect within one business day. Replies are not read by individuals, so please do not use this for queries about Morningstar.com. If you have questions about Morningstar.com or your membership, send a note to [joe@morningstar.com](mailto:%20joe@morningstar.com). ABOUT OUR PRIVACY POLICY Please [click here]( to learn about Morningstar's privacy policy. (c) Copyright 2019. Morningstar, Inc. 22 West Washington Chicago, Illinois, 60602 All rights reserved.