Trading with Charts for Absolute Return

BENCHMARKING AS AN INVESTMENT STRATEGY

A long-only stock fund is, obviously, long term focused and does not care about short term market swings. This is the reason many funds between 2000 and 2010 had drawdowns of up to 50 percent and more in their performance profiles, because almost all long-only funds moved with the underlying indexes. To look good even if the portfolios suffered huge losses, the banks and fund companies came up with the term benchmarking as an investment strategy. This means: If an underlying index has dropped 50 percent while a portfolio has lost only 48 percent, the fund company can still pride itself on beating the index if the benchmark is 2 percent.

But how does it help an investor if the stock market is down 50 percent and the portfolio is down 48 percent? Portfolios should never suffer drawdowns of 48 percent. But banks and fund companies get paid a lot for management fees for good marketing without performance pressure. Even the smallest, most inexperienced investors can achieve as good trading results as the biggest investment companies if they buy only ETFs of an index. What counts is the performance, nothing else. This is the reason why the ETF markets are growing so fast.

Long-only strategies worked for business tycoons like J.P. Morgan, who used his connections to continue to increase his fortune. But most investors don't have access to information like J.P. Morgan. As an alternative, many investors, dedicated to investment strategies with results ...