3 Steps to a 5-Minute Retirement
“I work about 70 hours a week, and my average competitor works probably 50 hours,” says the nearly white-haired 43-year-old Lynch. “So if I’m working 40% more a week than my competitor, I figure I ought to be able to beat him by 10%.”
– USA Today interview with Fidelity’s Peter Lynch, August 1987
Investing is hard work.
There’s a reason why Peter Lynch, the famed manager of the Fidelity Magellan Fund, during the in 1970s and 1980s spent 70 hours a week at the office — he figured that if he spent 20 extra hours a week poring over financial reports, he’d be able to outperform other funds.
But you don’t need to spend 70 hours a week in front of a Bloomberg Terminal to beat the market. In fact, you could fuel your retirement portfolio on just five minutes a day.
I know that sounds nuts, but let me explain how you can get there in just three steps.
For the past few weeks, I’ve been telling you about the power of a strategy known as “trend following.” It’s the same strategy used by high-end hedge funds to generate investment gains for millionaires and billionaires in any market — even this one. I’ve already shown you what makes trend following a better way than buy and hold as well as an amazing profit chart of a simple trend system over the past two recessions.
Today, though, I want to show you how much work it takes to put a trend system into place for your portfolio.
As investors, we’ve been conditioned to believe that investing is a lot of work. And if you’re purely a fundamental investor, it certainly can be. When you’re scouring the news looking for anything that could impact a company’s financial performance, or when you’re trying to manage a portfolio of more than 1,600 stocks (like Peter Lynch was over at Fidelity), then it’s no surprise that investors can make a full-time job out of watching the markets.
But trend following doesn’t have those same requirements.
Step 1: Cut the Noise
For starters, as a trader using a trend following system, you can ignore the news. Tim Ferriss, the author of the best-selling 4-Hour Workweek, calls it an “information diet.” Modern investors are bombarded with market news these days, and it’s always reactionary. When the market moves, journalists pick the biggest news story of the day and give it credit for making the market moving up or down.
I don’t know anyone who’s gotten rich trading the news off of The Wall Street Journal. That’s why you should just put it down unless you’re just looking for entertainment.
Traders use price as their primary input. That’s because prices react to news almost instantly — well before a journalist has a chance to write a story about it. In effect, price already has the news “baked in.” That’s why you should skip the Monday morning quarterbacks in the media and focus just on price.
For most individual investors, cutting out the noise is the biggest step you can take toward trimming your investment workload down to five minutes a day.
Step 2: Stop Searching for Stocks
Scouring the market for stocks is another huge time sink for investors. Two weeks ago, I told you that there are more than 8,700 stocks trading in the U.S. alone — trying to find out which one is the most attractive on any given week is a momentous task.
That’s why it’s so significant that I showed you the only five stocks you need to know about for your portfolio…
With a trend following system, there’s no scouring for stocks — you start with a finite number of possible choices and your system tells you which one you should buy. Yes, it’s truly that simple. (For a refresher on why it makes sense to stick to such a small group of stocks, I’d recommend checking out last week’s column here.)
Step 3: Think Like a Trader
Trading and investing takes faith. Each time you hit “buy” or “sell,” you’ve got to have faith that your trades will work out in the end. But I’m not talking about blind faith.
Trend traders have faith in their strategies because of performance testing — if you know that your trend system can thrive during recessions, depressions and roaring bull markets, then your faith is warranted. Let me tell you — it’s a lot easier to sleep at night when you’re invested in a strategy that holds up to statistical scrutiny.
I’ve already shown you a quick and dirty example of a trend following system and how it fared against the broad market (click here to see the profit chart again). It may surprise you to learn that the system I demonstrated in that column lost more frequently than it won — that’s actually common for a trend following strategy. Since you’re trying to spot trends early on, it’s understandable that you’ll have false starts. But trend following can be hugely profitable because the big trends that you hit a third of the time more than make up for the tiny losses you’re taking two-thirds of the time.
You have to be able to think like a trader to mentally shake off the losses and stick around to take advantage of those long-run gains. A hands-off approach to investing takes some faith, but it can be lucrative.
A Real 5-Minute Retirement
Obviously, developing a trend following strategy takes time. The backtesting, statistical tests and performance analysis involved make more than a full-time job. But that’s why I’m here. For an individual investor putting a finished strategy to work in his portfolio, all it takes is around five minutes a day of “work.” Sometimes less.
If you don’t want to spend a lifetime researching stocks, that’s a game changer — especially when you consider the fact that any good trend following system can beat the market by a broad margin.
Jonas Elmerraji, CMT
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