High-Return, Low-Risk Investing is the Holy Grail. Meet Fast Follow Investing.
Not only does this Holy Grail exist, but it’s low-cost, easy to manage, and requires no investing expertise. High returns and capped losses align perfectly for early retirees whose money needs to last for 50+ years.
Released for sale in 1948, the first Polaroid was an “instant” hit. People lost their minds when they first witnessed the camera. Photo by Megan Ruth on Unsplash
This post is part of a 4-part series about smart investing for the semi-retired.
Intro to Fast Follow Investing (this post)
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We’re often stuck in the rut of first-level thinking. So many of us aren’t willing to open our minds to new or different ideas. We need to develop our skills in second-level thinking.
In his book, The Most Important Thing, Howard Marks explains.
“Whereas first-level thinking is simplistic and superficial, and everyone can do it, second-level thinking is deep, complex, and convoluted.”
Search YouTube for Howard Marks-Second Level Thinking. It’s a great 2-minute video.
What is Second-Level Thinking?
Second-level thinking means checking much of what you already know about a subject at the door. As Adam Grant recommends in his book Think Again, you must first unlearn and then relearn.
How does this help the individual investor?
Here’s one example:
As a first-level thinking index investor, I once believed as fact that markets are efficient. Entire books are written about it (e.g. A Random Walk Down Wall Street, by Burton Malkiel).
But markets crashed in March 2020. How could that be efficient? It doesn’t make sense.
Second-level thinkers would dive deeper to learn more. Maybe markets are mostly efficient but with periods of extreme volatility due to crazy human behavior. It’s a more complicated and nuanced portrayal of markets.
But we must understand this to become smarter investors.
How? What if you could step aside before the steep decline in 2020 and then reenter the market when it reversed? That would honor the rule of loss asymmetry, putting you in a better starting position.
Second-level thinking is hard. And it takes time. But it makes you better. It gives you an edge.
An Exercise in Second-Level Thinking
Have you ever stumbled onto something that feels magical?
Remember the first time you used Shazam to name a song? Magic. How about seeing Google Streetview? Or better yet, when you went flying on Google Earth? That was crazy to me!
I read about the unveiling of the first Polaroid instant photography camera in 1947. People went wild…their minds blown. I’m sure you’ve had similar moments.
Warning! I’m going to stretch your thinking (to second level):
To retire early and reliably count on my invested savings to fund my living expenses, I need a high-return, low-risk investment process.
Is it possible?
Well, for one, it goes against everything that we’ve ever learned: high returns demand we take high risk, and low risk offers only low returns…so probably, no?
But what if we could take advantage of the steep (and market-inefficient) drops shown in the chart above?
If we bailed out of an investment before the steep drop, could we cut our losses? Then, if we jumped back into the investment at the right time, could we ride the gains? High returns at low risk. Magic!
Fast Follow Investing is an investing strategy that isn’t well known. It was news to me when I found it in 2021. I have since wondered where it had been all my life.
I’d like to introduce you to it in case it fits your investing goals.
What is Fast Follow Investing? Start with buy & hold passive indexing. Then, expand beyond stocks and bonds. Finally, bail out before suffering severe losses. You achieve a reliable, stock market-like return at lower risk.
What is Fast Follow Investing?
The Fast Follow Investor model:
Tracks market indexes and not individual stocks using low-cost exchange-traded funds (ETFs)
Chooses from all types of investments: stocks, bonds, real estate, gold, commodities, and cash
Requires no expertise or personal judgment about the direction of markets. In fact, it demands that you don’t try to outsmart the mathematical models
Works in all markets and economies (growth, recession, inflationary), and not only those seen recently
Rides extreme market gains, often well into bubble territory
Yet, protects against severe crashes by moving money into cash savings when markets turn negative. The model does not bet against falling markets.
As a Fast Follow Investor, I don’t start an investment trend but instead jump in on the trend quickly.
What Are the Benefits?
Here is the high-level case for Fast Follow Investing.
It has superior results no matter the future. Will stocks go up or down? No one knows, and it doesn’t matter. Fast Follow Investing works no matter the economic or market conditions.
The process is easy to manage, so my day-to-day attention can be elsewhere. It takes only two hours a month to maintain. I can spend most of my time building a great business or focusing on personal relationships.
It gives me control that I didn’t think was possible. Control is what I crave as a consultant and founder. So, it makes sense that I also crave control as an investor.
Why Have I Not Heard of It Before?
You may be wondering why this is the first time you’ve heard of Fast Follow Investing. Or Tactical Asset Allocation or quantitative trend investing upon which it is based. (These were early questions of mine, too.)
Thanks to the evolution of low-cost ETFs, no-cost trading, and tools like AllocateSmartly, individual investors can now mimic these strategies, once available only to investment professionals and the wealthy.
Access to this type of investing is only five years old. As individual investors, we are early to the game. But the process is time-tested with proven success. Professional hedge fund investors have refined it over the years. We can take advantage of those successes.
How Does It Work?
Every month, the Follow Follow Investor statistical model looks at the entire investment landscape across low-cost stock, bond, cash, gold, and commodities ETFs.
The model adjusts how your monthly portfolio is allotted, similar to what we know as rebalancing… call it trend-based, dynamic rebalancing.
Money shifts into investments expected to grow and out of those expected to shrink.
Using a spreadsheet and your brokerage account(s), you make buy and sell trades to align your investments with the Fast Follow Investor model.
How is It Distinct from Buy & Hold Investing?
The Fast Follow Investor model honors everything I respect about John Bogle and the FI/RE movement. The model is do-it-yourself, owns the market, keeps costs low, and skews long-term.
Then, it adds two very simple yet vital ideas that were blind spots for me. If you remember nothing else, remember these two points!
This is how Fast Follow Investing wins over time:
It broadens investment options (e.g., gold, commodities) to help find winners in any economy. Why had I limited my investments to only stocks and bonds?!
It caps investment losses by selling before investor fears sink prices even more (losses are asymmetric). I now know why structured, disciplined rules for selling investments are crucial.
Fast Follow Investing is magical because it adds a layer that is so simple yet completely new to me. The result is higher returns with lower risk. It is possible to have cake and eat it too. We can achieve stock-like returns with bond-like risk.
How Should I Approach This Investment Strategy?
Like any new strategy, you should learn everything you can about it before investing any money. Then, when you think you know what you need to know, test it out.
Try the strategy using just $10,000 to $50,000 of your savings. And do it for several months until you get the hang of it.
You can learn more by checking out AllocateSmartly. (I use this service to manage my money, but this is not an affiliate link.)
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Brian Herriot has been Fast Follow Investing for three years from his home in Alameda, California, and cabin in Hazelhurst, Wisconsin. He also prepares financial freedom plans for consultants and other mid-career professionals in one-week sprints. Check out his take on a new and different kind of retirement at choosyconsultant.com.