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Beware of the Whipsaw

Sigma Investment Counselors

November 7, 2014

Most investors recognize that markets tend to fluctuate, sometimes quite suddenly, and predicting these swings has proven to be very difficult.  Avoiding the whipsaw is usually crucial to successful, long term investing.

Investopedia defines “whipsaw” as a condition where a security’s or market’s price heads in one direction, but then is followed quickly by a movement in the opposite direction.  The origin of the term is derived from the push and pull action used by lumberjacks to cut wood with a type of saw with the same name.

CNBC, which tends cater to short term trading rather than long term portfolio management, frequently features prognosticators on both sides of a prospective trade, leaving the viewer to decide who is right.  Moreover, some presenters change their minds quite quickly.

For example, on October 16, a noted investment letter writer told CNBC that the “…selloff in global markets was the start of a bear market that looked set to take hold for a long period of time”.  By October 31, the Dow Jones Industrial Average had risen about 8 percent and the same individual concluded that, “It’s’ still a bull market”.

Over time, investors are likely to be rewarded by developing a long term strategy that meets their needs and resources, and sticking to it.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®

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