Ten-Month Trend Defense
Use a monthly moving-average signal to step away from prolonged market declines
- Difficulty
- Easy
- Time to result
- ~ongoing to results
- Steps
- 5
- Confidence
- 99%
The method monitors a ten-month moving average for each liquid asset or asset class and reviews the signal monthly. Exposure is maintained while the market remains above its trend; a break below the moving average triggers a defensive move, such as shifting to cash. Faber emphasizes that trend following works mainly by reducing volatility and drawdowns rather than by creating extraordinary returns. The lower review frequency produces fewer signals and fewer whipsaws than a daily rule. Its central objective is survival: preserve enough capital to continue investing after severe declines. The approach can be overlaid on diversified portfolios or implemented through liquid futures, but it requires philosophical commitment because hedges can underperform for extended periods.
Origin
Faber's pre-crisis paper, Quantitative Approach to Tactical Asset Allocation, presented the ten-month moving-average rule as a simple defensive signal.
Core principles
- 01Survival is the first requirement of investing
- 02A simple trend signal can reduce volatility and drawdowns
- 03Monthly signals limit unnecessary activity
- 04Trend following is defensive rather than a promise of outsized returns
How to run it
- 1
Select liquid exposures
Choose the asset classes or holdings where a trend signal can be acted on without an illiquidity constraint.
Pro tip Use broad markets rather than relying on one company.
- 2
Calculate the trend
At month-end, compare each asset's price with its ten-month moving average.
Pro tip Keep the calculation and review date consistent.
- 3
Maintain risk above trend
Remain invested while the asset stays above its moving average.
Watch out Do not infer that being above trend eliminates market risk.
- 4
Defend below trend
When the asset breaks below the moving average, reduce exposure or move the allocation to cash according to the predefined rule.
Pro tip Execute the signal rather than debating the latest headline.
Watch out The signal can whipsaw and can lag sudden declines.
- 5
Repeat monthly
Reassess once each month and restore exposure when the rule permits it.
Pro tip Judge the method by drawdown control across cycles, not a single year.
Watch out Trend programs can struggle for years before proving useful in a bear market.
In the wild
Faber proposes replicating a globally diversified endowment allocation while using trend following to move liquid holdings toward cash during long bear markets.
→ The investor retains broad allocation while adding a defense against severe equity-heavy drawdowns.
Faber says applying a trend-following exit to historical bubbles can avoid periods when volatility expands after markets have begun declining.
→ The investor seeks to preserve capital rather than endure the entire collapse.
Common mistakes
Expecting a return engine
Faber says the principal benefit is lower volatility and drawdown, not a massive source of return.
Abandoning the hedge after a weak period
Trend-following programs can struggle for years, creating the career and mindset risk that causes investors to quit before protection matters.
Is it for you?
Best for
Investors with liquid portfolios who prioritize drawdown and volatility control.
Not ideal for
Illiquid holdings or investors who cannot tolerate false signals and periods of lagging a rising market.
From the transcript
“Just use a ten month ten month moving average and that's your warning sign to get aggressively defensive.”
“It usually it works by reducing volatility, reducing draw down.”
“It's to live, to to trade another day, to survive, right to not engage in behavior that either a destroys your capital”
From the episode
Cambria CIO Meb Faber: Masters in Business (Audio)
Meb Faber