The problem with trend chasing
It is tempting to anchor decisions to stock market trends, especially after a strong month or a sharp pullback. When prices move quickly, it feels like the market is sending a clear message. In reality, short term moves are noisy. A great business can slump for reasons that have little to do with long term value, while a weak company can rise on excitement that fades as new facts emerge. Reacting to the latest wiggle turns attention from business fundamentals to the tape, and that shift is where many costly errors begin.
Randomness is not a reason to avoid equities. It is a reason to build a process that limits how much day to day movement affects your choices. A process helps you separate durable information from passing chatter.
Why momentum and dip buying feel right but go wrong
Two habits capture most reactions to recent price action. One group loves to ride winners. They buy stocks that have been climbing and often add more after gains, assuming the strength will continue. Another group prefers to buy weakness. They add to positions after declines to lower the average cost and wait for a rebound.
Both approaches can work sometimes, which is why they persist. Over long periods, though, they lean on patterns that include a large random factor. If a rising stock is being pushed by a fad rather than improving fundamentals, averaging up can compound risk. If a falling stock reflects deterioration in the business, averaging down can trap capital for years. The common thread is that the decision is driven by the path of recent prices, not by what the company is likely to earn five years from now. In other words, both habits rely too heavily on stock market trends that may say little about future cash flows.
Put business quality ahead of price action
A steadier path is to put business quality first. Focus on growth in cash flow per share, return on invested capital, and balance sheet strength. Ask whether the company has a defendable edge that competitors struggle to copy. Think about whether that edge is getting stronger or weaker, and why.
This mindset is especially useful in Canada, where the index is concentrated in financials, energy, and materials. Chasing strength can lead to even more concentration. A quality lens encourages diversification across sectors and borders. It pushes you to own Canadian standouts in banks, pipelines, and railways, as well as global leaders in technology, healthcare, and industrials.
Build a rules based plan you can follow
Write down a few simple rules that you can explain in plain language. Examples include the maximum size of any one position, a minimum profitability trend you require, and the valuation range you are willing to pay for growth. Keep your order types simple. Limit orders can protect you from paying extreme prices, but do not let pennies keep you from owning a compounding business for the next decade.
A short checklist keeps you honest. Before buying, confirm that revenue quality is improving, debt levels are sensible, and management is allocating capital with discipline. Before selling, confirm that something material has changed, not just the last two weeks of price action.
How to size positions and handle averaging
Position size shapes risk more than any single pick. Many long term investors are comfortable starting between two and five percent per holding, then letting winners grow. If a position swells beyond your comfort level, trim it back to your limit, redeploy the proceeds to your best ideas, and move on.
Averaging up is reasonable when the thesis is playing out and valuation remains fair. Averaging down should be rare and only after a fresh assessment confirms that the balance sheet is solid, the competitive edge is intact, and the original reasons to own the business still apply. If you would not buy the company fresh today, do not add just to lower your average cost. Price alone is not a thesis.
Rebalance on a schedule, not a headline
Reactive trading around headlines gives randomness too much power. A calendar based or threshold based rebalancing routine brings discipline. Quarterly or semiannual reviews work well. Use them to trim stretched positions, top up underweights that still meet your criteria, and document why you own each holding. Let this routine guide you, rather than the latest stock market trends splashed across a chart this week.
This rhythm helps you act on durable changes. Fundamentals typically evolve over quarters and years. A scheduled process keeps you engaged with what matters, without tying decisions to every uptick or downtick.
Account placement choices for Canadians
Placement can add meaningful after tax return without extra risk. Canadian dividend stocks in taxable accounts may benefit from the dividend tax credit. U.S. dividend stocks in a TFSA are generally subject to withholding tax that is not recoverable. In an RRSP, U.S. dividends are often paid without withholding due to the tax treaty. In a non registered account, you can usually claim a foreign tax credit to offset part or all of the withholding. These mechanics can tilt which accounts you use for income heavy positions.
Growth oriented stocks and broad market equity ETFs often fit well in TFSAs where gains can compound tax free. Income heavy U.S. holdings often fit better in RRSPs. Highly speculative ideas belong where you can emotionally and financially tolerate a complete loss, which for many means a small size in a TFSA or a non registered account.
Currency and cross border tax notes
Global diversification helps Canadians because our market is narrow. Owning U.S. and international equities spreads sector risk and gives exposure to industries that are underrepresented at home. Currency adds another layer. A stronger Canadian dollar can reduce the translated value of foreign holdings even when the underlying companies perform well. A weaker dollar can amplify returns. Over long periods currency often evens out, but in shorter windows it can dominate results.
ETF structure matters. Canadian listed ETFs that hold U.S. stocks are convenient, but withholding taxes on dividends may be paid inside the fund and are not recoverable in registered accounts. U.S. listed ETFs held in an RRSP may avoid U.S. withholding and can be efficient for long term investors who are comfortable holding U.S. dollars. If you convert currencies often, learn a cost effective method at your brokerage rather than paying wide retail spreads every time you trade across borders.
A 90 day action plan to put this to work
Week 1: Draft a one page investment policy. Define target allocation ranges, maximum position sizes, and a simple valuation framework. Decide on a quarterly or semiannual review schedule and put those dates on your calendar.
Weeks 2 to 4: Audit current holdings using your checklist. For each position, write why you own it, what would change your mind, and whether new information strengthens or weakens the case. If the only reason to hold is that it is down and you want to get even, consider redeploying.
Weeks 5 to 8: Fix account placement. Move income heavy U.S. holdings toward your RRSP where appropriate. Direct growth names and equity ETFs toward your TFSA. Keep the overall asset mix in balance while you shift.
Weeks 9 to 12: Implement rebalancing rules. Trim back positions that exceed your size limits. Top up high quality holdings that are below target. Review currency exposure and decide whether to keep U.S. dollar cash for future buys. Throughout this process, take notes on any decision you made primarily because of stock market trends, then ask whether fundamentals supported the move. That habit builds awareness and improves the next round of choices.
The bottom line for patient investors
Chasing strength or buying weakness appeals to human instincts, yet both approaches depend on short term price patterns that are unreliable guides to long term value. A process that prioritizes business quality, sensible position sizing, and scheduled rebalancing shifts the odds in your favour. Combine that with smart account placement and a clear view of currency effects, and you will have done more to improve outcomes than any attempt to forecast stock market trends.
Canadian investors do not need to predict the next move to succeed. They need a repeatable plan that keeps randomness in its place and lets fundamentals do the heavy lifting over time.
