High Relative Strength Investing: Put Strength in Your Portfolio
Just like produce in a supermarket, sectors and asset classes in the stock market rotate in and out of season as well. You don’t go into the produce section of the grocery store and look to buy summer squash in the winter and winter squash in the summer. If you were to walk out of the supermarket in the fall, your shopping cart might be filled with a pumpkin or two, some gourds, berries, etc. However, in the spring time, the tomatoes, cucumbers, sweet corn, etc. find their way into your basket. And why does this phenomenon occur? Spring time vegetables taste much better in the spring time when they are nice and ripe. As areas within the stock market rotate in and out of season, knowing what sectors are in season is important to your investing process.
The objective of relative strength investing is to identify major themes in the investable markets, in an effort to gain exposure to the asset classes and sectors controlled by demand (strength), while concurrently eliminating exposure to the areas controlled by supply (weakness). Trends will emerge and end. We want to be involved in the bulk of that trend, then shift elsewhere when the trend starts to roll over. Relative strength is longer term in nature and designed to not have a large amount of turnover or volatility in a portfolio, yet be responsive enough to the changing currents in the markets to identify trends and rotate as needed. The objective of relative strength is to mitigate losses, yet allow profits to run, which is the key to successful portfolio management. The systematic and rules-based approach also allows us to eliminate the human emotion. Our objective is to be involved in the leaders and not waste time with the laggards.
Success in the business of investing requires discipline and most of us understand the damage caused by emotional investment decisions. The market is made up of opinions. There is always someone on the other side of the trade with an opposing view. Who do you think will see the best results? Will it be those that rush to the gym on January 1st to start shedding the holiday pounds, or those who are at the gym regularly throughout the year? Obviously, the latter will reap the benefits of disciplined behavior. This same concept can be applied to relative strength. It’s not glamorous going to the gym every day and grinding it out on the treadmill, but that is what will keep a person in shape. Relative Strength aims to build a portfolio that remains strong compared to the market over the long stretch, not just for the month of January. You will achieve the best results relative strength has to offer if it is consistently utilized. The fortitude is the ability to implement the system that leads to investment success. It is so easy to be swayed by the barrage of information that comes at us every day in the financial world. The news headlines are splashy, the videos and interviews are convincing, but in the end they aren’t proven to provide timely investment advice.
For more information, please contact Scott Brooks at 949.545.6500.