“The first rule is to keep an untroubled spirit. The second is to look things in the face and know them for what they are.” — Marcus Aurelius
Everyone has an ideal vision that they hope will come true. But in investing, you cannot rely on hope alone — when reality kicks in, things can suddenly go awry. To be a successful investor, you don’t have to be perfect. But you do need to have a plan that will act as your guide, telling you when to focus on wealth accumulation versus wealth preservation.
Managing wealth is about more than money. It is about legacy, philanthropy, and family relationships. With so much to look forward to, emotional bias is often an overlooked obstacle that impedes the financial future we envision for our family. Like Marcus Aurelius says, “look things in the face and know them for what they are.” In terms of your wealth, your vision cannot depend solely on hope. This is where our rules-based, relative strength strategies can help.
Trusting in Relative Strength
As an investment strategy, relative strength (also known as momentum) has been shown to be a robust factor that can deliver outperformance over the long term. Unlike other stock selection criteria (like fundamental valuation), relative strength is evaluated on a purely quantitative or technical basis. As a result, relative strength removes subjectivity and emotion and lends itself to creating systematic, rules-based systems for investing which are both repeatable and dependable.
Will we catch the exact top of the market and get out using relative strength? No.
Will we catch the exact bottom to get back in? No.
Will there be times your portfolio is down? Absolutely.
Will your portfolio be positioned to adapt to and take advantage of major themes in leadership? Yes.
A typical relative strength cycle looks like the graph below. As you can see, it compares the rolling six-month excess return of the Dorsey Wright Technical Leaders Index (DWTL) to the S&P 500 Index. The DWTL selects 100 stocks on a quarterly basis that exhibit high relative strength within a body of 1,000 stocks, so it provides an excellent “proxy” for a relative strength strategy.
Looking from 2007 on the left to 2021 on the right, you can see the relative strength of DWTL going through repeating periods of underperformance followed by rebounds, many of which are strong. The periods of underperformance usually occur during overall trends such as market bottoms and choppy market environments, instances in which most strategies seem to struggle. Yet even in these moments of negative relative strength, there are opportunities to be seized in preparation for the next upward trend in the market. You can learn more about analyzing those trends here.
Think of relative strength’s application like this: If you were asked at the beginning of the NFL season to pick which team will have the best record by the end, you probably would not pick a team just because you are a fan. Your money is probably being wagered on the team that has recently and most consistently performed the strongest, or the team of a star player who has historically led his squad to the playoffs. They may not go undefeated, but you can be confident in their relative strength.
Confidence in the Future
“Never let the future disturb you. You will meet it, if you have to, with the same weapons of reason which today arm you against the present.” — Marcus Aurelius
The overall goal of a relative strength strategy is to help us navigate the financial waters — whether calm or choppy — until we arrive at our envisioned destination. The small changes you make may seem imperceptible at first, but along your course they add up. While we may never know what the future holds, we can be confident using a rules-based, emotionless strategy will position us toward those names that are most likely to outperform in the future.
As a family office that specializes in serving the needs of executives at publicly traded companies, we’ve seen strategies like this work well for our clients. Contact me to see if this could be an opportune strategy for you, too.
Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Nasdaq Dorsey Wright is not affiliated with nor endorsed or sponsored by Raymond James.
Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Past performance is not a guarantee of future results.
The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
The NASDAQ-100 (^NDX) is a stock market index made up of 103 equity securities issued by 100 of the largest non-financial companies listed on the NASDAQ. It is a modified capitalization-weighted index. … It is based on exchange, and it is not an index of U.S.-based companies.