Overview:  Know WHERE to Invest and Know WHEN to Invest

Just like playing a piano the music sounds best when played with both hands.  Simply diversifying and holding for the long term is not the best answer in our opinion.  Proponents of this approach believe that owning a percentage of a variety of investments provides a form of principal protection – the idea being when one investment zigs, there will be another that will zag.  We believe that Identifying and Investing in the strongest areas of the markets will lead to superior performance.  When an investment loses it’s strength it is replaced with something stronger.  This is called Relative Strength investing and there is a multitude of independent research to validate this approach.

WHERE to invest:

Most financial advisers follow some form of asset allocation to help advise their clients where to invest.  Most of these models use historical data that reflect both the historical rates of return, but also the level of volatility of those assets to achieve those returns.  Then computer modeling provides suggested combinations of these assets based upon the investor’s desired rate of return and their tolerance to risk/volatility.  This all sounds well and good, however, it is much like driving your car by looking only in the rear view mirror.  It establishes where to invest based on what has happened over the past 5, 10, 15 years.  In the same breathe, adviser disclaimers commonly use the phrase “past performance is not indicative of future results” which is very true.  So why put so much emphasis on past results to create the mix of investments in your portfolio?  Think back to the late 1990’s for one moment…the asset class that did exceptionally well in that decade was large growth stocks; particularly technology stocks; particularly internet stocks so advisers following traditional asset allocation modeling were recommending a healthy percentage of investor portfolios to be placed in these areas and then what happened in 2000?  Well one thing is the Nasdaq index (filled with large growth, technology stocks) declined approximately 50% that year and 75% from it’s high to it’s low.  If your adviser was following a re-balancing program then at the end of 2000 your allocation to large growth stocks which was just cut in half by the market was re-filled with new money from other parts of your portfolio to bring it back to a “proper balance” only to decline another 25%.  Ouch!!  This was being done because historical numbers pointed advisers to invest in large growth stocks yet the market place had made a shift away from that area.

So what to do?

Carlson Wealth Management (CWM) follows a more dynamic form of asset allocation tied directly to the areas of the market that are currently showing greatest demand.  This is termed as “relative strength”.  What does this mean?

Relative strength is conceptually simple.  It compares the up and down price movement of all asset classes one against the other to help determine and rank the strongest areas vs. the weakest based solely on changes in prices.  The relative strength of a security is strong ONLY because there are more buyers than sellers.  There are more buyers than sellers for many reasons which in the opinion of CWM are secondary in importance.  The ONLY THING THAT MATTERS is the price when it comes to whether your portfolio goes higher or lower in value.  If price goes up, you are worth more.  If the price goes down, you are worth less.

CWM will invest client portfolios in the strongest areas of the market that are also appropriate to their risk tolerance and will re-balance those investments when the relative strength changes.  Buy the strong; sell the weak.

Certain areas of the markets can remain strong for years while other areas can change after only a month or two, but in either case the objective is to maintain portfolios with assets that the markets like and discard what they don’t.

More on Relative Strength


The information contained herein has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs.  Accordingly, investors should not act on any recommendation (express or implied) or information in this material without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions.  Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources believed to be reliable (“information providers”).  However, such information has not been verified by Carlson Wealth Management (CWM), Dorsey, Wright & Associates, LLC (DWA) or the information provider and DWA, CWM and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein.  CWM, DWA and the information provider accept no liability to the recipient whatsoever whether in contract, in tort, for negligence, or otherwise for any direct, indirect, consequential, or special loss of any kind arising out of the use of this document or its contents or of the recipient relying on any such recommendation or information (except insofar as any statutory liability cannot be excluded).  Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice.  Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products.  This document does not purport to be complete description of the securities or commodities, markets or developments to which reference is made. 

Unless otherwise stated, performance numbers are based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.   You should consider this strategy’s investment objectives, risks, charges and expenses before investing.  The examples and information presented do not take into consideration commissions, tax implications, or other transaction costs. 

The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.  Performance information presented is the result of back-tested performance.  Back-tested performance is hypothetical (it does not reflect trading in actual accounts) and is provided for informational purposes to illustrate the effects of the CWM strategy during a specific period.  The CWM strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The CWM strategy is not predictive. 

Back-tested performance results have certain limitations.  Such results do not represent the impact of material economic and market factors might have on an investment advisor’s decision making process if the advisor were actually managing client money.  Back-testing performance also differs from actual performance because it is achieved through retroactive application of a model investment methodology designed with the benefit of hindsight.  CWM believes the data used in the testing to be from credible, reliable sources, however, CWM makes no representation or warranties of any kind as to the accuracy of such data.