Many investors equate investing to buying stocks. But over the last 10 years, the access to other asset classes
traditionally only available to large institutional investors has become available to a much wider segment of the population. Broadening the places for investment from just U.S. stocks to other asset classes like international stocks, commodities, currencies, fixed income and even cash alternatives gives you greater flexibility in your investments when U.S. Equities are not in favor.
Over the last 10 years, no one asset class has held the top spot for performance each and every year. Sometimes U.S. equities were at the top, sometime they were at the bottom. Sometime commodities found their way to the top in terms of performance while in other years it was fixed income or cash alternatives. Just as a chef will seasonally adjust his menu offerings based upon the freshest produce available, investors should be willing to shift their portfolio focus based upon what asset class is in season.
Tactical decisions are made utilizing the point and figure research and evaluation techniques of an institutional research group that has extensive expertise in a technique known as Point & Figure charting. This type of analysis attempts to evaluate the supply and demand forces of particular asset classes and ranks the asset classes from strongest to weakest based upon relative strength (RS).
We feel asset classes can be ranked similar to the way one might rank sports teams. If you think about your favorite sport, they rank teams based upon how well they perform against their opponents. The more games, matches or races won, the higher in ranking the team will go. We believe the same thing can be done in the investment markets. In the financial markets, a “game” is played each day and it consists of comparing the daily performance of one asset class to another. Each day we compare asset classes to one another to determine which asset classes are the strongest or weakest. A relative strength calculation is compiled for each member of the roster versus every other member of the evaluation set, for example, International Equities. In essence, a very large arm wrestling tournament is held. After all individual calculations are computed and charted on a Point & Figure basis, each member now has its number of RS “wins.”
The finished product is a portfolio made up of the strongest RS investments in each asset class. Without the weak RS components, this allows the portfolio to perform well and not be dragged down by underperforming investments. This approach gives us the ability to “play defense” by raising cash in markets where cash and bonds gain RS over equities. While no investment strategy works 100% of the time, RS does provide for long-term growth and the ability to control risk in difficult market periods.
This article was provided by Arthur Levin, Senior Vice President-Investments, Tumlin, Levin and Sumner Investment Group of Wells Fargo Advisors.
The views expressed by Arthur Levin are his own and do not necessarily reflect the opinion of Wells Fargo Advisors or its affiliates.
Wells Fargo Advisors, LLC, Member SIPC, is a registered broker – dealer and a separate non-bank affiliate of Wells Fargo & Company.
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