Current holdings are sold because the relative strength rank has fallen sufficiently against our benchmarks and the holding's alternatives. New portfolio holdings are added because of favorable relative strength rank. The basics are to buy strong positions and hold them for as long as they remain strong. Sell weak holdings using the proceeds to buy strength.
Each portfolio model has universe of Exchange Traded Funds that is reviewed monthly. A relative strength calculation compares each holding against all existing portfolio positions. A relative strength calculation compares each holding against all possible new portfolio positions. Point and Figure chart characteristics and technical attributes are compared to refine the list of potential new positions. A relative strength calculation compares each holding against all possible new portfolio positions as well as a balanced portfolio benchmark and against money market. When a money market index produces a higher ranking than existing or alternative holdings, the money market or cash account replaces the weak holdings. It is possible for a portfolio to become 100% cash during deteriorating market environments.
Examining recent holdings in our Global Opportunity Portfolio for risk exposure in 2008. The portfolio would have been forced in to defense as early as January.
Cash balances increased to as much as 90% of the portfolio prior to the market crash. Did your portfolio increase cash prior to October 2008? Our portfolios never hold assets with a relative strength ranking lower than cash. Cash is defense against losses in a falling market. When a new position replaces a faltering position, the portfolio is rebalanced back to an equal weighting.
The paradox of relative strength investing is its combination of flexibility and discipline. At first glance it seems to be an oxymoron. In the financial markets, the word flexibility is commonly used to categorize whimsical investment decisions with seemingly different rationale used for every trade. How different that is to the way that we invest at Investor Resources.
We build portfolios that are open to all six major asset classes. Flexibility is evidenced by a portfolio's process of excluding assets classes in declining trends. While the process of portfolio creation has a great deal of flexibility, the rationale for every buy or sell order is the same—relative strength rank.