2010Sep14 Investors at a cross road
“At every crossroads on the path that leads to the future, tradition has placed 10,000 men to guard the past.”
Maurice Maeterlinck
“More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly.”
Woody Allen
“That’s the way we do it, we have always done it that way.” This is the statement that sums why many advisors and investors are clinging to the ways of the past. Make no mistake about it, we are at a crossroad, an investment strategy crossroad. The paths that we are presented with are very different, and we must make a choice.
The first path looks familiar but it is not headed in the same direction that we remember. In fact we find that it is not headed in one direction at all, but it changes direction quite often.
This is the path guided by Modern Portfolio Theory. For decades this has been the prevailing investment strategy world wide. It relies on historical return averages and asset class correlations. In other words it is like trying to head forward on the path while looking backwards the whole time. In fact this system ignores what is happening in the markets now in favor of what has happened before in the hope that it happens again.
MPT gained favor during a time when the markets were comparatively slow moving and orderly. Baby Boomers provided a seemingly endless wave of consumer spending providing economic support. Stay invested, buy on the dips and you would be OK. This is the past that is being protected by tradition today.
Unfortunately for the defenders of MPT, today’s markets trade at lightning speed, maybe faster than that. Trades are identified, analyzed and executed in less than 30 milliseconds over and over again. We do not believe that the price of a security since 1972 (historical returns) has any bearing on today’s trading, but that is the basic assumption for MPT.
Fortunately, there is another path we may follow. This path is guided by momentum and relative strength analysis. Momentum monitors which direction a given sector or individual security is headed in its present trend. How it moved ten years ago is not part of the analysis. We need to know where it is going now. Essentially, our task is to follow the money and add that value to a portfolio.
Relative strength helps identify the possible magnitude of the move up or down. This allows us to focus on the investment choices with the greatest chance for meaningful gains. The stronger an asset is relative to others, the longer run it can potentially make.
This is the path to the future for investment strategies. Its primary strength is adaptability. MPT is trapped in the past, looking backwards and hoping to replay the past. Momentum and relative strength take their cues from what the markets are doing now, and monitor the markets and positions to confirm that the choices were good. Adapt, adjust, move on.
If you would like to follow MPT back to the past you can find a guide most anywhere. The brokerage firms are full of them. If you prefer to pursue your personal financial freedom with a forward looking, results oriented process, give us a call. We offer a free relative strength analysis of your portfolio. Find out what you should keep, what you should sell and what the strengths of your portfolio look like in today’s market.
Give us a call or send us a list of what is in your portfolio by regular mail or email. We will run the numbers and get back to you promptly.
Now, every Saturday at 9 AM, you can listen to the Don Creech Show on various radio stations: In the Puget Sound area you have three choices for stations: KITZ 1400 AM; KGTK 920 AM and KKOL 1300.
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