Ranking Assets with Relative Strength
(For more information on relative strength, click here)
Relative strength calculations and rankings provide us with valuable information throughout the investment process. From a big-picture perspective, we're able to identify which general asset classes we want invest in - and, perhaps more importantly, which asset classes we want to avoid investing in. On a more-specific level, we're able to look within those asset classes and separate strong performers from weak performers.
We see relative strength as an extremely powerful tool that is useful in multiple situations. An obvious area of value is in the investment process we go through with our clients. Relative strength gives us the capability to make sense of thousands of investment choices; we're able to make decisions that are process-based and free of emotion.
Another area we believe relative strength can be very valuable is when applied to employer-sponsored retirement plans (such as a 401(k) or 403(b)). Regardless of how many choices a particular plan offers - some offer hundreds, others only 10 or 20 - how do you know which one(s) to buy? By using relative strength calculations to rank those investment choices, we can get a sense of which assets are "winners" and which are "losers". A sample of plan rankings is below:
The process is simple: we gather the group of funds in question and, with the help of Dorsey, Wright & Associates, perform a "round-robin" of relative strength comparisons within the group. Each investment choice undergoes a head-to-head relative strength matchup with another investment choice in the group, and the stronger of the two receives a "win". This is repeated until each investment choice has "faced off" with every other choice in the plan. When all matchups are complete, the choices are ranked based on number of "wins". This puts strong choices at the top of the rankings, and weak choices at the bottom. With this information, we are then able to identify which choices we would want to invest in and which we would want to avoid.
For a practical example of these rankings, let's take a look at the funds available in the retirement plans at one of the employers in our region. Below are links to quarterly relative strength rankings dating back to the end of 2006:
When viewing these rankings, keep a few things in mind:
"MNYMKT" is a Dorsey, Wright & Associates proxy for a Moneymarket fund, and cannot be directly invested in.
We fundamentally do not recommend investing in any asset ranked below MNYMKT in any set of rankings.
Specific fund names and ticker symbols are not referenced on this publicly-available material due to regulatory restrictions. However, each fund retains the same general name through these historical rankings even though its position may change.
The relative strength calculations and fund rankings are performed by Dorsey, Wright & Associates and subsequently provided by Jeff Harris & Associates, Inc., a registered investment advisor. Dorsey, Wright & Associates and Jeff Harris & Associates, Inc. are not affiliated. While this information is believed to be from reliable sources, no guarantee is made to accuracy or completeness. The investment securities and strategies discussed are not necessarily suitable for all investors. Recommendations are of a general nature, not based on knowledge of any individual's specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory, or management services. Jeff Harris & Associates, Inc. is not an authorized representative of the employer represented in the historical rankings above or its retirement plans.
Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client or prospective client's investment portfolio. Historical performance results for investment indices and/or categories generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results.