Written by: Tom Dorsey, Co-founder, Dorsey, Wright & Associates, a Nasdaq Company
Your business is changing—fast. Robo advisors are offering to do your job for free (or close to it). Regulatory changes are eating up your time and your resources. And as your client base gets younger, “business as usual” simply isn’t winning business any more.
So what can you do to change course?
The key is taking a close look at the mound and making the right changes at the right time to begin to deliver a level of performance your clients no longer simply wish for, but demand.
I know. I know. Your clients are risk-averse—especially the ones with the greatest assets. But while the oldest set may stay put with steady but less-than-stellar performance from their portfolios, younger clients who will drive your business in a decade won’t. The good news: there’s a simple way to enhance performance without increasing risk. It has nothing to do with timing the market, and everything to do with leveraging the basic laws of physics—and baseball—to deliver a level of performance that helps you provide greater value to your clients and earn your keep—even when facing a robo-competitor that promises to rebalance and reallocate on a dime at little or no cost.
We’ve all seen pitchers getting swapped out of a great game of baseball. Your home-team pitcher opened with a strong arm, struck out a stream of hitters, and allowed only a single run. Sure, he walked a guy…or two, but it’s the top of the fourth and he looks like he’s still doing great. So you’re surprised to see the coach walk to the mound, say a few words and, for no obvious reason, send the winning pitcher to the dugout as a replacement heads in from the bullpen. But why the change, you wonder? Everything seemed to be going great.
The answer: the coach knows all about Newton’s first law of motion.
Yes, here’s where physics comes in play. You remember the rule: “An object at rest stays at rest and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force.” The coach knows his pitcher, and even if you didn’t, he saw something shift. The pitcher’s arm was getting tired. Not tired enough to change the game’s momentum, but enough that the coach saw the difference. To ensure the win, he put in a fresh pitcher with a fresh arm who could keep the runs from coming in. The coach saw that “unbalanced force” in play, and he know the pitcher’s momentum was about to change—perhaps even before the man on the mound saw it coming himself.
Your job as an advisor is to do the same for your clients by managing their portfolios as carefully as a coach manages his players. Rather than building a portfolio based on your client’s risk tolerance and then letting it stagnate (good old “business as usual”), it’s time to shift your own strategy by applying simple math, a bit of physics, and cloud technology to build smarter portfolios that deliver better, more sustainable performance—all while taking emotion out of the process (for you and your clients) and, ultimately, beating the robos at their own game. Here’s how it works:
Every night, current market positions are used to create charts that compare the relative strength of each asset class to create a Relative Strength Calculation using nearly 2,000 individual calculations and this simple division: the performance of a stock or ETF is divided by the performance of an index that aligns with the investment strategy, and that number is multiplied by 100. The result is the Relative Strength Calculation. And just as the coach’s trained eye could see the pitcher’s momentum beginning to shift downward, these calculations clearly illustrate any change in momentum for each asset class. For example, since 2011, the asset class showing the greatest upward momentum was US Equities, so it made sense to buy. But beginning this past January, US Equities began to lose strength—a shift that was clear when looking at the Relative Position Calculations. Like the coach bringing in the new pitcher, Fixed Income was waiting in the bullpen to take the #1 spot as US Equities stepped down to position #3. It’s simple. It’s easy. And over the past 25 years, we’ve seen it enhance portfolio performance. Without market timing. Without emotions getting in the way. And without exceeding the portfolio thresholds set by the standard method your clients know and trust: Modern Portfolio Theory.
When our firm first started taking this approach in the late 80s, we were diligently creating 200 Relative Strength Calculation charts per week—by hand. Today, using cloud computing, we’re able to create 7.5 million charts every night. The result is a clear, concise, and simple analysis that illustrates what assets should stay put and what should change—all based on their real-world strength and momentum relative to other assets.
We all know there are a lot of pitchers in the investing bullpen.
By combining simple math and the power of cloud computing to identify the relative strength and shifting momentum of each asset class, you can create portfolios that generate more income, deliver greater value to your clients, and give you the power to start winning the game all over again.
To learn more about Smart Beta ETFs and the Dorsey Wright Relative Strength strategies, download the whitepaper Point & Figure Relative Strength Signals or contact Dorsey Wright. You can also listen to the Dorsey Wright weekly podcast here.
The relative strength strategy is not a guarantee. There may be times where all investments or asset classes are unfavorable and depreciate in value. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.
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.
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