At the core of my investment advisory work with individual company 401(k) retirement plan participants lies the concept of Relative Strength.
My primary investment management objective is to advise my client to remain invested in the handful of mutual fund options available on their default company 401(k) retirement plan menu that have the highest Relative Strength score.
But what is Relative Strength? What does it mean for something to have positive Relative Strength? Relative Strength is simply a measure of performance compared to something else.
Do you want to own Coke or Pepsi? FedEx or UPS? Small Cap Growth or Mid Cap Value? A Relative Strength calculation can answer each of those investment management questions.
Relative Strength improves the decisions you need to make when picking mutual funds on a default company 401(k) menu. One mutual fund can be compared to another mutual fund. Even better, all the mutual funds available on a default company 401(k) menu can be ranked top to bottom based on a Relative Strength score.
Have you ever played fantasy football? Do you bet in the office pool on the NCAA Men’s Basketball Tournament? You most likely have used a form of relative strength to place your bets on favorite players and teams.
The Value of Relative Strength
In several academic studies, Relative Strength (also known as momentum) has been shown to be a robust factor and when used to pick investment options. In many cases Relative Strength has been shown as capable of delivering stock market outperformance over the long-term.
Relative Strength is a purely subjective quantitative or technical valuation method. Relative Strength is a systematic, rules-based investment selection strategy.
Relative Strength Expectations
As is the case with any investment selection factor, Relative Strength is not a guarantee. No investment selection tool can guarantee to get you in at the bottom and get you out at the top of a stock market cycle. But Relative Strength is designed to allow you to participate in the largest part of an upward move.
Relative Strength forces you to remain invested in strong trends and themes. It is one of the best answers to the “what to buy” question in your company 401(k) account. A rules-based, Relative Strength strategy that will identify and keep you invested in the best possible 401(k) mutual funds during your working career.
Everyone has an ideal plan or vision that they HOPE will happen to the preservation and growth of their company 401(k) account. When stock market perception and reality change, Relative Strength can also improve your timing of moving to the sidelines in the early stages of a stock market decline.
My company 401(k) investment advice clients know that we have a logical, disciplined and organized plan that will act as an unemotional guide to the long-term preservation of their retirement plan account principal.
Relative Strength tools help determine the critical difference between wealth accumulation versus wealth preservation investment management decisions.
Company 401(k) investment management will always require small changes to be made during the course of economic and stock market cycles.
Ric Lager
Lager & Company, Inc.
