There are only a handful of investment management decisions you have to get right in order to both preserve and grow your company 401(k) retirement plan account. In that handful, is the age-old question of “what to buy.”
The financial media spends a lot of time and money preaching the merits of asset allocation. Several academic studies back up their claims.
I don’t know many wealthy academics. Except for the few who get paid to publish research reports and give speeches on asset allocation to financial services providers and mutual fund conferences.
Over time, asset allocation works. Given the recent stock market volatility, asset allocation is far down the list of most individual company 401(k) investors’ concerns.
Instead of traditional asset allocation, relative strength has worked much better for my individual company 401(k) participant investment advice clients over the last few years.
Relative strength is simply a measurement of investment performance of one investment option versus another investment option. In a company 401(k) account, the relative strength of each default mutual fund option can be compared to all the other mutual funds options.
Are you old enough to remember the “Pepsi Challenge” blind taste test? This competition allowed for a taste test between Coca-Cola and Pepsi. That’s what relative strength does. It compares one thing to another, and provides a clear set of facts to improve your investment management decisions.
Let’s get back to academic studies. Relative strength has been shown to be a robust factor, and when used as a selection criterion, capable of delivering stock market outperformance over the long-term.
Relative strength is evaluated on a purely quantitative or technical basis. As a result, relative strength removes subjectivity and emotion. The analysis provides a systematic, rules-based systems for choosing from a fixed universe of company 401(k) mutual fund options.
Each mutual fund on your company 401(k) retirement plan menu can be ranked on its relative strength score. Those mutual funds can then be ranked against each other, or against the most popular broad stock market index, the S&P 500.
Relative strength is not a stock market investment performance guarantee. It is not designed to get you in at the bottom and get you out at the top. Instead, it is designed to allow you to invest in the best mutual funds in a rising stock market environment.
Ric Lager
Lager & Company, Inc.
