Investors are being forced to play Where’s Waldo? with the economy. Is it stronger? Is it weaker? Where is it today? Will the economy continue to recover, or are we headed for a double-dip recession? This story from the Washington Post shows just how many cross-currents there are right now. With such mixed data, you are going to see divergent opinions from analysts—as well as a lot of confusion. If you are trying to navigate the markets, it’s easy to let your emotions dictate your asset allocation, depending on how the market reacted to the last set of data. And, of course, the data changes every day.
Rather than being trapped on an emotional rollercoaster, we think it makes sense to navigate the market using an unemotional, systematic process. The news of the day does not affect the systematic process, except to the extent that it creates actual changes in price levels that can be distinguished from noise. In other words, wait to identify a trend and then go with it. A systematic relative strength process is not a panacea. Some trends work out well; others don’t. In my opinion, the most important thing with a systematic, adaptive process is the emotional space that is created. (It helps that relative strength has exceptional performance over time too.) You no longer need to worry about every economic report, or to try to figure out the report’s implications for your portfolio. You have the space to be patient and calm, and to let the adaptive process work.
