I love this image from Carl Richards of Behavior Gap:
Experience teaches us that the image above is true. Anyone can get it right in the short run. We’ve all seen it. The gambler at the slot machines who walks out with a few thousand dollars, the sports fan who successfully bets on his home team over the higher ranked opponent, the investor who makes some money buying stock in a company recommended by his brother-in-law. Yet, will any of the previous approaches end well in the long run? Not likely.
Relative strength happens to be our discipline of choice. It has been extensively tested. It is logical. It has been effective over time. There are other disciplines that have also been effective over time. There are many approaches that fall in the category of undisciplined. One example: the quant manager who incorporates many different return factors into an ever-changing investment model. A tweak here. A tweak there…
When building allocations meant to last and designed to make a meaningful difference for a client over time, advisors and their clients would be well served to build allocations around effective disciplines and leave the rest by the wayside.
A relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Past performance is no guarantee of future returns. Potential for profits is accompanied by possibility of loss.