Enjoying the Ride: The synergy of asset allocation and relative strength momentum investing

By Dan Parnes EBS CONTRIBUTOR

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In the ever-evolving landscape of investment strategies, the combination of asset allocation with relative strength momentum investing has emerged as a potent approach for managing portfolios and maximizing returns. By leveraging the strengths of both methods, investors can achieve a balanced and dynamic investment strategy that helps adapt to changing market conditions.

Asset Allocation: A foundation for diversification

Asset allocation involves distributing investments across various asset classes—such as stocks, bonds, real estate, and commodities—to help optimize the risk-return profile of a portfolio. The primary benefit of asset allocation is diversification, which helps mitigate risk by spreading investments across different sectors and asset types. This approach works to reduce the impact of poor performance in any single investment, leading to a more stable and resilient portfolio.

Relative strength momentum investing: Capitalizing on trends

Relative strength momentum investing focuses on identifying and investing in assets that are showing strong performance relative to others. This strategy is grounded in the idea that assets exhibiting upward momentum are likely to continue outperforming their peers in the near term. By analyzing price trends and relative performance, investors can allocate capital to the assets with the highest potential for continued gains.

The benefits of combining both approaches

Enhanced risk management: Asset allocation provides a broad risk management framework, while relative strength momentum investing offers a tactical approach to capitalize on market trends. Combining the two allows investors to adjust their asset mix based on performance trends, potentially enhancing overall risk-adjusted returns. Asset allocation focuses on long-term return numbers to determine portfolio holdings. A more tactical approach using relative strength can allow an investor to overweight areas of the markets doing well in the short term.
Dynamic adaptation to market conditions: Asset allocation establishes a diversified base, but market conditions can shift rapidly. Relative strength momentum investing enables investors to respond to these changes by reallocating resources to the strongest-performing assets, helping to ensure that the portfolio remains aligned with current market trends.
Improved return potential: By incorporating momentum investing, which focuses on assets with strong recent performance, investors can potentially enhance returns compared to a static asset allocation strategy. This dynamic adjustment helps capture upside potential during favorable market conditions.
Strategic flexibility: Combining these strategies provides a flexible investment approach. Asset allocation sets the strategic long-term framework, while momentum investing introduces a tactical layer that can adjust asset weights based on short-term performance trends.

Implementing the combined strategy

To effectively implement this combined approach, investors should start by establishing a solid asset allocation plan that reflects their long-term goals, risk tolerance, and investment horizon. Regularly review and rebalance the portfolio to maintain the desired allocation. Simultaneously, apply relative strength momentum techniques to identify and invest in the best-performing assets within each asset class, adjusting as trends evolve.

In conclusion, the synergy of asset allocation and relative strength momentum investing offers a robust strategy for navigating the complexities of financial markets. By blending the stability of diversification with the agility of trend-based investing, investors can create a portfolio that not only potentially withstands market volatility but also helps capitalize on emerging opportunities.

Dan Parnes is a Financial Advisor at Shore to Summit Wealth Management. He currently works and lives in Washington, DC.

Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.

Wells Fargo Advisors Financial Network is not a legal or tax advisor. Be sure to consult your own tax advisor and investment professional before taking any action that may involve tax consequences.

Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy Wells Fargo Advisors Financial Network and Shore to Summit Wealth Management are not legal or tax advisors. You should consult with your attorney, accountant and/or estate planner before taking any action.

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