Coach’s Corner-Creating a Winning Investment Strategy

While the Buckeye game didn’t end how I hoped it would, my Cleveland Browns are still in the playoffs, and for the first time in 17 years.  In fact, the last time the Browns won a playoff game, I had just obtained my driver’s license, and the last time they beat the Steelers in a playoff game, my parents were 17-year-old high school sweethearts in Lorain, Ohio.

 

For the last several years, when explaining part of how my investment strategy works, I’ve explained that “No matter how much I love my Cleveland Browns, if they were an ‘investment’ that we could buy in our portfolio, I wouldn’t throw a single dollar of my hard-earned money at them.”

 

There are 32 teams in the NFL and 14 make the playoffs each year.  So, when it comes to building a winning investment strategy, if we use “all the teams in the NFL” as an analogy for “all the investments we can buy,” then what we want to do is invest our money in the playoff teams and avoid the rest.

 

The analogy works with college football as well.  With 130 NCAA schools, I think our metaphorical portfolio would be a little too concentrated if we invested our money in the top four teams that make the College Football Championship Playoffs, but what if our money stayed invested in the top-25 teams, instead?  Again, the concept still works here.

 

Think about it… generally speaking, you tend to see the same teams make the playoffs each year.  For instance, the New England Patriots made the playoffs for 11 straight years, winning three Super Bowls in the process, but their RS compared to other teams in the NFL doesn’t stop there.  In the 2000’s, they only missed the playoffs in 2000, 2002, and 2008.  That’s it!  Oh, and they won the Super Bowl in 2001, 2003, and 2004, by the way.

 

Going back through history, you can observe when other teams experienced similar RS:

 

  • The Indianapolis Colts made the playoffs for 9 seasons in a row from 2002 – 2010
  • The San Francisco 49ers made it 8 years in a row back in the 80’s
  • The Cowboys did it 9 years in a row in the 70’s (the Steelers and the Rams both made it 8 years in a row over the same decade), and
  • The Cleveland Browns made it 10 years in a row back in the 40’s and 50’s.

 

Playoffs-40s-to-90s-1024x317 Coach's Corner-Creating a Winning Investment Strategy

 

Playoffs-90s-to-present-1024x348 Coach's Corner-Creating a Winning Investment Strategy

 

Observing that last statistic, it’s important to note that the Browns also own one of the top-ranked losing streaks in history, winning only four games (out of 48!) in all of the 2015, 2016, and 2017 seasons.  So, you can understand Browns fans’ level of excitement as they get ready to play the defending Super Bowl champions this Sunday, but I digress.

 

I used the phrase “Relative Strength” (or RS for short) on purpose because this concept also works extremely well when it comes to your retirement portfolio and investment strategy.

 

Look at this basket of Energy stocks, below and notice how it’s been a loser for the last three years for sure… but one could also argue that it’s been a sector in the investment world that would’ve been best to avoid for the past 6+ years as well.  Could the tide be changing for energy, perhaps?  Notice how we can see a higher low in 2020, followed by the current price butting up against the former 2020 high, as well as the 2016 low.

 

XLE-Energy-ETF-1024x456 Coach's Corner-Creating a Winning Investment Strategy

 

Now take a look at this basket of technology stocks, which over the same time period, has been what we’d call a “repeat offender” when it comes to “making the investment playoffs.”  However, I’m starting to see a negative divergence in momentum (lower-highs in the bottom pane vs. higher-highs in the upper-pane/price).

 

XLK-Tech-ETF-1024x616 Coach's Corner-Creating a Winning Investment Strategy

 

So, what we want to do is focus on strength, staying invested in “the playoff teams,” until that strength weakens.  Then we want to rotate out of the investments that are weakening in RS and rotate into new investments with emerging RS vs. the rest of the market.

 

Using the two examples above, technology is a sector that we’ve had exposure to for a long, long time, while energy is a sector I’ve largely avoided, but it’s one that I’ve been watching lately, specifically looking to see if strength in the market will rotate back into energy stocks.

 

Just like any team in sports, all winning streaks eventually come to an end.

 

So, whether you’re a Cleveland Browns fan with undying passion for your hometown team or a proud fan of a winning dynasty, it never pays to blindly invest in “your favorite team,” unless it’s exhibiting the kind of relative strength that can provide you with the highest probability of winning.

 

Treat your retirement portfolio objectively, don’t let politics or news events drive your investment decisions, and you’ll be one step closer to treating your life savings with better, more conservative care!

 

Till next time…

Adam

Categories: Adam Koos, CFP®, CMT®, Educational Articles

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