Dorsey at Wright Money Management, a well known firm specializing in relative strength and momentum investing, discussed a way to diversify relative strength investing with other stock investing strategy. In Relative Strength and Low Volatility Portfolio, they showed one can combine momentum stock strategy, represented by The PowerShares DWA Technical Leaders Portfolio (PDP) (an ETF managed by DWA), and low volatility stocks, represented byThe PowerShares S&P 500® Low Volatility Portfolio (SPLV) in stock portion of an asset allocation portfolio.

They showed that combining these two strategies in stock investing (not in cross asset allocation) can result in better risk adjusted returns:

They further showed the following table:

The table below is also for the period April 1997-September 2011.  (The hypothetical returns for PDP only go back to April 1997.)

A portfolio P PDP 50 SPLV 50 is constructed to have 50% in PDP and 50% in SPLV. The following shows how this portfolio is compared with PDP, SPLV and SPY.

One Year Chart

Detailed comparison.

It is still to early to tell for the portfolio performance but the idea seems to be very intuitive and reasonable. We will continue to monitor the portfolio and ETFs in the coming years.

As of 2/3/2011, the top 10 PDP holdings are

Fund Holdings subject to change
Apple Inc. 2.98% Inc. 2.95%
Silgan Holdings Inc. 2.85%
American Tower Corp 2.74%
Liberty Media Corp 2.70%

J.B. Hunt Transport Services Inc. 2.49%
O’Reilly Automotive Inc. 2.45%
Cypress Semiconductor Corp. 2.17%
Alexion Pharmaceuticals Inc. 1.92%
Ametek Inc. 1.77%

See also

Investment Strategies: Relative Strength Rolling 10 Year Out Performs Stocks

Year End Tactical Asset Allocation Fund Review: Part II