In last week’s issue of Banyan Market Letter (Issue 39 – Oct. 19, 2011), we explained how proper asset allocation can enhance the performance of your investments over the long run.

We showed you why, when appropriate, you should consider going beyond traditional asset classes such as stocks, bonds and cash, and broaden your portfolio to include non-correlated asset classes such as commodities (especially gold), global currencies, real estate and international investments to reap the full benefit of diversification.

Plus, since leadership among global asset classes tends to shift over time, sometimes rapidly, your approach should be nimble enough to rebalance your asset allocation frequently in response to changing financial market trends.

In fact, we’re convinced the ability to rotate among leading asset classes, in an effort to keep your money invested in what’s performing best right now, can be the single most important factor when trying to avoid painful draw downs in volatile markets.

But how do you know which asset classes to invest in? How long should you stay invested … and when will you know it’s time to sell and rebalance your portfolio?

To complete the picture for you and provide answers to these questions, let’s take a closer look at the time-tested virtues of momentum investing.

Editor’s Note: Exclusive Webcast: Mastering Global Asset Class Rotation on
Thursday, November 3, 2011 at 4 p.m. Go here to register now.

How to Profit from Key Market Trends

When it comes to choosing the right global asset classes to invest in, timing can be everything.

Knowing which asset class offers the best investment opportunity, when to consider taking profits, and how often you should rebalance your portfolio are critical components to success. While it’s nearly impossible for anyone to consistently pick the top and bottom in markets, it is possible to measure the risk-adjusted returns of different asset classes compared to one another.

This extra step can give you valuable historical information that can help you determine when to allocate more of your capital toward particular asset classes that may be poised to outperform others. It all comes down to a simple, time-honored investment concept known as momentum.

Momentum is simply a measure of the relative performance of one asset class compared to another. Investors use different terms to describe it, including relative strength or trend following, but it is the tendency of individual securities or broad asset classes — whether stocks, bonds, commodities or currencies — to show a well-defined trend in performance.

Up trends for example, tend to keep moving higher and downtrends move lower. Momentum isn’t a new concept; it’s been used as a tool for analyzing stocks for many decades. Momentum has been used in other financial markets, for identifying commodity and interest rate cycles for example, dating back centuries.

Historical research shows that momentum-driven strategies have a long history of delivering market-beating returns AND holding up well under many different market conditions. Our own internal research confirms this.¹

Global Asset Class Momentum

For instance, one study on stock momentum (results summarized in graph above) includes over eight decades of data on US equities dating all the way back to the 1920s. It shows that a portfolio of stocks grouped by the best upside momentum outperform those with poor momentum by more than three-to-one in annual total return.²

Also, a study covering the period of 1973-2009 showed that momentum persisted over time, with positive momentum strategies outperforming buy and hold about 70 percent of the time.

What’s more, momentum appears to have even greater potential when applied to global asset classes rather than individual stocks alone.

You can see in the graph above that an asset class rotation strategy (using ETFs) driven by momentum has not only outperformed buy and hold consistently… but the magnitude of outperformance is eye-opening — ranging from 3 percent to 6 percent per year on average.³

Our takeaway: Investors that add a momentum component to their investment portfolios can look for higher risk-adjusted returns over an intermediate-term investment horizon..

Further, when you combine the time-tested diversification benefits of non-correlated asset classes (see Issue 39 – Oct. 19, 2011) with the results of momentum investing, you get the potential for higher risk-adjusted returns over the long run.

In my book, any strategy that aims for enhanced total returns while potentially limiting draw downs in volatile markets is a strategy you may want to consider for your own portfolio.

Mastering Global Asset Class Rotation

That’s why we’ve decided to broadcast a special webcast devoted to asset class and momentum investing.

Join us next Wednesday for a special strategy briefing: Mastering Global Asset Class Rotation, when we will provide more details about how asset class diversification, combined with momentum investing, can help identify the top-performing asset classes in which to invest.

We’ll show you a unique, risk-adjusted relative strength indicator we have developed that tells us which global asset class ETFs are likely to outperform and has lower risk characteristics in volatile markets.

Just click this link to register now, and then be sure to mark your calendar:

THE EVENT:		Mastering Global Asset Class Rotation
THE FORMAT:		Online webcast
DATE:		Thursday, November 3, 2011
TIME:		4:00 PM Eastern Time
REGISTRATION:		Free — just click here.

During this exclusive briefing we will give you the essential information you need to take advantage of this new investment approach that combines two time-tested concepts of investing with the potential to …

Diversify among all of the major global asset classes in a single portfolio …

Tactically shift between asset classes in an effort to catch profitable trends in volatile markets …

Adapt to changing market conditions by frequently rebalancing the portfolio into the top-performing asset class ETFs …

Navigate broad market declines by shifting into less volatile assets during difficult markets …

Deliver market-beating returns over the long run while limiting risk.

I hope you plan to join us for this exclusive online investment briefing.

Good investing,

Mike Burnick
Director of Client Communications
Banyan Partners, LLC

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¹ Dorsey Wright Money Management: Relative Strength and Asset Class Rotation, March 2010.
² AQR Capital Management: The Case for Momentum Investing, 2009.
³ Cambria Investment Management: Relative Strength Strategies for Investing, April 2010.