Relative Strength Investing with ETFs—A Great Combination

In your investing plan, ETFs should be used as the vehicle of choice for the reasons previously discussed in Chapter 4, “Exchange-Traded Funds—The Most Suitable Investment Vehicles.” That chapter provides a listing of the specific ETFs for your investing plan, as well as the percent allocation among the asset classes dependent on your risk tolerance—conservative, moderate, aggressive, or very aggressive. You can fine-tune any of the percentage allocations in specific ETFs to better suit your needs. You shouldn’t necessarily be concerned that you are a few percentage points off, if you are on the borderline of conservative/moderate or moderate/aggressive. Just select an overall allocation that you are comfortable with, and remember that you can always adjust the plan to work better after your real-time experience.

Therefore, your next step is to rank your selected ETF universe based on its most recent six-month price performance to determine which ETFs are the most attractive purchase candidates. This time frame was selected instead of a shorter or longer time frame because a number of research studies found that the six-month time frame offered reliable results over time. Of course, I could have used a weighted average approach, for example, the six-month period with 75% weighting, the three-month period with 15% weighting, and the one-week period with 10% weighting. However, I wanted to not only make the process as simple as possible for you to follow, but also make sure that the ranking information was available from free Web sites.