Category: Asset Management

Technology is one of those things in life that’s constantly changing, forcing us to relearn systems, adapt and overcome. Call it forced adaptation. Call it annoying and counterintuitive at times. However, technology can be the answer to a difficult problem or just the tool we need to make our lives a bit easier from day to day.

To illustrate my point, I was gifted a Google Home Hub and a Nest Thermostat over the holidays this past year. Although I previously found myself reluctant to join the whole “smart home” bandwagon, my mind was now racing with a plethora of tantalizing home automation ideas.


I may have gone a little overboard. First, I installed the Nest and connected to the Google Home Hub. Simple enough. For about a week I fiddled with the controls, adjusting temperatures from work and programming routines based on my schedule. Needless to say, I was hooked. Over the next few weeks I installed a surveillance system, smart bulbs and smart switches to bring my house up to 22nd century standards.

Shortly thereafter, I left the Google ecosystem, choosing instead to use the home automation software called Home Assistant. My next task was to assemble a miniature computer with the Raspberry Pi as my base and a variety of other components to build the structure. After installing the software, my house now adjusts and triggers specific actions based on where I am (or rather, where my phone is) in the house.

I had a lot of fun building this system, but it took an outrageous amount of time to get all of this up and running. Out of the box, these systems are nice, yet lack the level of sophistication one might expect from a self-described home automation system.

At any rate, this adventure taught me several lessons that I believe can be applied to the world of Fintech and the software advisors leverage on a daily basis.

Building the Financial Advising Software of the Future

You might be able to build the coolest, most sophisticated software featuring artificial intelligence and other modern technological advances, but it’s all worthless without a solid user experience. This aspect is extremely important, challenging to get right, and very often an afterthought when created technology systems.

It’s like learning a new language or learning to interact with a new demographic of people you’ve never interacted with before. It’s also about forming new habits; this process often takes a good deal of time to fully pan out.

Let’s use an example: If you’ve controlled the TV with a remote your entire life, it’s hard to retrain your brain to use voice commands instead. The same goes for turning on and off the lights in your house. At first, it can feel inconvenient relative to the normal way of doing things. Even programming automation based on your habits and schedule requires you to define your habits and schedule, which can take time and isn’t always the easiest.

Check out the diagram below to help you better understand this phenomenon.

The learning curve for some technologies can deter early adopters before they adapt and discover the true benefits. Ergo, I believe it makes more sense to slowly introduce new technology in smaller, more manageable chunks that address their immediate needs without overwhelming them with everything and the kitchen sink.

Introducing The “Hassle Factor”

That initial struggle to adapt (which is that hill in the graph above) is what I refer to as the “hassle factor”. Can positive reinforcement help to get users over this theoretical hurdle? Maybe, but I think training and handholding when rolling out technology could be useful and is just as important as the quality of the technology (or the wow factor).

As I was writing this, I couldn’t help but think about this illustration (see below) I saw recently on the University of Nebraska-Lincoln’s website that discusses complex changes in an organization and how they’re addressed.

This is particularly relevant to IFP, as we are right in the middle of rolling out complex changes to both our advisors and internal employees.

Putting this framework around the home automation example from earlier:

  1. Vision: I can automate my home to make my life easier and optimize energy consumption without giving it a second thought. Just as you may feel when adopting new technology, I did not initially foresee the benefits of installing these systems.
  2. Skills: To start using the new tech, I needed to train myself and form new habits.
  3. Incentives: I’ve effectively reduced energy costs at home and effort spent on reducing them.
  4. Resources: Although I started with an open source platform, Google Home Hub, and decent documentation, tech support or a consultant would have been more ideal.
  5. Action Plan: My action plan was rough at best, which led to several cycles of buying and installing hardware, especially once I better understood the technology’s nuances. This resulted in money down the drain and time spent installing and then reinstalling switches and electrical components. This was likely my largest hassle factor.

Per the Managing Complex Change framework, I would have greatly benefitted by having both vision and an action plan before beginning my adventure. I experienced a ton of confusion and false starts and felt like quitting multiple times. However, if I had no experience in technology and was not resourceful with internet search engines and knowing how to code, I would have lacked the skills and resources required to continue. I most definitely would have bailed at some point before finishing the job. I am still not entirely finished, although I’ve now moved past the hassle factor hump and am starting to see the benefits.

Minimizing the Hassle Factor at IFP

You may have heard that we’re launching some new technology at IFP, namely Advisor[X] and the integrations therein. Our primary goal was to mitigate the hassle factor through something similar to the Managing Complex Change framework from the very beginning. Here’s how we did it.

Streamlining the Sign-up Process

The very first interaction with Advisor[X] needed to be smooth. Although you will only traverse the sign-up process once, we never wanted it to become a deterrent. As everyone in this industry knows, first impressions are everything.

Designing the Layout

IFP Web Designer Scott McCreedy collaborated with the IFP Technology team to design and progressively edit the user experience based on advisor feedback. It’s also mobile responsive, meaning it will adjust to the size of the screen on your tablet or phone, so you can access Advisor[X] wherever you go.

Emphasis on Accessibility

Advisors can access a member of our technology team in a number of ways. First, they can provide feedback regarding Advisor[X] from the top navigation bar after logging in. Second, we integrated a robust request and tracking system to help advisors quickly find the status of their support tickets with ease (see below). Third, we created the Knowledgebase. It’s designed as a collective effort to answer the big questions, identify gaps in knowledge that need to be filled, and provide an ever-growing database of internal updates to keep advisors informed.

Constant Evolution

We don’t want to be another firm that hasn’t pushed a meaningful update to their platform in over 10 years. So, we’ve vowed to constantly evolve Advisor[X] based on user feedback and usage data we’re collecting on the back end. Our teams are also proactively developing various sections of the software to scale with future needs or streamline processes that are typically handled by old school paperwork.

The Fight Against Hassle Rages On

While it’s certainly not a perfect science, we are striving to build the technology platform of the future. Rather than restrict advisors to a proprietary platform with proprietary software, we decided to build the crossroads for all the top third-party applications in one place. After all, you and your clients deserve the power of choice.

Everyone likes a way to track their performance. Whether it be through reviews at work, stepping on the scale at the gym, or performance of an investment account, humans like feedback. Feedback acts as a guidepost, allowing us to analyze whether we are on the right track to meet our goals. While it is necessary to have some way to measure performance, there are many different factors that need to be considered when evaluating your progress.

While absolute performance metrics, like number of pounds lost or annual percentage return on your investment account, are valuable, the time horizon over which you are measuring, the amount of risk you are taking to get the performance, and the process you have in place are all critical aspects that can frame the way you interpret the results.

To demonstrate the first key consideration, time horizon, I will present two graphs:

Take a moment and evaluate the performance of the investments seen in both graphs. If you’re like most people, you would never want the investment in the first graph but would jump on the chance to get in to the second. I will let you in on a little secret: both charts are the S&P 500 total return index, just evaluated over different periods. The first from the market peak on 10/8/2007 to lowest point in 2009 (3/9/2009), and the second also from 10/8/2007, but going through the end of 2017 (eight-year longer time horizon).

While it always hurts when our investments are going down in the short term, it is important to keep in mind that investing is a marathon, not a sprint. Putting too much emphasis on short-term performance, or performance over arbitrary time periods, can lead to sub-optimal decision making, such as selling at the market bottom for a 55% loss instead of holding a few years longer and more than doubling your money.

Taking on Risk

Another important factor to consider is the amount of risk you are taking to reach your goals. While this is often talked about with regards to investing, the same idea can be applied to most other goals, like weight loss, for example. If your goal is to lose 50 pounds, you can take the safe route and work out every day and eat the right food, or you can take the riskier route and take weight loss drugs or practice unhealthy eating habits. While the result might be the same under both methods, the risker path has the potential to lead to negative side-effects that may actually hurt your chances of success.

For example, had you taken weight loss supplements that you were allergic to and had to be hospitalized, you might not be able to work out for an extended period. This could potentially lead to you gaining weight and failing at your goal of losing 50 pounds. Putting this idea into an investment context, two investment strategies could have the same annualized return, but one might have taken a much greater amount of risk to achieve those results. It is important to evaluate the amount of risk being taken to put context around the performance to determine if you are being rewarded for taking the additional risk.

Probabilities and Luck

Understanding probabilities and luck is also important when gauging performance. If a person who has never played the lottery wins on their first ticket, they might mistakenly think that lottery tickets are the best “investment” in the world. And that may be true for this one individual, however that line of thinking doesn’t take probability into account. With the probability of winning the lottery being negligible, when you adjust the potential return (i.e. lottery payout) for the probability of winning the jackpot, the expected return is negative, despite some lucky people winning millions. From an investing context, this is like making moonshot investments on penny stocks or speculative growth companies. While some might produce big returns, most will fail. If you look at too small of a sample size or if you don’t take probability into consideration, you may be mistaking luck for skill.

Often times the difference between luck and skill in investing is a clearly defined investment process. Make sure that you or your financial advisor has a well-defined investment strategy based on empirical evidence that you understand and believe in. Ask questions to make sure you understand the strategy and hold your advisor accountable for sticking to the process. Short-term underperformance is tolerable, but only if the process is followed. Likewise, while strong performance is desirable, it should be viewed as lucky and fleeting if a process is not in place.

Gauging Account Performance

With so many factors at play, how should investors go about evaluating their account performance to ensure they are on the right track? The biggest key is to clearly define your goals, specifically outlining the time until the goal and the amount you will need at that time. From there, it is wise to work with an advisor to create a financial plan tailored to your unique situation. This plan should be used to come up with an appropriate asset allocation strategy. The plan should be dynamic and should be reviewed and updated at least annually, but preferably in real-time. Rather than comparing your investment portfolio to an arbitrary benchmark, your financial plan can become your performance guidepost to see the progress you are making towards reaching your goals. As long as you are on pace to meet your goals, you should not concern yourself with your account’s performance relative to a market index, your neighbor’s performance, or any other arbitrary benchmark.

Final Thoughts

Investors need to understand their emotional investing biases and their impact on evaluating performance. To combat these biases, you should focus on time horizons similar to that of your goals and evaluate performance over rolling time periods, as opposed to arbitrary point to point measures like calendar years. You should also not get too caught up by short-term performance. Additionally, make sure you have a well-defined investment process that is appropriate for your risk tolerance and ensure it is strictly followed. Finally, you should avoid comparing your performance to indexes and/or other people and instead focus on the progress toward your goals.

The US Dollar Index (‘DXY’) is an index that values the US Dollar relative to a basket of major currencies. When the index goes up, the US Dollar is strengthening versus this basket, and when the index goes down, the US Dollar is weakening relative to the basket of major currencies. The US Dollar Index is a weighted geometric mean of the US Dollar’s value relative to the following major currencies:

  1. Euro (EUR 57.6%)
  2. Yen (JPY 13.6%)
  3. Pound (GBP 11.9%)
  4. Canadian Dollar (CAD 9.1%)
  5. Swedish Krona (SEK 4.2%)
  6. Swiss Franc (CHF 3.6%)

Using classic technical analysis, inter-market analysis, and a graphical representation of rotation in currencies, I will try to build a case for being bullish on the US Dollar Index versus all major currency pairs.

Support and Resistance, Trendlines, and Percentage Channels

Chart A: Historical, Long-Term Trendline Resistance

  • Beginning with the highest high in 1986 and the subsequent next highest high in 2001
  • I believe this trendline, which is long-term resistance, will be challenged in the future

Chart B: Medium-Term Trendline Support and Resistance with Percentage Channels

  • Medium Term Resistance
  • Beginning with the high in 2007 and the subsequent high at the end of 2016
  • Medium Term Support
  • Beginning with the lowest low in 2011 and the subsequent low in 2014

Observations and Eventual Outcome

The US Dollar Index is moving in an upward sloping, medium-term channel that is bound by an approximate 20-25% range. Although we are in the lower-half of this upward moving channel, it doesn’t mean that we cannot consolidate around these levels for an extended period of time. We do not necessarily have to immediately move higher. It wouldn’t be a surprise to consolidate around the 88 – 92 range for an extended period.

The longer it takes for the US Dollar Index to reach the historical resistance in ‘Chart A,’ the lower this trendline will be. There is nothing that uses time as a factor pictured in ‘Chart A’. Time could be more of a factor in ‘Chart B,’ and the approximate 20-25% channel could possibly extend out to the mid 2020’s.

Using Intermarket Analysis to Support the Case for Being a US Dollar Bull

The goal of intermarket analysis is to compare the performance of two or more instruments that are in related markets to try to find correlations or connections in price series. We will use the historical movements of an international interest rate differential to try to find some indication of where the US Dollar is headed:

  • US 10-Year Note – German 10-Year Bund spread
  • US Dollar Index (orange line)

Looking at a chart beginning in 2012 of both price series overlaid on top of one another, it seems as the US Dollar Index (orange) is influenced by this international rate differential.

  • As the spread increases, the US Dollar (orange) seems to pick up and follow, albeit with significant delay in some cases

Observations and Eventual Outcome

  1. In June of 2017, the correlation between the two pairs fell apart
  2. The last time this happened, which was July of 2014, it took almost one year for the US Dollar Index (orange) to begin to catch up to the gain in the spread between the US 10-YR and German 10-YR
    • It has almost been one year since the correlation fell apart in June 2017
  3. Looking at the recent movements of both the interest rate differential and the US Dollar Index (orange), one could potentially make a case for simultaneously shorting the spread differential and buying the US Dollar Index (orange).
    • For instance, buying the US Dollar in isolation would not be acceptable, as the interest rate differential could collapse, and the US Dollar Index (orange) could potentially remain stationary.
    • Being able to accurately execute this trade would be difficult. It would involve the use of derivatives and greater detail than what could be expressed here.
    • In the case, we want to use this inter-market analysis in context only as a piece of the puzzle within the bigger picture, which could possibly indicate that the US Dollar (orange) will move higher as this spread differential moves higher.

Using a Relative Rotation Graph to Support the Case for Being a US Dollar Bull

A relative rotation graph (RRG) is a visual means to display relative trends in the marketplace, in a very concise and quickly comprehensible manner.

The RRG is composed of four quadrants:

  • Upper Right (Leading)
  • Bottom Right (Weakening)
  • Bottom Left (Lagging)
  • Top Left (Improving)

The x and y-axis represent quantitative data points:

The X-axis: Relative Strength

  • Move to the right = positive relative strength to benchmark
  • Move to the left = negative relative strength to benchmark

The Y-axis: Momentum

  • Move upwards = positive momentum relative to benchmark
  • Move downwards = negative momentum relative to benchmark

The resulting datapoints that represent our securities will actually move clockwise, or rotate, around the benchmark, which is assumed to be in the middle of the rotation graph. The wider the swing around the benchmark, the greater the chance for under/out performance. Securities that are closely rotating around a benchmark have a less chance for future under/out performance.

The following GIF is a Daily RRG that encompasses the most recent bullish run in the middle of April through May 1st, and will show you the relative rotation of other major currencies around the benchmark, the US Dollar.

Other Interesting Things to Note in the Chart of the US Dollar Index

The length between the two previous high’s and low’s in the US Dollar Index

  • The highest high, where the chart begins in 1985, to the lowest low in 1992 was approximately 2500 days
  • The subsequent next highest high to the lowest low was also approximately 2500 days

The length between the first high in 1985 in the US Dollar Index and the next subsequent highest high in 2002 was approximately 5800 days

  • It has been approximately 5900 days since our last high in 2002

Putting it all together

Using classical technical analysis techniques, such as support and resistance, intermarket analysis, and a graphical representation of rotation amongst major currencies, we can start to begin to make a case for a bullish US Dollar Index in the future.

Zooming in on the chart, from the recent support levels at 88.95, it would be an approximate 2.2:1 risk/reward scenario if one were to enter the trade in hindsight.

Risk could be greatly improved by placing a stop at the lower, upward moving red-dotted support line that is presently at an approximate 87.50. This would be in place of the stop I show below, which is under the last low in 2015, which is approximately at 80.

If you look closely, outlined in blue, is a recent consolidation we have recently broke out of to the upside. I believe we may come back to test this blue line at some point. This may be a prudent time to enter the trade if the recent bullish momentum has one looking to enter without getting in with the rest of the crowd.

  • Upside Approximate Target = 107
  • Downside Approximate Target = 80