The Formula is an asset allocation strategy designed for investors seeking a long-term, systematic approach to risk management of equity capital. The primary objective is to achieve above average returns while avoiding large losses.
The Formula's long-term effectiveness as an investment strategy hinges on the assumption that the stock market exhibits cyclical regularities which "skew" the distribution of returns into clearly identifiable time-periods which can be exploited for profit. Alpha's research has identified two cyclical forces which have profoundly and regularly affected the distribution of stock market returns. They are: 1) the annual earnings forecasting cycle; and 2) the four-year presidential election cycle.
The Formula seeks to accomplish its goals by restricting equity exposure in the stock market to well-defined time periods within the calendar year (power zone) as well as within the four-year presidential election cycle, when we believe the odds of positive returns are significantly higher than average. The strategy avoids equity exposure during time periods when the market climate is typically less favorable and the odds of a market decline increase substantially (dead zone).
The Formula Asset Allocation: The Formula holds an S&P MidCap 400 Index fund from the beginning of November to the end of May and then invests in an intermediate-term bond fund for the remaining five months of the year. The only exception is the 15-month period that extends from the beginning of the fourth quarter of the mid-term year (year two) to the end of the pre-election year (year three) of the four-year presidential election cycle. During this period, which we refer to as the "election cycle power zone", the strategy holds an allocation of 50% S&P 500 index fund and 50% NASDAQ 100 index fund.
In our opinion, The Formula represents a good alternative to mutual funds and managed accounts which assume a constant exposure to market risk. Buy and hold strategies, even when actively managed, remain exposed to unpredictable market risk during the market's "dead zone" which decades of historical return data have shown to be unproductive over the long-term and are likely to suffer the most during bear markets and other significant market corrections.
For more detailed information about this strategy, please click the links below to read The Formula brochure and fact sheet.
Click here for the strategy brochure
Click here for the strategy fact sheet