Alpha Power Investing NewsletterJanuary 6, 2017
The Benefit of a Long-Term Investment Perspective
In last month's newsletter we presented a variety of performance results for the benchmark indexes that we use to manage the Alpha Mid-Cap Power Index Managed Account strategy. In numerical and chart detail we highlighted the performance for both the S&P MidCap 400 Index and the Intermediate-term Treasury Bonds Index during what we refer to as the "Power Zone" and the "Dead Zone." We also compared these results to the results for the more widely quoted S&P 500 Index. For all testing we used monthly total return data for the S&P MidCap 400 Index, the S&P 500 Index and the Intermediate-term Treasury Bonds Index (data source: Callan Associates PEP Database) starting in 1981.
In this issue of the Alpha Power Investing Newsletter we would like to tie all the myriad facts and figures together from last month's issue and highlight the importance of a longer-term perspective.
For the testing results this month we will apply the following System using monthly total return index data starting in November 1981 through October, 2016 (The results presented here depict index returns and do not represent actual returns of the Alpha Mid-Cap Power Index strategy).
*Hold the S&P MidCap 400 Index from November 1st through May 31st
*Hold Intermediate-term Treasury Bonds from June 1st through October 31st
Using monthly total return index data from November 1, 1981 through October 31st, 2016 generates the results depicted in Figure 1.
While the long-term results look decent, year-to-year results can vary greatly. This is an important point because many investors tend to view their results on a year-to-year basis. Any periods showing negative returns and/or returns that are below a stipulated benchmark (such as the S&P 500 Index) can cause an investor to believe that it is time to "change course." Unfortunately, this often works to their detriment as virtually all investment methods experience periods of outperformance and underperformance. By bailing out of a given strategy following a period of underperformance an investor risks missing out on the next period of outperformance.
The purpose of the data that follows below is to help build confidence in the Alpha Power Index method of investing and to better appreciate the potential benefits of looking at results on a five to ten year basis rather than focusing on 12-month returns.
12-Month Holding Periods
Figure 2 displays results generated by looking back 12 months at the end of each calendar month starting at the end of October 1982.
Key things to note from Figure 2:
*The worst 12-month performance for the System was a loss of -11.4% versus a loss of -43.3% for the S&P 500 Index.
*The System showed a gain during 95% of all 12-month periods versus 82% for the S&P 500 Index.
*The S&P 500 Index outgained the System during 39% of all 12-month periods. In other words, it is NOT uncommon for the System to lag the S&P 500 Index over any given 12-month period. This emphasizes the point of focusing on longer timeframes.
5-Year Holding Periods
Figure 3 displays results generated by looking back 5 years at the end of each calendar month starting at the end of October 1986.
Key things to note from Figure 3:
*The worst 5-Year performance for the System was a gain of +28% versus a loss of -28% for the S&P 500 Index.
*The System showed a gain during 100% of all 5-Year periods versus 85% for the S&P 500 Index.
*The S&P 500 Index outgained the System during 27% of all 5-Year periods. During extended stock bull markets the System may underperform the S&P 500 Index by virtue of being out of stocks and in bonds for five months out of each year.
10-Year Holding Periods
Figure 4 displays results generated by looking back 10 years at the end of each calendar month starting at the end of October 1991.
Key things to note from Figure 4:
*The worst 10-Year performance for the System was a gain of +180% versus a loss of -29% for the S&P 500 Index.
*The System showed a gain during 100% of all 10-Year periods versus 92% for the S&P 500 Index.
*The System outgained the S&P 500 Index during all 10-Year periods. This illustrates the potential rewards to investors who adopt a long-term perspective.
Rare is the investment strategy that "beats the market" every single year. Given this reality, a better approach to investing is to adopt a strategy or group of strategies that hold the potential to outperform over long periods of time - and to hopefully mitigate a certain amount of risk along the way - and to stick with them.
The results presented here - while based on index data and not actual real world trading returns - offer a favorable argument for considering the Alpha Power Index method of investing as a potential long-term strategy.
To learn more about our strategies, go to the Strategies and Performance page of our website at www.alphaim.net to read the brochures and fact sheets.
Disclosures: Past performance is not a guarantee of future performance. Indexes are not investment vehicles. The returns illustrated above are not returns of any Alpha strategy and do not include management fees or the cost of funds, trading, or other expenses. To see the impact of these costs, please refer to the net of fees and expenses performance data for specific Alpha strategies. The illustrations above are designed to quantify the effect of certain time periods on representative market indexes.
Alpha Investment Management, Inc. is an SEC registered investment advisor. Such registration does not imply a certain skill or training and no inference to the contrary should be made. The information and opinions expressed in this document are for informational purposes only. Any recommendation or opinion made in this document may not be suitable for all investors. The information contained herein does not constitute and should not be construed as investment advice, an offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
© 2017 Alpha Investment Management, Inc.
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