Alpha Power Investing Newsletter

January 7, 2019

Investing - The Big Picture

Here is what you really need to know about market history. If we look at rolling 10-year returns for the Dow Jones Industrials Average, 89% of the time the Dow shows a 10-year gain. Many investors look at this and say, "Well, if I just put my money in and leave it here, I have almost a 90% likelihood of making money". But what people tend to overlook is the fact that along the way most every 10-year period witnesses a peak-to-valley drawdown of -30% up to -89% (during the 1930's). Too many people fail to consider the effect that these occasional "downtrends" will have on their portfolio - and just as importantly - on their psyche.

On the face of it, investing seems like it should be easy. Pick a few stocks or funds, pick a couple of strategies and let the long-term propensity for the stock market to rise take care of the rest. But it rarely works that way. The mechanical process of choosing investments is itself not a terribly difficult process. And during a long-term bull market - like the one we had since the 2009 bottom - "sitting back and letting it ride" is also a fairly simple thing to do. But the emotional part of watching the equity in your account fluctuate when things get volatile - especially when that volatility is to the downside - is the "fly in the ointment", the "monkey in the wrench", the "pain in the", well, you get the idea.

In reality - from a Big Picture perspective - the last decade has been "Easy Street" for the stock market. It has also been an aberration. A serious look at market history reveals that rarely has the market enjoyed a more unimpeded advance than what we experienced in the past decade. And while such an advance is terrific while it lasts, it quietly raises the level of "complacency" among investors to a dangerous level. The more accustomed investors become to low volatility and a steadily advancing market, the more they want it and - most dangerously - the more they come to expect it. And when the inevitable next serious decline unfolds the more of a shock to the system it is.

There are two important potential impacts of any market decline. The first obviously is the effect on your wealth. Depending on your stage of life and/or your station in life, a decline of -30% or more in your net worth can exert an impact ranging from highly stressful to downright catastrophic. The other potential effect is psychological. One of the most dangerous scenarios lurking out there for the average investor goes something like this:

  • An investor is comfortably watching their investments grow steadily over a period of time, quietly extrapolating those gains in their head and dreaming of a very bright future.
  • The stock market tanks - quickly, violently, unrelentingly - and a significant portion of that investor's wealth vanishes. (If you have not experienced it, know that there is a feeling you get in the pit of your stomach when things go beyond what you can handle that can only be felt, not described.)
  • As the decline continues the investor reaches their own "I can't take it anymore" limit and they dump their stock holdings and/or their long-term strategies in an effort to make the pain and/or fear stop.
  • At some point in the (usually) not too distant future, the market bottoms and begins to rise. The investor at first has no desire to get back into the market. But as the advance continues the investor starts to feel the urge to jump back in - but fights the urge due solely to avoid the risk of feeling again the pain/fear they experienced during the previous decline.

This cycle can lead an investor to miss the best opportunities. The only antidote to all of this is to employ the following two-step process:

  1. Develop a well thought-out investment plan - one that considers returns, risk, volatility and one's own priorities.
  2. Maintain the emotional and financial wherewithal to follow the plan.

A solid investment plan should typically involve a variety of individual investment strategies whose patterns of return tend to complement one another, but which are each consistent in their own way over time. Some strategies are designed to make a lot of money during the worst of times. Others are designed not to lose a lot of money during the worst of times. And others still fit somewhere in between, typically offering steady long-term returns with less risk and volatility than simply buying and holding through inevitable swings.

The strategies offered by Alpha Investment Management typically fit into this third category. They will rarely be the top performers during a bull market nor the worst performers during a bear market. But the fundamentals that serve as the foundation of each strategy provide the consistency that can allow them to serve as an integral part of a portfolio of strategies.

Jay Kaeppel
Vice President and Director of Research
Alpha Investment Management, Inc.

Disclosures and Disclaimers: Past performance is not a guarantee of future performance.  

Alpha Investment Management, Inc. is a 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.

© 2019 Alpha Investment Management, Inc.

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