Alpha Power Investing Newsletter

May 1, 2018

The Purpose of a Strategy

At Alpha Investment Management we have developed and trade objective strategies that we believe have positive expectation for the long-term and which provide an "edge" over time relative to a simple buy-and-hold strategy. While we adhere to our strategies religiously, a "strategy" can take several different forms - a system, a method, a set of rules, a set of general guidelines, a setup, a chart pattern, so on and so forth. The purpose(s) of using any strategy however, is generally universal.

Fear and greed are universal human emotions and invariably strike investors at exactly the wrong time. Therefore, the primary function of utilizing any strategy is to take emotion out of the investment decision making process. Another goal of using a strategy is to attempt to maximize the tradeoff between reward and risk. In other words, we want to make as much money as we can without taking on so much risk that we one day say, "I don't want to do this anymore", or even worse, "I can't afford to do this anymore." One other goal of using a strategy - as well as combining different strategies and trading them together - is to attempt to smooth out the equity curve as much as possible. The smoother the growth of equity in one's account the easier it is to maintain the confidence and discipline required to continue following your strategy or strategies, not to mention to sleep at night.

The financial markets can and will experience wide (and sometimes wild) fluctuations over time. The overarching goal of a strategy then in essence is to create "order from chaos".

  • Figure 1 below displays the cumulative growth of $10,000 invested in the S&P 500 Index over eight different 10-year periods.
  • The first period is 12/31/1999 to 12/31/2009 and the last period is 12/31/2007 through 12/31/2017.

In other words, each line in Figure 1 displays the performance of the S&P 500 Index across a particular 10-year period.

If there is one thing we can say about the results displayed in Figure 1 it is that there is no "order", only "chaos". Some 10-year periods show terrific gains, some show little gain or a loss, and all display some significant volatility and significant interim declines along the way. As we mentioned, the purpose of a strategy is to create "order from chaos".

Figure 2 below displays the cumulative growth of $10,000 invested in the Alpha Mid-Cap Power Index Managed Account strategy over the same eight different 10-year periods. In other words, each line displays the performance of the Alpha Mid-Cap Power Index Managed Account strategy across a particular 10-year period.

Notice anything different? Whereas the action of the equity growth lines displayed in Figure 1 appear to be quite random and chaotic, the equity growth lines displayed in Figure 2 all slope from lower left to upper right in one fashion or another. As noted below Figure 2, this data includes a mix of hypothetical results net of fees and actual results using internal composite performance also net of fees of the Alpha Mid-Cap Power Index Managed Account strategy. With that noted, remember that the point of this exercise is not so much to focus on the raw level of returns but rather on the general trend of the equity lines - i.e., Figure 1 shows "chaos" while Figure 2 shows "order".

The consistency of performance and the relative lack of volatility displayed in Figure 2 clearly illustrate the potential benefits associated with maintaining the confidence and discipline to follow a strategy that is designed based on positive expectation and which provides investors with an "edge".

To read more about Alpha's strategies, please go to the Strategies and Performance page of our website at to read the brochures and fact sheets. 

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

Disclosures and Disclaimers: Past performance is not a guarantee of future performance. The returns illustrated in Figure 1 do not represent actual trading and do not include management fees or the cost of funds, trading, or other expenses. Indexes are not investment vehicles and persons cannot invest directly in an index. The illustration in Figure 1 is designed to quantify the effect of certain time periods on the S&P 500 Index. The S&P 500 Index is market-cap weighted index and is widely regarded as the best single gauge of large-cap U.S. equities. The index includes the common stock of 500 leading U.S. companies and captures approximately 80% coverage of available market capitalization. The data used to construct the illustration was obtained from third-party sources. While Alpha believes the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The returns illustrated in Figure 2 include a mix of hypothetical net of fees returns (12/31/1999 - 12/31/2009) and actual internal net of fees composite returns (1/1/2010 - 12/31/2017) of the Alpha Mid-Cap Power Index Managed Account strategy. The Alpha Mid-Cap Power Index Managed Account is an asset allocation strategy which seeks to exploit several seasonal influences on the stock market. The strategy is constructed by holding an S&P MidCap 400 Index fund from late-October to the end of May and then investing in an intermediate-term bond fund for the remaining five months of the year. During the fourth quarter of each year, the strategy leverages the mid-cap index by 50% during three pre-determined sub-periods totaling 20 days. The Alpha net composite returns include all internal accounts managed by Alpha Investment Management at various custodians that pay Alpha advisory fees ranging from 0.8% to 2.0% annually, and as such, individual results may vary. The Alpha client composite returns are calculated using the time-weighted rate of return method. The monthly composite level performance is calculated by asset-weighting portfolio performance, using end of month market values. Trade date accounting is used for calculation and valuation purposes. The composite returns are net of all fees and trading expenses and reflect reinvestment of dividends, interest and capital gains. Performance results do not reflect the impact of taxes. A model portfolio of the same name as this strategy may be managed by Alpha and offered by investment advisors at various trading/investment platforms, TAMPs, and/or custodians outside the parameters of the internal Alpha client composite returns. Assets invested in such model portfolios may experience significant dispersion in returns from those of the internal Alpha client composite. The causes of dispersion may include, but are not limited to, higher or lower advisory fees, custodial fees, trading expenses, the date on which a client engaged Alpha's investment management services, and the preference/availability of funds used to implement the strategy (i.e. ETFs vs. mutual funds) at the custodial level.

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.

© 2018 Alpha Investment Management, Inc.

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