Alpha Power Investing Newsletter

July 5, 2016

Brexit: Perspective and Discipline

All the talk these days in the financial markets relates to Brexit, the referendum on whether Britain would "Stay" or "Leave" the European Union (EU). The common speculation was that Britain would "Remain", thus leaving things - for better or worse - pretty much as they had been before. As a result, the vote to "Leave" took the financial markets by surprise and created great uncertainty regarding the implications going forward.
There has been and will continue to be much debate about whether the decision is a good one or a bad one. But what is most relevant to the financial markets is the following well-earned phrase:
"The markets hate uncertainty."
The stock and bond markets can and do perform well at times even in the face of bad news. As long as the news is out and investors can reasonably adjust their expectations, adverse fundamental developments can be overcome. It is events like Brexit - with all of the varying prognostications - when no one can say with exact certainty what the short and long term effects will be, that cause great uncertainty amongst investors. This uncertainty is typically manifested with sharply increased volatility in the financial markets.
It is also during times like this that the benefit of adhering to an objective, long-term based strategy can offer you the greatest advantage. It is human nature to react to events such as Brexit with fear and uncertainty. The potential to lose a lot of money quickly is certainly something to be concerned about. Still, if you step back and look at things as calmly and rationally as possible you will likely come to agree that scrambling to adjust your investment portfolio in reaction to world events is not really the ideal approach to investing.
The "keys" to long-term investment success are:
  1. Use a strategy (or strategies) that generates a realistic probability of making money in the long run: You should have some concrete reason for believing that your method will work in the future.
  2. Make sure your method has an "edge": Don't just do what everyone else is doing and do not just react to every new twist and turn in the markets. Also, if you do not know what your "edge" is, then you don't have one.
  3. Have the discipline to follow your method: Having the discipline to follow your investment strategy is the only thing that allows you to make it work.
  4. Make sure you have confidence in your method: If your strategy has a realistic expectation of success and affords you an "edge" this will give you the confidence you need to maintain the discipline required to follow your strategy as planned.
The Advantage of a Tactical Strategy
The following Alpha strategies utilize a variety of time-tested seasonal trends to determine when to be in or out of the stock market:
  • Alpha Mid-Cap Power Index Managed Account
  • Alpha Bonds Strategy
  • Alpha Seasonal Strategy
  • The Formula
The underlying seasonal trends upon which each of these strategies is based upon are well established and are based on 40 to 80 years of testing and/or real-time results. As a result they offer a positive expectation for returns over the long-term. Because these trends are little known nor used by the majority of investors they also offer investors a unique "edge". Alpha follows an objective, disciplined set of trading rules in order to implement each strategy so investors can hold a high degree of confidence in the potential for successful long-term results.
Where We Are Now
The strategies listed above are all presently in bonds and have been since at least the beginning of June 2016. The primary reason for this appears in Figure 1 which displays the cumulative percent return for the Barclays Intermediate-Term Treasury Bond Index versus the S&P 500 Index during the months of June through October since 1980.
As you can see in Figure 1, during some years the S&P 500 performs very well during this five month "Dead Zone" period. But overall the long-term results have been subpar and a great deal of market volatility as well as several severe bear market declines have unfolded during this period. Intermediate-term treasury bonds on the other hand, have generally offered steady, consistent performance.
By following our disciplined, objective approach these strategies were in the relative safety of bonds when the turmoil of the Brexit surprise roiled the financial markets. At the moment, the general allocations for each strategy is as follows:
  • Alpha Mid-Cap Power Index Managed Account: 100% Intermediate Bonds
  • Alpha Bonds Strategy: 30% Limited Maturity Bonds / 70% Intermediate Bonds
  • Alpha Seasonal Strategy: 50% Limited Maturity Bonds / 50% Intermediate Bonds
  • The Formula: 100% Intermediate Bonds
Each of these strategies will remain out of the stock market until at least late October. We are comfortable with this approach as it may well take several months for some of the Brexit uncertainty to work itself out.
If you would like to learn more about Alpha's strategies, please go to the Strategies and Performance page of our website at

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

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 illustration above is designed to quantify the effect of a certain time period on representative market indexes.

Alpha Investment Management, Inc. is an SEC registered investment advisor. 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.

© 2016 Alpha Investment Management, Inc.

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