Alpha Power Investing Newsletter

August 1, 2019

The Importance of "Lower Left to Upper Right"

In a sense, all of investing can be boiled down to two key factors:

  1. Developing a plan that affords an investor the opportunity to achieve long-term success.
  2. Having the financial and emotional wherewithal to follow the plan.

Factor one involves deciding - among other things - what areas to consider for investment (stocks, bonds, real estate, etc.), how broadly to diversify across and within the various areas, how to allocate capital, what - if any - timing methods will be used to determine when to actually buy and sell, tax implications and so on and so forth. In its fullest form, this type of effort is certainly not a small undertaking. Yet, the reality is that it is also imminently doable for virtually any investor. For investors who are not comfortable doing it themselves, there are professional advisors who can help them establish a plan with a better than average chance of achieving long-term success.

The bottom line is that while there is no "one size fits all" financial/investment plan, the ability to formulate a plan that gives an individual the potential to reach his or her financial goals is within the reach of virtually everyone.

The second factor of the equation is where people can get into trouble. Having the "financial wherewithal" to "follow the plan" means, at a minimum, coming up with enough money to invest to make the plan viable. For many people, this is half the battle (or more). Part of the reason IRA's, 401k's etc. are so popular is because in many cases they "force" an individual to invest money without having to "think about it" or actively take steps to move money around on any kind of a regular basis. For whatever reason, writing a check or transferring money into an investment account each month is a pretty easy thing NOT to do.

Another aspect to having the financial wherewithal involves taking steps to minimize downside risk and/or to limit the amount of any actual losses that occur. The key here is to plan in advance. In the long run it is far better for an investor to determine in advance that, "If this investment loses x% or more I will automatically get out and cut my losses.", than it is to not plan in advance and suddenly shout, "Oh my gosh, I'm down x%! What the heck do I do now?" This lack of planning regarding how to handle the inevitable losing trades can have an insidious effect on how well a person executes their long-term plan because it can throw off one's "emotional wherewithal."

The bottom line is that every person has a certain level of risk tolerance. And the spectrum is wide. Some investors cannot seem to tolerate any risk at all, whereas others are - for lack of a better phrase - big swingers, i.e., people who can handle big swings in equity and keep on keeping on. And then of course, there is every level in between. One of the most important decisions each investor makes - in some cases consciously in other cases subconsciously - is in deciding where they fit along this "risk tolerance spectrum." And it is a critical decision for many reasons. An investor who can tolerate little or no risk may struggle to reach their financial goals as they will never allow themselves enough opportunity to grow their capital. At the other extreme, an individual who deems themselves a "big swinger" but who in reality is unable to tolerate the attendant volatility, is setting themselves up for inevitable disaster, as they will quite likely "pull the plug" someday at exactly the wrong time.

Another key concept of long-term success to consider is this assertion: The volatility of the fluctuations of the equity in your account will have a greater impact on your long-term success than any other factor. You may or may not agree with this assertion but the fact remains, "swing too little" and the returns never quite add up, "swing too much", and the risk of losing one's emotional wherewithal - and reacting emotionally to one's own detriment - skyrockets.

One concept we embrace is something we refer to as "LLUR", which stands for "Lower Left to Upper Right." As displayed in the example in Figure 1, LLUR is the type of equity curve that ensures that an investor is maximizing the likelihood of reaching their long-term goals.

The more frequently the equity curve "dips", the larger the dips, the longer the sideways periods with no new highs in equity, and so on, the higher the likelihood that an investor will stray from their well thought out investment plan that was devised way back in factor #1.

One last concept to implant in the back of your brain is this: Everyone wants to make as much money on their investments as they reasonably can. That is human nature. But the reality is that if one takes on too much risk in attempting to achieve the maximum gain, something bad almost invariably ends up happening. As such, your ultimate goal as an investor should NOT be: a) to maximize return; nor, b) to minimize risk; but rather, c) to maximize the tradeoff between reward and risk.

Alpha Investment Management incorporates time-tested seasonal trends into each of its investment strategies, based on exhaustive research that indicates that this approach can offer patient, long-term investors the potential opportunity to achieve consistent long-term growth of equity with lower volatility (in terms of equity swings) than a simple buy-and-hold approach using a benchmark index fund.

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

Disclosures and Disclaimers: TThe 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. Before investing in any fund and/or strategy, investors should consider the investment objectives, risks, charges and expenses of the fund/strategy and its investment options.  

Alpha Investment Management, Inc. is a SEC registered investment advisor located in the State of Ohio. 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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