Alpha can sometimes be interpreted as the value that an adviser adds above and beyond a relative index’s risk/reward profile.
Our very human focus on the day to day can often encourage us to make decisions that affect our long term interests. From minute to minute, market sentiment shifts in reaction to news – about the economy, companies, governments, politics and the wider world. Prices rise and fall in response to the news, which by definition is unpredictable. Think of this like the weather. One day it’s sunny. The next it rains. It’s unseasonably warm one day but cool the next. It’s constantly changing unlike the climate which changes more gradually. With long term investment it is the climate you need to think about while implementing the principles of sound investment strategy, such as working with markets; understanding risk and return; broadly diversifying and focusing on elements within your control including portfolio structure, fees, taxes and discipline.
Investing evokes emotion and our job as advisers is to help you maintain a long term perspective and disciplined approach. The potential value added here can be large. Abandoning a planned investment strategy can be costly and research has shown that some of the most significant reasons for doing so are the allure of market timing and the temptation to chase performance or the next ‘hot’ investment or alternatively panic selling. By keeping these emotions in check and staying the course, you can avoid significant wealth destruction – ‘time in the market instead of timing the market’.
Over the past 30 years the S&P * 500 Index has managed an annualised return of +11.6% – pretty spectacular over such a long period and especially if you consider that inflation averaged +2.7%. Startlingly, the average US investor only managed a return of +3.79%, but why? Maybe this was due to some weak performance by active managers or underlying costs and fees dragging down value? Maybe in part, but the main culprits are the investors themselves and the fear of losses. In times of market stress, investors can panic and sell funds at the worst time thereby missing out on market rebounds or recoveries.
For example in 2008 the S&P 500 was down -38.5% over the year and continued to decline in early 2009. However, for the 5 year period between 2010 and 2014 it gained +105% and in early 2015 reached a record high. The best action or inaction is to ‘stay in your seat’ and avoid being derailed off course just as markets are about to turn. Sometimes rational common sense is not so common! Working with an adviser can, in some cases, avoid significant losses and potentially more than offset years of advisory fees.
* S&P – Standard & Poor’s Financial Services LLC is an American financial services company. It is a division of McGraw Hill Financial that publishes financial research and analysis on stocks and bonds.
RMT Ref: 108/05.15/SL