Investment Strategy 2018-01-24T01:49:22+00:00

Positive Alpha:

Beating the market on a risk adjusted basis

Our investment strategy stems from a discussion regarding the “ideal portfolio”.  After analyzing dozens and dozens of portfolios we realized, in our opinion, the overwhelming majority use the same investment strategy.  It did not matter if the portfolio was from the largest firm in the world or a local investment advisor, they were virtually identical!.  This couldn’t possibly be the best solution for most investors, could it?  We certainly don’t think so…

Our research has shown portfolios with consistent, predictable returns over time will perform better no matter what your objective.  For example, if your desired return was 5%, you would want to get 5% every year if possible.  Would it be ideal to ride the roller coaster of a negative year followed by a year with huge gains?

Two common strategies we believe are certainly the enemies of predictable returns are:
First, trying to time the market and
Second, trying to beat the market by picking individual stocks that will outperform the broader market.

A third very common strategy is asset allocation.  If you’ve ever heard of the ’60/40′ portfolio or the ‘rule of 100,’ this is in reference to asset allocation.  In short, the idea is to “allocate” a certain percentage of your portfolio to stocks and a certain percentage to bonds (60% in stocks and 40% in bonds, for example).  The idea is that when the stocks do poorly the bonds will do better and help balance out the returns.  We firmly believe this is a losing asset allocation strategy for consistent retuns.

First, the traditional 60/40 is invested to perform adequately in two of the four possible economic outcomes.  You can see in the chart below most investments are going to be affected by either rising or falling interest rates and increasing or decreasing market and economic growth.  Logic dictates that you own investments that produce consistent returns in each of the 4 possible outcomes, not just half of them like a typical 60/40 portfolio.

25 % Positive Growth 25% Rising Rates
Risk Parity = 25% Risk

60/40 Portfolio Here

Risk Parity = 25% Risk
25 % Negative Growth 25% Sinking Rates
Risk Parity = 25% Risk Risk Parity = 25% Risk

60/40 Portfolio Here

Second, most portfolios are not properly balanced.  Generally, stocks are far riskier and more volatile than bonds meaning that the typical 60/40 portfolio has nearly all of its risk concentrated in one asset class. This, in our view, is hardly a “balanced” approach for any portfolio but particularly a retirement portfolio that could have more need to be risk adverse.

Although we believe Risk Parity to be a superior investment strategy, it is possible it is not right for you.  All investments carry risk of loss, as well, all investment strategies have pros and cons, Risk Parity is no different.  At the core of our beliefs, we think it’s important to be an informed consumer and finding out if Risk Parity could be for you is no different.

-The Alpha Retirement Wealth Team