Alpha can sometimes be interpreted as the value that an adviser adds above and beyond a specific 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. As I write this article Greece has until the end of the day to secure a third bailout. Market’s are down by -5% over the last month but by the time you read this it will have all changed again, possibly for the worst or perhaps for the better.
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’.
For example in November 2008 the FTSE All Share was down -33.4% over the year and continued to decline in early 2009. However, for the 5 year period between January 2009 and December 2013 it gained +73.6% 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.