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Advisor Alpha – It’s More Than Just Portfolio Performance

| October 01, 2015
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Advisor Alpha – It’s More Than Just Portfolio Performance

By Gregg Shaw – October 2015

For the past several weeks, market volatility returned with a vengeance.  China has caused much of the anxiety as investor’s fear the stock market selloff and economic slowdown could spread domestically.   Will the Fed increase rates this year?  Many factors suggest volatility is likely to continue. 

Recently, we have seen many investors make investment decisions based on the market.   In a sense, the market has been dictating their investment strategy.  According to the American Association of Individual Investors, retail investors have reduced their stock allocations to 65%, the lowest percentage allocated to equities in 10 months.  

 In 2001, Vanguard created the “Advisors Alpha” concept, which outlined how advisors could add value (or alpha) through relationship-oriented services such as providing wealth management via financial planning, discipline and guidance rather than by trying to always outperform the market.  

Because investing evokes emotion, investors need help navigating volatile markets.   The hard part of investing is sticking to a plan in the best and worst of times.  Abandoning a planned investment strategy can be costly and research has shown that some of the most significant derailleurs are behavioral: the allure of market-timing and the temptation to chase performance. 

Vanguard believes that advisor alpha can add “about 3%” in net returns, particularly for those investors with taxable assets.  According to Vanguard, the 3% increase in potential net returns should not be viewed as an annual value-add, but is likely to be intermittent, as some of the most significant opportunities occur during periods of market duress or euphoria when clients are tempted to abandon their well-thought-out financial plan.  

As the financial advisory industry continues to gravitate toward fee-based services, there is temptation to define an advisor’s value-add as an annualized number.  During these volatile times, a financial advisor suggesting to an investor to stay invested, according to their “financial plan”, as opposed to abandoning the plan, does not show up on any monthly statement.   

How is CWM providing “advisor alpha”?   By guiding and educating our clients on the following:

  1. BE COMFORTABLE WITH YOUR INVESTMENTS – You have to be comfortable with the short-term ups and downs of the market.  This is common!   The stock market does NOT go up in a straight line!  Although you must trust what you own (CWM DOES THIS FOR YOU), be wary of being too conservative especially with a long term horizon.  
  1. DIVERSIFY – One of the most important things to help manage risk of volatile markets is to diversify.  While there are no guarantees that you portfolio “won’t go down” (did you notice I didn’t say “lose” money), it can help limit the downturn. 
  1. BEAR MARKET TEST - Test your financial situation with a bear market test.   Do you still maintain a high probability of success (i.e., for those in retirement who are concerned about “running out of money”?) based on the downward pressure of your investment portfolio.  
  1. DO NOT TRY TO TIME THE MARKET – Many of the best periods to invest have been those environments that were the most un-nerving. See chart below:  

  1. INVEST REGUARLY DESPITE VOLATILITY – If you invest regularly over months, years, and decades, you can actually benefit from volatile markets.  More importantly, you avoid the temptation of trying to time the market.   

Rather than focusing on the “turbulence” and the daily fluctuations of your portfolio, it makes more sense to stick with and maintaining a sound investment/financial plan.  What?  You don’t have a plan?   Call CWM today to start!   

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