If you spend much time studying investing and investment strategies, you will quickly recognize that the end-all, be-all appears to be to find a way to “generate alpha.” By this, investors mean that the “goal” of investing should be to have your investment portfolio outperform against the relevant benchmark. This performance delta is known as “alpha.” And it is what many, many investment professionals tell you should be your pursuit.
First, a disclaimer—I will ALWAYS do what I can to find opportunities to capture alpha (more on that in the coming weeks in a planned blog post); HOWEVER, alpha is NOT my primary focus.
In my mind, there are three things that make this single-minded focus erroneous. At a high level, these three things are:
- Investment management vs. financial planning
- Benchmarks and historical performance
- Outcomes vs. alpha
First, notice that above I indicated that INVESTMENT PROFESSIONALS will turn their focus towards alpha. That’s because investment professionals—as a rule—ONLY focus on investments. This means that they ignore goals, cash flow, taxes, insurance, estate planning, college planning, philanthropic planning, and a plethora of other issues. Conversely, financial planners focus on ALL of the above issues AND investing. A single-minded focus on alpha is—in my opinion—not a wise choice.
Question number one for you to consider:
- Do you or your advisor have a holistic approach to financial planning, or are you being seduced by the sirens of alpha?
Second, alpha has been shown—again and again—to NOT be something that is sustainable! Look at the Dalbar studies or the SPIVA website. Read through the literature. Time and time again the results are clear—active management (i.e., seeking alpha) has not been shown to be effective. Now mind you there are some that will show vis-à-vis comparison to an index (often an inappropriate index) that alpha exists for their particular strategy. In many cases, the reality is that their strategy is more closely aligned with an alternative index. Disclaimer, I AM a HUGE believer in factor-based investing— equity, size, value, and profit factors have been shown to be present and persistent. HOWEVER, there is a HUGE difference in pursuing a factor (which is empirically demonstrated to exist) versus trying to outperform an index.
Question number two for you to consider:
- Have you or your advisor identified an Investment Policy Statement (IPS) and established an appropriate benchmark for performance-comparison purposes?
Finally, the third reason that alpha is (relatively) unimportant is the PARAMOUNT importance of outcomes. I have stated— and will continue to state—that investments are ONLY a tool that is used to support a comprehensive financial plan. And a financial plan is built around a desired set of outcomes. First, you decide on where you want to go (outcomes), and then you decide on the path (plan) and tools (one of which is investments) that will get you there. Too many people focus ONLY on the investment performance and NOT on the outcomes.
A couple of weeks back, I had a gentleman in my office who was a seasoned investor with a solid portfolio. While it was overly complex in my opinion, it was well thought out and monitored. However, what struck me as we spoke/after he shared a bit about his situation was that this individual was not aware of all of the doors he has opened for his future from his investing prowess. I encouraged him to think a bit about what is important to him and his spouse and whether or not they were/are positioned to pursue these things. I have a ton of confidence that he will take this question to heart and either make a solid plan for his family, or ask me to support him in building and implementing such a plan.
Question number three for you to consider:
- Have you or your advisor identified the outcomes that are most important to you and your family and put a plan in place to maximize the probability of these outcomes?
I’m as big of a numbers geek as the next guy. And life would be SO much easier if, in my role as a financial advisor, all I had to do was focus on the topic of investments and alpha. However, life is NOT about numbers. It’s about making an impact on others—what I have come to call significance.
Finally, a bit of a personal statement: There IS one Alpha that is definitely worth pursuing. I’ll let you think on that one a bit and/or come back to me with any questions you might have if this statement does not make sense to you!
Hopefully, after reading this blog post, you will have a bit more motivation to dig deeper into your personal plan and evaluate how things are going in looking to achieve your outcomes.
- Do you have a well-defined Investment Policy Strategy that is used to drive your investments in support of a comprehensive financial plan?
- If not, would you like to partner with someone who is used to helping people get through these struggles and (then, with confidence) implement portfolio strategies in a systematic manner while focusing on your desired outcomes?
If so, feel free to send us an email or give us a call. We’d love to have the opportunity to help you find a bit more peace of mind when it comes to investing.
Photo credit: Rawpixel on unsplash.com
F5 Financial is a fee-only wealth management firm with a holistic approach to financial planning, personal goals, and behavioral change. Through our F5 Process, we provide insight and tailored strategies that inspire and equip our clients to enjoy a life of significance and financial freedom.
F5 Financial provides fee-only financial planning services to Naperville, Plainfield, Bolingbrook, Aurora, Oswego, Geneva, St. Charles, Wheaton, Glen Ellyn, Lisle, Chicago and the surrounding communities; to McDonough, Henry County, Fayette County, Atlanta and the surrounding communities; to Venice, Sarasota, Fort Myers, Port Charlotte, Cape Coral, Osprey, North Port, and the surrounding communities; and nationally.
We'd love to have the opportunity to hear about your situation. Contact us here to schedule an appointment for a consultation.
Helping You With
Wealth Preservation – Wealth Enhancement – Wealth Transfer – Wealth Protection – Charitable Giving