Written by Brent J. Welch, CFP®, ChFC, CRPS®, CLU, AIF®

Alpha is the first letter in the Greek alphabet denoting the first of a series of items or categories. The dictionary also tells us that the Alpha is the brightest star in a constellation. You’ve probably heard or used the term “alpha dog” referring to the lead dog in a pack.

Behavior Alpha regarding your money is ignoring emotions to stay the course. Your behavior isn’t typically adding the value to your money. According to J.P. Morgan Asset Management*, one of the record times of fund flows into stocks was in 1999 when we were at the absolute height of the technology stock bubble. Individual investors added 176 billion dollars of new investments at record-high prices. This is buying high and not buying low. Warren Buffet said, “we should be greedy when others are fearful, and fearful when others are greedy.” During the record-breaking bull market from 2009-2015, investors were pulling their money out of the market*. That 80 month bull market was up 184% and investors have pulled out of stocks a record $561 billion. Think about it! Investors sold when they should be buying and bought when they should have sold.

So how can you get on track and stay on track? One of the most important investment decision you make might be your stock vs. bond ratio. Figure out what your mix is and stick with it! Your emotions may cause you to sell low and buy high and not buy low and sell high. Sticking with your asset allocation may be the most important thing you do. 

Dr. Daniel Crosby, PhD, in his article entitled “Behavioral Alpha, the True Power of Financial Advice” found research that indicated the value of having a Retirement Wealth Advisor help you manage your money may add 1.86% to 3% per year, net of fees, to your portfolio. Half of that benefit may be derived from helping protect you from your emotions. Dr. Crosby said, “Vanguard’s Advisor’s Alpha study did an excellent job of quantifying the value added (in basis points, or “bps”) by many of the common activities performed by an advisor, and the results may surprise you. They include:
• Rebalancing – 35 bps
• Asset allocation – 0 to 75 bps
• Behavioral coaching – 150 bps

TOTAL BENEFIT of having a wealth advisor? up to 3.00%

Based on Vanguard’s assumption of 3% per year average added value, fully half of that owes to behavioral coaching, or preventing clients from making foolish decisions during times of fear or greed! Put more plainly still, an advisor is adding more value when he/she is managing your emotions than when he/she is managing your money.”

Morningstar has echoed the sentiment in Vanguard’s study in the release of a recent whitepaper, Alpha, Beta, and Now…Gamma. Morningstar’s definition of gamma is “the extra income an investor can earn by making better financial decisions.” It computes the actual amount of improvement in investment returns at 1.82% per year for those who use professional advice to make their financial decisions.  Let a wealth advisor help manage your money so you can focus your time and energy on your faith, family, and friends, having fun or volunteering to help others. Don’t let your emotions rule your investment decisions. Become more alpha-like in your investing by hiring a Retirement Wealth Advisor and holding the course with your asset allocation. Your stock vs. bond decision may be the most important investment decision you make.**

Follow Dr. Crosby on twitter: @incblot

* JP Morgan Guide to The Markets Q4 2020


Please contact Brent at 1-800-TAX-PLAN