2018 Q4 Review: What was your Return Relative to Risk (Alpha)?

Portfolio Return To Risk Chart. Far more information.

By showing risk in addition to return a great deal more is revealed.

The left hand vertical line represents return, while the horizontal line represents the standard deviation of daily returns.

The green dot shows both return AND risk of a portfolio, and a range of benchmarks are represented in the colored squares.

Investors can then seek to align themselves with the best practices of the most successful investors for the best chance of optimal performance. So the focus is more on risk than return and in particular on the ratio of Return to Risk.

The chart shows:

  1. The portfolio has far less risk than US equities.
  2. The  portfolio has alpha of over 2%. In other words the portfolio is above the return to risk line drawn between the blue square and the red square.

I believe when a portfolio return lies above the return to risk line that this is the clearest sign of optimal performance, as discussed in my previous notes.

I predicted an interest turn on November 1st, Time stamped

http://US Markets. The Debt Bet. 5 questions. Interest rate cycle turn.

This now looks to have happened.

https://kimblechartingsolutions.com/2019/01/stocks-bonds-look-repeating-2000-2007-patterns/?utm_source=ActiveCampaign&utm_medium=email&utm_content=Stocks+and+Bonds+look+to+be+repeating+2000+++2007+patterns%21&utm_campaign=Daily+Kimble+Blog+Posts+RSS

The chart above shows that 5 year Treasury yields may once again have peaked at a lower high, as rising interest rates have preceded a significant reversal in the S&P 500.

As the probability of a cyclical downturn in the US economy in Q4 became very significant I took a risk averse stance in advance, as time stamped in my Q3 2018 review.

Timestamped Analysis

At the end of Q3 I could not have been any clearer about the risks and challenges being unprecedented as we entered Q4.

Here is my summary written at that time:

“Summary and Mindset polarization

In my opinion declining global growth and tightening policy is typically a hostile investment environment.

In 2018 so far most of the world’s equity investment benchmarks are down year to date in dollar terms. Bonds, commodities, precious metals, international equities, are broadly negative. The outlier is US equities, with outstanding circumstances in debt growth and buybacks the main feature.

US markets are reflecting multiple historical extremes, most significantly in positioning.

Retail investors have never been more committed to passive investing with an extreme bias in favor of US equities relative to bonds and precious metals.

Seasoned Cycle investors and “commercial” futures investors with the best long term track records are broadly expressing the polar opposite position.

Fundamentally, the difference is in mindset, and then the investment process that flows from that.

At a time of such polarization, investors need to evaluate their own mindset.”

http://chrisbelchamber.com/q3-2018-quarterly-review-debt-cycles-and-mindset/

The last statement in that summary above is what I believe the key to understanding what happened in Q4 2018. I have grown convinced after 34 years of analysis, trading and investing that most investors are confused about how to go about investing and are unprepared for changing circumstances.

This is why I spent so much time this summer writing a series of articles about developing a well grounded investment process that will help to enable investors to transform their approach towards the best practices of the most successful investors of recent decades.

Investment Mindset Bootcamp

I believe that unless you have thought deeply about these points and done the necessary research and follow up work, it is likely that you are investing sub-optimally. Here are the 5 articles.

http://chrisbelchamber.com/investment-mindset-bootcamp-stop-gambling-start-accumulating-long-term-wealth-step-1/

http://chrisbelchamber.com/investment-mindset-bootcamp-stop-gambling-start-accumulating-long-term-wealth-step-2/

http://chrisbelchamber.com/investment-mindset-bootcamp-stop-gambling-start-accumulating-long-term-wealth-step-3/

http://chrisbelchamber.com/investment-mindset-bootcamp-stop-gambling-start-accumulating-long-term-wealth-step-4/

http://chrisbelchamber.com/investment-mindset-bootcamp-stop-gambling-start-accumulating-long-term-wealth-step-5/

I will be giving a seminar on this at the Tower club on Saturday January 12th 2019

Redefining Investment Management. Executing Transformation.

http://chrisbelchamber.com/redefining-investment-management-executing-transformation/

Chris Belchamber Investment Management and Chris Belchamber offer Investment advice through Belpointe Asset Management, LLC, 125 Greenwich Avenue, Greenwich, CT 06830 (“Belpointe”). Belpointe is an investment adviser registered with the Securities and Exchange Commission (“SEC”). Registration with the SEC should not be construed to imply that the SEC has approved or endorsed qualifications or the services Belpointe offers, or that or its personnel possess a particular level of skill, expertise or training. Important information and disclosures related to Belpointe are available at http://www.belpointe.com. Additional information pertaining to Chris Belchamber and/or Belpointe’s registration status, its business operations, services and fees and its current written disclosure statement is available on the SEC’s Investment Adviser public website at https://www.adviserinfo.sec.gov/.   

The information provided herein is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan feature or other purposes. Accordingly, it should not be construed by any consumer and/or prospective client as solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation. DBA and/or Advisor is not an attorney or a tax professional and the information contained herein should not be considered tax or accounting advice, legal or regulatory advice. This material is not suggesting a specific course of action or any action at all. Communications such as this are not impartial and are provided in connection with advertising and marketing. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor’s own situation.

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