The Cash Flow Clock: For Retirees - Book - Page 24
The Cash Flow Clock
If the S&P 500 is down 20% and our conservative portfolio has a Beta of
0.5, we should expect to lose 10%. But if our Alpha is negative 3, then our
portfolio is likely to lose 3% more than expected. That means we would
lose 13%.
Most investors don’t know what their Alpha and Beta are. They are not
listed on investment statements, although they should be. We can find them
using websites such as Morningstar or Yahoo Finance. The risk tab for any
investment shows its Alpha and Beta over specified time periods.
Understanding our Alpha and Beta allows us to hold our portfolios (and our
advisors) accountable for performance. Unfortunately, an almost
overwhelming majority of managed portfolios have negative Alpha.
Negative Alpha means that when the market is up, we don’t make as much
as we should. When the market is down, we lose more.
A negative Alpha portfolio has an extremely destructive effect on our
financial plan. The assets we have worked to save and accumulate are not
working for us efficiently. Even missing out on a couple of percentage
points of growth over 10 or 20 years can cost us tens or even hundreds of
thousands of dollars. Over a longer period of time, the impact is even more
significant. But losing more than we should is much, much worse.
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