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BeyondSelection
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​Video: Beyond Selection

Alger Director of Market Strategy Brad Neuman, CFA, discusses how having a disciplined sizing process may help investors better capitalize on fundamentally favorable investments.

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In this video, Alger Director of Market Strategy Brad Neuman, CFA, discusses how having a disciplined sizing process may help investors better capitalize on fundamentally favorable investments.  For more information on this topic, please view our latest white paper, "Beyond Selection".

BRAD NEUMAN: ​​The vast majority of investing literature and discussion deals with what to buy or which investments will have the best returns. Of course, security or fund selection is important, but what about how to size those investments? Or in other words, how best to allocate the investments in your portfolio?

It turns out that many investors lack an adequate framework to address that question. So much so that even portfolios consisting of investments with high probabilities of success can yield surprisingly poor results.

Take for example the experiment done by Victor Haghani and Richard Dewey, in which they gave a large group of individuals with finance backgrounds the opportunity to bet real money on a virtual coin flip that was programmed to land 60% of the time on heads and 40% on tails. Sounds like pretty good odds, huh? The subjects were given $25 and a half hour to bet on the coin flips with an opportunity to earn up to $250.
While predictive modeling suggests that nearly everyone should have theoretically earned the maximum payout if they had a proper, consistent sizing – or allocation – framework, only 21% of participants actually did achieve the highest return. More disappointingly, one-third of participants lost money and fully 28% went bust and received no payout. Think about that – with great odds they still lost money because their sizing was wrong!

Sizing can be a problem in fund investing as well. Morningstar estimates that investors have underperformed the mutual funds & ETFs in which they invest by more than 170bps annually over the past decade. Much of this underperformance is due to investors buying or increasing positions after strong performance or vice versa. Morningstar estimates that dollar-cost averaging or investing a fixed amount on a regular basis such that more shares are purchased as an investment declines in value (and fewer shares purchased as the investment appreciates), would have greatly improved the results.

At Alger, we believe the lesson here is that if investors stopped to consider the amount of gains lost on investments with seemingly favorable returns due to poor sizing or timing, they might think beyond their typical selection process. Because having a disciplined sizing or allocation process may go a long way in limiting behavioral errors and capitalizing on fundamentally favorable investments.

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Sources: Rational Decision Making under Uncertainty: Observed Betting Patterns on a Biased Coin, Victor Haghani and Richard Dewey, Journal of Portfolio Management, Spring 2017. And Morningstar Mind the Gap 2022.

The views expressed are the views of Fred Alger Management, LLC (FAM) and its affiliates as of January 2023. These views are subject to change at any time and may not represent the views of all portfolio management teams. These views should not be interpreted as a guarantee of the future performance of the markets, any security or any funds managed by FAM. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities. Holdings and sector allocations are subject to change. 

Risk Disclosures:  Investing in the stock market involves risks, including the potential loss of principal. Growth stocks may be more volatile than other stocks as their prices tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political, and economic developments. Local, regional or global events such as environmental or natural disasters, war, terrorism, pandemics, outbreaks of infectious diseases and similar public health threats, recessions, or other events could have a significant impact on investments. Active trading may increase transaction costs, brokerage commissions, and taxes, which can lower the return on investment. Past performance is not indicative of future performance. 

Important Information for US Investors: This material must be accompanied by the most recent fund fact sheet(s) if used in connection with the sale of mutual fund and ETF shares. Fred Alger & Company, LLC serves as distributor of the Alger mutual funds.

Important Information for UK and EU Investors: This material is directed at investment professionals and qualified investors (as defined by MiFID/FCA regulations). It is for information purposes only and has been prepared and is made available for the benefit investors. This material does not constitute an offer or solicitation to any person in any jurisdiction in which it is not authorised or permitted, or to anyone who would be an unlawful recipient, and is only intended for use by original recipients and addressees. The original recipient is solely responsible for any actions in further distributing this material and should be satisfied in doing so that there is no breach of local legislation or regulation.

Certain products may be subject to restrictions with regard to certain persons or in certain countries under national regulations applicable to such persons or countries.

Alger Management, Ltd. (company house number 8634056, domiciled at 78 Brook Street, London W1K 5EF, UK) is authorised and regulated by the Financial Conduct Authority, for the distribution of regulated financial products and services. FAM and/or Weatherbie Capital, LLC, U.S. registered investment advisors, serve as sub-portfolio manager to financial products distributed by Alger Management, Ltd.

Alger Group Holdings, LLC (parent company of FAM and Alger Management, Ltd.), FAM, and Fred Alger & Company, LLC are not an authorized persons for the purposes of the Financial Services and Markets Act 2000 of the United Kingdom (“FSMA”) and this material has not been approved by an authorized person for the purposes of Section 21(2)(b) of the FSMA.

Important information for Investors in Israel: This material is provided in Israel only to investors of the type listed in the first schedule of the Securities Law, 1968 (the "Securities Law") and the Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law, 1995. The Fund units will not be sold to investors who are not of the type listed in the first schedule of the Securities Law.

Fred Alger & Company, LLC 100 Pearl Street, New York, NY 10004 / 800.305.8547 / www.alger.com


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ETF Investors

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You may have to pay more money to trade the ETF’s shares. This ETF will provide less information to traders, who tend to charge more for trades when they have less information.

The price you pay to buy ETF shares on an exchange may not match the value of the ETF’s portfolio. The same is true when you sell shares. These price differences may be greater for this ETF compared to other ETFs because it provides less information to traders.

These additional risks may be even greater in bad or uncertain market conditions.

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