An investment space for readers to learn about automated investing, robo-advisor algorithms, investment models and portfolio management.

Your New Year’s Resolution: Holistic Self-Care is a Key to Financial Success

Body. Mind. Spirit. It’s not just a slogan for martial arts or yoga instruction. It’s a recipe for financial wellness and a lengthy retirement. Exercise the body. Stimulate the mind. Nourish the spirit. Addressing all three of these gives you more energy and enthusiasm while you’re still working and a longer runway to enjoy the golden years of retirement. 

Wealth building for retirement is pointless if you’re not around to enjoy it. Far too many people put extra effort into making money and not enough into holistic self-care. Ironically, ignoring the latter can limit your ability to do the former. Unhealthy people don’t perform at optimal levels. Unhappy people don’t want to.

A Body in Motion Stays in Motion

Exercising when you’re young can lead to a more active lifestyle as you get older. Newton’s First Law of Motion states, “a body in motion stays in motion.” It describes objects in a vacuum where no other forces can affect their momentum, but the metaphor applies in this case. Don’t stop moving, and you won’t get stuck in one place. 

No one is asking you to go to the gym every morning or run marathons. Staying in motion can be as simple as taking a walk around the neighborhood in the morning or after work. Those with at-home jobs often buy treadmills or elliptical machines so they’re not just sitting at a desk all day. You need to use them, of course, and not just hang coats on them. 

A physically fit individual will have more stamina and energy than one who is out of shape. They’ll also be less likely to have a stroke, heart attack, or adult-onset diabetes. Those are all life events that can arrest the motion of your body and prevent you from building wealth. That makes them a financial wellness issue, not just a healthcare problem.       

You Have Power Over Your Mind

Jim Morrison once said, “He who controls the media, controls the mind.” Marcus Aurelius, widely considered one of the greatest thinkers in human history, had a different opinion. He said, “You have power over your mind – not outside events. Realize this, and you will find strength.” In modern terms, that means, “Don’t let social media dictate your actions.” 

Enhancing your cognitive skills can be done with nutrition. In March 2021, the Harvard Medical School published a list of “smart foods” that includes green leafy vegetables, fatty fish with an abundance of Omega-3 fatty acids, berries, and walnuts. Eating those can make you sharper. That’s a key to making better decisions.

Clarity also promotes independent thought, a mindset that also requires fortitude and integrity. A focused mind is key to financial success because the world of finance is changing. Investment models from twenty years ago aren’t effective in a down market with rising inflation and high interest rates. Sharpening your mind opens you up to embrace new ideas.  

Dance Like Nobody’s Watching

This self-care summary would not be complete without a Mark Twain quote. He said, “Dance like nobody’s watching; love like you’ve never been hurt. Sing like nobody’s listening; live like it’s heaven on earth.” Following that advice is one of the most spiritual things you can do for yourself. Life has no real meaning unless you live it to its fullest. 

Spiritual health is up to the individual. Prayer, meditation, communing with nature, or just sitting quietly with self are all proven techniques to enhance the spirit. Exercise regularly, eat right, and sharpen your mind. Don’t feel you need to follow the crowd. Do all this, and you are on your way to achieving financial success and, hopefully, a long and happy retirement.

 

Disclosures:
Strategy Marketplace, LLC dba Tactive is a SEC registered investment adviser. Information presented is for educational purposes only intended for a broad audience. The information does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Tactive has reasonable belief that this marketing does not include any false or material misleading statements or omissions of facts regarding services, investment, or client experience. Tactive has reasonable belief that the content as a whole will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the adviser’s ADV Part 2A for material risks disclosures, linked here.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, nature and timing of the investments and relevant constraints of the investment. Tactive has presented information in a fair and balanced manner. Tactive is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed.

The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.

Alternatives Have Outperformed Your 60/40 Portfolio in the 21st Century

Are you still a believer in the 60/40 portfolio? The S&P 500 is down 17.39% YTD as of the writing of this article. US Government bonds are down 15.67%. Passive investors are calling it normal. They believe this model always returns 8% to 10% if you wait out the downtrends. What if it doesn’t? Inaction could cost you your retirement savings.

It’s not the first time the S&P has shown red numbers. Annual returns have been in the negative six times since the turn of the century. Three years (2002, 2008, and 2022) have been -20% or more. Bond yields at that time don’t even match the rate of inflation. Run the numbers for yourself. The 10% return on a 60/40 model is not happening right now.

Going “Back to the 80s” is Skewing Market Projections

Do you believe that market performance in the 80s is relevant today? We’ll beep your pager. You can find a payphone to call us back and make your point. Sadly, that’s how far behind the curve many market projections are. Even the newer financial planning tools are doing 50-year lookbacks to project 10% returns. Meanwhile, the S&P is up just 6.44% since 2000.

Let’s do some math. According to a Gallup poll released earlier this year, working adults start saving for retirement at the average age of 29. We’re twenty-two years into a 3%-4% drop in S&P returns, but financial planners are telling them to expect 10% before they retire. That’s ten to fifteen years away for people who started saving in 2000.

This generation has already been through 9/11, the 2008 housing crash, and the Covid-19 pandemic. The bottom dropped out of the market each time and now we’re on the cusp of a global recession. Have you noticed the drop in your 401(k)-retirement savings? You’re not alone. Outdated investment philosophies are affecting everyone.

Alternative Investments can Boost Your Returns

One of the least productive sayings on earth is, “this is the way we’ve always done it.” Sticking to a stock/bond mix without considering alternative investments is essentially making that same declaration. The way we’ve “always done it” is no longer working. Expanding into other, often riskier, asset classes is the only way to get those returns into double digits.

Cryptocurrency is a good example. Many investors view it as too volatile to rely on, but others have made substantial money on it. Like anything else in the investment world, high risk sometimes leads to high rewards. Where were you when Bitcoin hit $64,000 in 2021? Chances are you were smugly watching the S&P peak. How do you feel about that today?

Active investors took advantage of the crypto spike last year. Many of them sold their BTC when it hit that all-time high, knowing the bubble would burst at some point. Passive investors are still holding their S&P stocks, waiting for the next uptrend. Based on a twenty-year lookback, they’ll make 6.44%. Inflation hit 9.1% earlier this year.

The Holistic Approach with REITs, Insurance, and Mutual Funds

Tactive advisors are active investment managers who believe in a holistic approach to portfolio construction. That means embracing alternatives. Real estate investment trusts (REITs), according to research published earlier this year by The Motley Fool, have produced an annual return of 13.3% over the past twenty years. That’s double what equities did.

Variable life insurance policies are permanent insurance plans with an investment component. The returns aren’t spectacular, but they’re a bonus to buying a product that provides peace of mind. As for mutual funds, there are large-cap funds that have produced upwards of 19% in the past twenty years. Ask your financial advisor about those.

Henry Ford said, “If I asked everyone what they wanted, they would have said faster horses.” He took a chance and produced the automobile instead. That’s the type of thinking we need in the financial sector today. The world has changed. It’s time we did the same.

 

Disclosures:
Strategy Marketplace, LLC dba Tactive is a SEC registered investment adviser. Information presented is for educational purposes only intended for a broad audience. The information does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Tactive has reasonable belief that this marketing does not include any false or material misleading statements or omissions of facts regarding services, investment, or client experience. Tactive has reasonable belief that the content as a whole will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the adviser’s ADV Part 2A for material risks disclosures, linked here.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, nature and timing of the investments and relevant constraints of the investment. Tactive has presented information in a fair and balanced manner. Tactive is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed.

The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.

Tax Loss Harvesting Should be Bountiful this Holiday Season

Turkeys, briskets, and hams aren’t the only feasts on the table this holiday season. Investors are hungrily eyeing a bounty of tax loss harvesting opportunities from an underperforming stock market. Yes, Virginia, there is a Santa Claus. His name is Jerome Powell. He and his seven reindeer, aka Fed governors, have given us the gift of tax-deductible losses this year.

This isn’t for everyone. Active investors who minimized drawdown during 2022 might not see a box under their holiday tree. Many of them need to pay taxes on realized gains this year. On the other hand, passive investors should be able to reap the rewards of watching their retirement savings dwindle away. Be joyful! Your losses will minimize your tax liability!

In the spirit of the holidays, we’ll give the Fed a partial pass on this one. Higher interest rates are only one factor that fueled the downtrends in market equities this year. Supply chain problems, global conflict, and the persistence of Covid-19 variants have done their part. We also had several overvaluations from 2021 that have since corrected themselves.

What is Tax Loss Harvesting?

Tax loss harvesting is essentially “selling the dogs.” This is done to lock in market losses that can offset taxable gains. It can happen anytime during the year, but most financial advisors and seasoned investors do it during the holiday season. There’s something special about lowering your tax liability while you’re spending money on holiday gifts.

We’ve just been through months of significant losses across all sectors, so choosing which securities to offload during harvest season is a more difficult task this year. You may be attached to those “core holdings” that have been perennial mainstays in your portfolio. What does their recent performance look like? It might be time to move on.

The traditional view on tax loss harvesting is to use the proceeds from selling a security at a net loss to purchase a “similar” security to keep the portfolio “properly balanced.” Read that sentence a few times. Does it make sense to you? Doing the same thing and expecting different results is the very definition of insanity. Why not buy an entirely different asset?

The Wash-Sale Rule and the $3,000 Limit

You might think, “I’ll sell it, take the loss, then buy it right back.” Aside from that obsessive-compulsive disorder (OCD) in action, it’s also illegal. IRS regulations prohibit sellers from buying back the same stock within thirty days. It’s called the Wash-Sale Rule, and it only applies to equities. Cryptocurrencies and ETFs can be sold and bought on the same day.

Do you see a window of opportunity with your crypto losses? Unfortunately, the IRS puts a $3,000 cap on what you can take in losses against your realized capital gains. You might want to keep your Ethereum for a while longer. 

There are consequences if a loss is disallowed by the IRS for violating the Wash-Sale Rule. The taxpayer is unlikely to get fined, but they will need to add the loss to the cost of the new stock, which becomes the cost basis. To avoid that, have a financial advisor handle your harvesting, or simply don’t buy anything new after you sell. Cash is a position also. 

Tactive Advisors do this Year Round

Tax loss harvesting is more complicated when you’re an active trader. Managing downside volatility means you’re selling poor performers year-round. Capital gains could remain unrealized if you don’t liquidate those positions. Tactive advisors always pay attention to this, not just in December. Tax planning is part of investment management. Reach out to your Tactive advisor today to learn more about this.

 

Disclosures:
Strategy Marketplace, LLC dba Tactive is a SEC registered investment adviser. Information presented is for educational purposes only intended for a broad audience. The information does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Tactive has reasonable belief that this marketing does not include any false or material misleading statements or omissions of facts regarding services, investment, or client experience. Tactive has reasonable belief that the content as a whole will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the adviser’s ADV Part 2A for material risks disclosures, linked here.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, nature and timing of the investments and relevant constraints of the investment. Tactive has presented information in a fair and balanced manner. Tactive is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed.

The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.

Why Modern Portfolio Theory Isn’t Modern

A lot can change in seventy years. That’s how long it’s been since economist Harry Markowitz first presented Modern Portfolio Theory (MPT) in a Journal of Finance article. It was 1952. New homes were selling for less than $10,000, the US median salary was $3,850 a year, and gas was 20¢ per gallon. Social media didn’t exist, but neither did the home computer.

MPT wasn’t the only “modern” invention in 1952. The world also saw the first barcode, the first roll-on deodorant, and the first automotive air bag. They’ve all evolved over the years. Modern Portfolio Theory has not. Eighty years later, its original principles are still being applied to portfolio construction by countless advisory firms and third-party money managers. 

The world has changed. We don’t say that to disparage the work of Mr. Markowitz. He’s a legend in the world of finance who won a Nobel Prize in Economics. His treatise on modern portfolio theory was ground-breaking in 1952. Today, it’s an old-school technique that doesn’t work in the new normal. In this article, we’ll present the reasons why.   

What is Modern Portfolio Theory?

When your financial advisor speaks to you about a “balanced portfolio,” there’s a good chance he’s using modern portfolio theory. The concept revolves around risk. It assumes that certain investments are high risk and can produce high returns, with the opposite being true about low-risk investments. Balanced portfolios have a mix of the two to ensure optimal returns.

These risk assessments can be applied to individual securities or asset classes. For instance, cryptocurrency is considered high risk. Many investors earned high returns with it in 2021. Technology companies like Amazon and Apple showed minimal risk for years, suggesting the reward would be minimal but steady. Can you see the flaws yet?

Modern portfolio theory is a long-term strategy. In the 1950s, life was simpler. The workforce was composed primarily of W2 workers who stayed on the same job for decades and retired with a pension. Managers of those pension funds bought into MPT because the stock market was predictable based on historical performance. That remained the status quo for fifty years.   

This “buy and hold” approach to portfolio construction is also known as “passive investing” because the investor doesn’t need to do anything but rebalance to keep the individual asset risk evenly distributed. There’s very little active trading. Financial advisors embrace this because it gives them greater capacity to scale their business. 

The word “modern” has an expiration date

Henry Ford’s Model-T was the most modern machine ever created in 1908. Now it’s an antique. That’s the way it is with most things. The word “modern” has an expiration date. In 2022, that date could be six months from now. Look at the technology sector if you need proof of that. Companies rise and fall every day as the big fish eat the little fish. 

The rapid development of new technology is one of several factors that have disrupted the stock market, making it impossible to use historical market trends to predict performance. That eliminates the core driver for Modern Portfolio Theory. Equity markets no longer rise and fall on a cyclical basis. They constantly shift in random patterns. 

Harry Markowitz based his theory on a concept called “efficient market hypothesis.” It states that all knowledge is known and tends toward “rationality based on knowledge.” At the time, licensed professionals did all trading on Wall Street. It was safe to assume that investor knowledge would dictate rational behavior.  

In 1952, Harry’s world didn’t have retail investors trading on Robinhood, meme stocks on Reddit, or the buying and selling crypto on Coinbase. Rational behavior is not a strong point in any of those locations. Retail traders are a force that has disrupted the “natural order” of the stock market that financial professionals have come to rely on. 

The “pandemic effect” is the third strike for MPT

Financial advisors using Modern Portfolio Theory have been struggling to get their clients decent returns since this millennium began. In 2001, the attacks of 9/11 caused a market shutdown. In 2008, subprime adjustable-rate mortgages, which were first introduced in 1981, crashed the market. In March of 2020, the Covid-19 pandemic crashed it again.

What we just described was a twenty-year period where a long-term strategy like MPT couldn’t possibly work. Each of the three “black swan” events in the past two decades required action by financial advisors. Being passive while the market bottoms out is a sure way to lose clients. Sadly, many advisory firms went right back to their old ways when the dark days passed.

Don’t expect that to happen this time around. The “pandemic effect” on the stock market is the third strike for MPT. Supply chain disruptions, rising interest rates, and what’s looking like an endless conflict in Ukraine have permanently altered the financial landscape. Passive investing in this climate makes no sense. Change is the only constant we can rely on right now.    

The transition to Tactive Investing has already begun

Tactive investing is active trading combined with tactical investment models. The idea behind it is always to be fluid enough to make changes on the fly but to do that within the parameters of an investment model that matches the investor’s risk tolerance. In other words, don’t wait for a market crash before making a move, and don’t rely on historical trends to predict the future. 

Tactive investing can minimize drawdown and help the investor take advantage of uptrends as they happen. Bitcoin made a lot of people money in 2021, but it’s not an asset you want to hold onto. A long-term MPT portfolio would never incorporate BTC as a position. Tactive investing allows for a purchase in the trough and sale at the peak. That’s a positive return.

Are there risks involved with Tactive investing? Yes. There are also trading fees and occasional losses, but that’s just the nature of investing. What you don’t see are sustained downtrends that you seemingly can’t get out of. Based on Modern Portfolio Theory, those will reverse themselves at some point. You’re probably still waiting for that to happen.

 

Disclosures:
Strategy Marketplace, LLC dba Tactive is a SEC registered investment adviser. Information presented is for educational purposes only intended for a broad audience. The information does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Tactive has reasonable belief that this marketing does not include any false or material misleading statements or omissions of facts regarding services, investment, or client experience. Tactive has reasonable belief that the content as a whole will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the adviser’s ADV Part 2A for material risks disclosures, linked here.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, nature and timing of the investments and relevant constraints of the investment. Tactive has presented information in a fair and balanced manner. Tactive is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed.

The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.

Is Cryptocurrency a Legitimate Asset Class

Historically, financial advisors have diversified their clients’ portfolios using three main asset classes: equities, fixed income (bonds), and cash equivalents like Treasury bills and CDs. Progressive firms also add real estate, commodities, and derivatives. The idea is to have a mix of financial vehicles that perform differently under specific market conditions, maximizing the chances of a decent return.

Political infighting over crypto classification

Where does crypto fit? The US Senate is reviewing a bill to classify crypto as a commodity, putting it under the Commodity Futures Trading Commission (CFTC) jurisdiction. The Senate Agriculture Committee, which oversees the CFTC, introduced the bill. They do not have purview over the SEC, which is controlled by the Senate Banking Committee.

Under the guidance of Gary Gensler, the Securities and Exchange Commission (SEC) has repeatedly called crypto “securities” in its legislative actions. They even went as far as to classify nine crypto assets as securities in an insider trading case they’re prosecuting that involves Coinbase. Keep an eye on that in the coming months.

The “Digital Commodities Consumer Protection Act of 2022 (DCCPA), which advocates for CFTC control, is getting overwhelming support from the crypto trading community. Giving a security classification to certain tokens could disrupt the crypto market and raise fees for smaller trading platforms. Virtually no one outside of the SEC wants to see that.

SEC Bulletin 121 calls crypto a “liability”

SEC Chair Gary Gensler was a professor at MIT who taught cryptocurrency and blockchain technology. His selection as the investment world’s “top cop” was lauded by the DeFi world when he first came into power. The SEC’s rhetoric and actions since then have dampened that enthusiasm. The “security vs commodity” argument is only one part of that.

Headline news is often a smokescreen for what’s going on behind the scenes. On April 11, 2022, the SEC published Bulletin 121, an accounting bulletin that advises public and private companies combining with SPACs to report cryptos as liabilities on the balance sheet and provide additional disclosures on the value of those assets.

The SEC backpedaled when the backlash hit. They called it “interpretive guidance for entities to consider” and didn’t put their official approval seal on it. Gensler defended the bulletin by saying, “Crypto assets aren’t ‘well-enough developed’ and are ‘sufficiently different’ from traditional assets like stocks and bonds.” Pause and think about that for a moment.

This argument is about regulation, not classification

Fear of change makes people do strange things. Decentralized finance (DeFi) is perceived as a threat to central bank fiat currencies. Bitcoin has the 27th largest market cap on the global currency list. It’s ahead of the Norwegian Krone, the South African Rand, and the New Zealand Dollar. Ethereum comes in 36th on the list. Tether is in the #50 spot.

United States Senators don’t particularly care about exact classification when it comes to crypto. The only reason that’s important is that it determines which regulatory body will control crypto trading rules. Commodities and securities both trade on government-regulated exchanges. This battle is about regulation and control, not classification.

The SEC cites Ripple XRP as their poster child in the argument for declaring crypto a security, but XRP isn’t a true cryptocurrency. It was sold by Ripple Labs Inc to fund company growth. The SEC had a legitimate case on that. Using that case, which was filed in 2020, as a precedent to pull other cryptos into the same bucket is proving to be a losing battle for them.

Treating crypto as an asset class in portfolio construction

Oil and orange juice are both commodities. You’d never treat them the same when constructing an investment portfolio. That’s why commodities are broken down into sub-categories like agricultural, energy, and metals. With momentum seemingly on the side of the DCCPA, it looks like we’re going to add cryptocurrency to that list. It’s best to treat it as its own asset class.

Like all asset classes, the crypto class will have winners and losers. Bitcoin and Ethereum look like solid long-term investments right now. Other tokens are newer and have a lower adoption rate. That’s no different from startup companies and new public listings on the stock exchange. Value is determined by investor participation and behavior.

When building a portfolio, the goal is to choose investments with varying degrees of risk that balance to achieve a favorable return. Crypto is a high-risk/high-reward investment, like agricultural commodities, microcaps, and emerging market equities. It’s an asset class that’s established and growing rapidly. Your clients want to be a part of that.

Cryptocurrency as a Tactive investment

Tactive investing is a term we use to describe active trading with tactical investment models. We’re not advocates of passive investing using “modern” portfolio theory. Sitting and waiting for the market to cycle back around is not a sound strategy in 2022. In our world, we minimize drawdown now and utilize all asset classes to maximize investment returns.

Cryptocurrency is one of the many financial vehicles we utilize for Tactive investing because we already view it as a legitimate asset class. The political infighting and legislative battles make for interesting theater, but they’re not affecting our portfolio construction. We’re watching the numbers for crypto, and they’re favorable. Reach out to us if you’d like to learn more.

 

Disclosures:
Strategy Marketplace, LLC dba Tactive is a SEC registered investment adviser. Information presented is for educational purposes only intended for a broad audience. The information does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Tactive has reasonable belief that this marketing does not include any false or material misleading statements or omissions of facts regarding services, investment, or client experience. Tactive has reasonable belief that the content as a whole will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the adviser’s ADV Part 2A for material risks disclosures, linked here.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, nature and timing of the investments and relevant constraints of the investment. Tactive has presented information in a fair and balanced manner. Tactive is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed.

The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.

Investing in 2022: Active is Not the Same as Reactive

Trading on developing market trends will get investors in late and out too soon. That’s not active investing. It’s reactive trading. Your clients aren’t interested in becoming day traders. They want to see their portfolios grow over time and have confidence that retirement will be a pleasant time in their lives, not a scramble to make ends meet.

The line has been understandably blurred with all the volatility the market has gone through this year. Passive investors are still sticking to their models, despite epic losses in historically reliable market sectors. Panic selling and impulse buying have been rampant in the retail investor space. Active investing doesn’t garner much attention amid all the noise.

Blending Technical and Fundamental Analysis

Tracking price swings in the market using stochastic indicators and resistance bands is called technical analysis. Looking at economic and financial factors that influence businesses in certain sectors is known as fundamental analysis.  Active investors use both. Passive investors rely on historical data to predict future market movement.

Day traders use technical analysis to track short-term price swings and make trades within hours or even minutes of each other. Buying and selling on flags and pennants is not investing. For wealth managers, that would be like taking your clients to the casino and handing them a stack of chips to gamble with. We’re betting that’s not what they’re paying you for.

Reactive Trading is How We Got Here

Based on the market cap to GDP ratio, the market is currently overvalued by 77%. Some of that is due to GDP falling during the pandemic and post-pandemic years, but the trend started long before that. According to Investopedia, overvaluation happens when you have “an uptick in emotional trading, or illogical, gut-driven decisions that artificially inflate stock prices.”

During the heart of the 2020 pandemic, retail traders accounted for 25% of all the trades made in the stock market. That group included your eccentric Aunt Bea on Robinhood and crazy Uncle Alvin who subscribes to Reddit. Emotional and illogical trading was at an all-time high when folks were stuck at home that summer. It’s no wonder that the market is overvalued.

Of course, we can’t exonerate the institutional investors in this mess. The “Reddit Raiders” weren’t the only party that made money on the GameStop squeeze. Institutional money will almost always follow retail money if the gains are big enough. Between that and SPACs setting outrageous IPO prices during the market surge of 2021, we have arrived at a correction point.

Active Investing is a Process, not a Panacea

Have you ever tried one of those “miracle” weight loss programs that claims you’ll drop thirty pounds virtually overnight? They don’t work. Losing weight and keeping it off requires hard work and dedication to diet, exercise, and a lifestyle change. Active investing is like that. It’s not a panacea that will instantly restore your portfolio after years of losses.

Active investing is not an “anti-model” investment philosophy. Tactical models work because they have the flexibility for changes as economic circumstances evolve. That’s why we call what we do “tactive investing.” Passive models are static. In this market, many clients with passive models are watching their retirement funds fade away with little or no option to restore them.

Making the right investments for long-term growth is a process. The market is always changing, so it’s important to be able to adapt. That doesn’t mean eliminating ETFs from the portfolio or avoiding entire sectors showing losses. There’s always a diamond in the rough. Active investors use technical and fundamental analysis to find out where it is.

It’s Okay to Change Your Mind

This word “change” sums up what active investing is all about. On November 12, 2021, Netflix (NFLX) hit an all-time high of $682.61. Nine months later, on August 23rd of this year, they opened at $226.74. Forbes profiled them in an article that morning as the “worst performing stock of 2022.” That’s how quickly the market can turn.

The origin story of Netflix is an iconic tale told in most business schools. In 2000, Netflix co-founder Marc Rudolph approached John Antioco, CEO of Blockbuster Video, with an offer to sell his company. He was basically laughed out of the office. Ten years later, Blockbuster filed for bankruptcy, and Netflix had a market cap of $10 billion. That was a significant number in 2010.

Nostalgia might induce some investors to hold off on selling Netflix because they are the ultimate David vs. Goliath story. There might even be a passive model or two that still includes them. Will Netflix rebound? It’s possible, but that doesn’t mean you should keep taking losses. It’s okay to change your mind. That’s one of the cornerstone principles of active investing.

Putting it all Together for Smarter Portfolios

Let’s stick with Netflix for the moment. The water cooler crowd, if there is such a thing anymore, would say that the company is “falling behind” its competitors. They’ll reference their favorite shows on Amazon Prime or the new “Game of Thrones” prequel on HBO Max as reasons for the decline in Netflix share prices. As usual, the “cooler crowd” is misinformed.

Netflix was overvalued. They posted $1.7 billion in net income for Q1 this year with a 25% margin, yet still lost 60% of their share value in nine months. That has nothing to do with programming. The price spike back in 2021 was an anomaly. Active traders saw that and sold the stock. Now that it’s bottoming out, maybe it’s time to buy it again.

Overvaluation and correction are common themes in 2022. The trick to getting through that is to sell at the peak and buy back in at the trough, if the company is worth investing in. That last part is what separates active investing from reactive trading. The technical charts show the price fluctuations. Fundamental analysis is how buy/sell decisions are made.

 

Disclosures:
Strategy Marketplace, LLC dba Tactive is a SEC registered investment adviser. Information presented is for educational purposes only intended for a broad audience. The information does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Tactive has reasonable belief that this marketing does not include any false or material misleading statements or omissions of facts regarding services, investment, or client experience. Tactive has reasonable belief that the content as a whole will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the adviser’s ADV Part 2A for material risks disclosures, linked here.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, nature and timing of the investments and relevant constraints of the investment. Tactive has presented information in a fair and balanced manner. Tactive is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed.

The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.

Why are Interest Rate Hikes Disrupting the Stock Market?

The news cycle for the stock market is in repeat mode. It feels like we’re on an endless rollercoaster ride of interest rate hikes, declining futures, and periodic selloffs. We’re guessing at this point that you are tired of seeing it over and over again. Expecting it to change any time soon is unrealistic, but perhaps we can shed some light on why it’s happening.

Why do increasing interest rates disrupt the stock market so much? Most financial analysts called for them months before the Fed Governors made their first move. According to them, raising rates should slow down inflation. Investors knew this was coming, yet many seem to go into panic mode every time it happens. Is selling a rational decision or a knee-jerk reaction?

The relationship between interest rates and stock performance

Grab a cup of coffee. You may need to read this twice. When the Federal Reserve Bank votes to raise interest rates, they’re raising what’s known as the “Federal Funds Rate.” That’s the percentage that banks need to pay when they borrow from other banks. HELOCs are tied to the Federal Funds Rate or LIBOR plus a margin. Traditional mortgages (e.g., 30-year fixed) are primarily driven by the 10-year treasury bond yield.

Lenders will always charge borrowers more than the Federal Funds Rate, so an interest rate hike means that the business cost of capital goes up. Borrowing money to fund operations or expand becomes prohibitive when loan interest gets into double digits. That’s the idea behind doing it. The economy slows when businesses don’t borrow. In theory, that could slow inflation. 

Companies that don’t borrow tend to show lower earnings on their annual reports. Investors look elsewhere when that happens. Many invest in bonds because they view them as a “safer” investment in this economic climate. Others simply sell the non-performing stocks and look to buy companies that are showing higher profits. That’s known as active trading.

The rebound effect of strategic investing

There are two types of active trading. The first is reactive. That’s when investors sell because the market went down. The second is known as strategic trading, which is more of an investment strategy than the first technique. It too involves selling in down markets, but it’s followed up by new investing to improve portfolio performance. 

Strategic investing is what creates the rebound effect we generally see shortly after a market sell-off. It’s been more pronounced in recent years because of the increase in retail traders on platforms like Robinhood and Coinbase. They tend to sell quickly during market downtrends, driving prices down. Strategic investors take advantage of that to “buy low.”

What does this have to do with interest rates? Seasoned investors look beyond borrowing rates and futures projections. They analyze balance sheets and evaluate market sectors for signs of a potential resurgence. Passive investors rebalance across all market sectors. Active traders load up on the more promising opportunities. That’s what moves the needle after a selloff.   

Are there “recession-proof” investments?

Much of the conversation around rising interest rates centers around a potential recession if the Fed stays on its current course. A recession is defined as two consecutive quarters where GDP contracts. We’re about to close out our third declining quarter in a row. That means we’re already in a recession. The Fed knows that. No one wants to talk about it just yet.

Are there “recession-proof” investments? Stock promoters have been using that term daily since the pandemic. They also like the word “hedge.” Some claim that gold is an inflation hedge. Others promote crypto, particularly Bitcoin, as a recession-proof investment. Neither is true. You also won’t see one sector consistently performing better than others. 

Recessions and high interest rates affect every business differently. Companies with a strong balance sheet and lots of cash on hand don’t need to borrow money. Highly leveraged firms will struggle if rates hit double digits. Each market sector has companies with both business models. Look for those that don’t need to raise money to perform better in a recession.

Higher interest rates can balance supply and demand

This is basic economics, but it’s worth mentioning. Part of the reason consumer prices have been rising is that demand is much higher than supply. Under normal circumstances, this could be attributed to manufacturing or materials shortages. In our current situation, supply chain disruptions are reducing onsite inventory. Have you tried to buy a new car lately?

Interest rate hikes can slow down consumer demand, particularly on high-ticket items that require financing. That should allow the supply side to catch up. Investors need to ask, “What happens next?” The answer won’t be found on historical performance charts. We’re living in a brand-new world. Strategic investors need to dig deeper to make buying decisions.

A report released by NPR on September 21st suggested that Fed policymakers will increase the Federal Funds rate to 4.4% by the end of 2022. That could push commercial lending rates into double digits. Some banks are already there. We’ll keep an eye on this for you and publish regular updates. 2023 should be an interesting year for the investment community.

 

Disclosures:
Strategy Marketplace, LLC dba Tactive is a SEC registered investment adviser. Information presented is for educational purposes only intended for a broad audience. The information does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Tactive has reasonable belief that this marketing does not include any false or material misleading statements or omissions of facts regarding services, investment, or client experience. Tactive has reasonable belief that the content as a whole will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the adviser’s ADV Part 2A for material risks disclosures, linked here.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, nature and timing of the investments and relevant constraints of the investment. Tactive has presented information in a fair and balanced manner. Tactive is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed.

The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.

Future of Work (FOW) – An Indicator That Investors Should Pay Attention

Why are we talking about the future of work (FOW) as an investment metric? Profitability in business is often dependent on a company’s ability to adapt to changing circumstances. The nature of work, particularly in the United States and other developed nations, was beginning to change prior to 2020. The pandemic simply accelerated trends that were already in motion.

Advanced technology, increased globalization, and remote workforces are three of the driving forces in this most recent evolution of modern business. The lines we once drew to separate equities into market sectors are being redrawn to reflect the widening gap between land-locked and virtual companies. Growth is no longer measured in square footage.

Redefining the Scale of Economies of Scale

Economies of scale are defined in microeconomics as companies with the ability to produce goods or services on a larger scale at a lower cost. Examples of this in manufacturing include lowering materials costs through bulk ordering and increasing production with upgrades to machinery and technology. If demand increases, additional workers are added.

Artificial intelligence (AI) has changed the rules. Time-consuming tasks once delegated to humans can be performed by AI in a fraction of the time at a much lower cost. Industrial robots have replaced assembly line workers. Line supervisors are being retrained to monitor production remotely. Getting your hands dirty only happens if you eat a messy lunch.

This is all very much the future of work, and it’s changing the scale of economies of scale. Like the ever-elusive “ten-bagger” in the investment world, companies with the right technology are now able to increase profitability at rates never seen before. It just takes the right product, a process that works, and the online bandwidth to handle the software.

Landlocked vs Virtual: One is Not Like the Other

An apple can be compared to another apple, but a banana is a different fruit. There are individual companies currently bundled into the same market sectors that don’t look anything alike. Let’s use the energy sector as an example. Some companies market digital solutions and virtual service models. Others mine coal. Who do you think scales faster?

The disparity inside market sectors increases dramatically every time new tech is introduced that can automate and enhance production and distribution. The technology (IT) sector was split in two when crypto came on the scene. Mathematics of scale, even in a sector accustomed to accelerated growth, forced investors to treat crypto as a separate asset class.

Blockchain, cryptocurrency, and decentralized finance (DeFi) in general have helped spark a long-overdue conversation in the investment world. With advanced technology increasing the profitability of some, but not all companies, how can we continue to generalize investments into the sector “boxes” that are still widely accepted in financial circles?

The Future of Work in the Metaverse

Science fiction often becomes science fact once enough time has elapsed. Not to burst your bubble, but the Metaverse was not created by Mark Zuckerberg. The term was first used by Neal Stephenson in his 1992 science fiction novel “Snow Crash.” The concept has been in development since 1968, when Ivan Sutherland produced the first “V/R headset.”

The Metaverse is already an active playground for online gamers and a new frontier for investors looking to strategically position themselves for the growth spurt that appears to be inevitable. Virtual “real estate” firms are currently selling Metaverse “properties” using blockchain technology to transfer deeds and NFTs as a store of value.

The 2020 pandemic proved that businesses could operate with remote workforces. Many companies chose not to go back to brick-and-mortar office space because running virtual teams was simply more cost-effective. Zoom and Google Meet have become the new corporate conference rooms. Imagine all that with 3D imaging and sensory controls.

The Role of Fundamental Analysis in Portfolio Construction

Studying the future of work (FOW) and how it will affect certain industries and companies is an example of fundamental analysis. Active investors and traders use fundamental analysis to predict which stocks are more likely to be winners. Passive investors use technical analysis, which is a reliance on past performance to predict future price movements.

Charts and graphs of past performance are great for reporting, but dramatic changes in the business world have made it impossible to count on yesterday’s market trends to predict what will happen tomorrow. Tactive advisors use fundamental analysis when constructing their models. If you’re self-managing your investment portfolio, you should do the same.

 

Disclosures:
Strategy Marketplace, LLC dba Tactive is a SEC registered investment adviser. Information presented is for educational purposes only intended for a broad audience. The information does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Tactive has reasonable belief that this marketing does not include any false or material misleading statements or omissions of facts regarding services, investment, or client experience. Tactive has reasonable belief that the content as a whole will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the adviser’s ADV Part 2A for material risks disclosures, linked here.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, nature and timing of the investments and relevant constraints of the investment. Tactive has presented information in a fair and balanced manner. Tactive is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed.

The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.

Is Proof of Stake Good or Bad for Crypto Investors?

It’s been more than a month since Ethereum switched to Proof of Stake (PoS) and many investors are questioning why it hasn’t impacted their portfolio yet. It’s the market, not the mechanism. Unfortunately, the Fed still has significant influence over US financial markets, so the “merge effect” on investor returns will unfold over time, not overnight.

What we can do at this point is break down exactly what happened on September 6th and whether it was good for crypto investors or not. From an environmental perspective, Proof of Stake (PoS) is more energy efficient than Proof of Work (PoW), so it’s better for the planet. For that reason alone, you can now add Ethereum to your ESG watchlists. (Gauntlet thrown)

Remember where you were on September 6, 2022

Proponents of a decentralized financial (DeFi) system stood up and cheered when “The Merge” became official last month. It was called a merge because Ethereum had been running a Proof of Stake parallel blockchain (The Beacon Chain) since December 1, 2020. The original chain hit Total Terminal Difficulty (TTD) and a new, more efficient blockchain was born.

Ignore the complex terminology if you’re not a techie. Think of it as two streams running side by side until they merge into a river. The river is more powerful, carries a larger volume of water, and becomes a force of nature. That’s the direction the Ethereum platform is heading in. September 6th could be remembered as the date business and finance changed forever.

Does that sound too dramatic? Ethereum isn’t a cryptocurrency. It’s a platform where you can create crypto, smart contracts, and decentralized applications (Dapps). The real value in implementing Proof of Stake is the upgrade to the blockchain. Ethereum can now run leaner and faster. That affects business applications, financial transactions, and lending.

The “Stake” in Proof of Stake is a Finance Concept

Most of the world hears the word “crypto” and they think “Bitcoin.” That’s okay. Satoshi Nakamoto’s creation has been around since 2008. He (or she) isn’t a real person, but the whitepaper introducing Bitcoin certainly was. The idea shook up financial markets. Expect the concept of “staking,” once it goes mainstream, to do the same.

You don’t need to be a PoS validator to make money on staking. Crypto owners can stake their coins to facilitate lending to other crypto owners. Stakers can earn “rewards” for doing this, much like they do when they validate new blockchain transactions in the Ethereum blockchain. It’s not a new practice. Expect to hear a lot about it in the upcoming months.

Another benefit to DeFi staking is that you can collateralize a loan with it. More specifically, anyone can collateralize a loan by staking their crypto. No credit score needed. No lengthy bank approval process. No origination fees or exorbitant interest rates. Ethereum charges a “gas” fee, but it’s a lot cheaper than what you’ll pay for a bank loan.

Blockchain Investing Just Got More Interesting

Please note that we did not say “crypto investing.” Cryptocurrency is a valid asset class that should be part of any active investment strategy. The Ethereum merge didn’t change that. It just made crypto more energy efficient. The real value in what they did was the improvement to the Ethereum blockchain. That will have a cascading effect in multiple sectors.

Blockchain eliminates middlemen. It allows users to interact directly with one another without the burden of extra fees and time delays on transactions. Smart contracts can be structured so receiving parties get paid only when certain conditions are met. Dapps can handle complex business functions that would crash the average laptop or office server.

Proof of Stake is good for crypto investors because it eliminates the power consumption argument that lawmakers have been presenting as a reason to regulate or ban digital assets. It’s beneficial to business owners because it gives them a new way to do business, one where traditional banks can be bypassed. That could break the Fed’s hold on the US economy.

 

Disclosures:
Strategy Marketplace, LLC dba Tactive is a SEC registered investment adviser. Information presented is for educational purposes only intended for a broad audience. The information does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Tactive has reasonable belief that this marketing does not include any false or material misleading statements or omissions of facts regarding services, investment, or client experience. Tactive has reasonable belief that the content as a whole will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the adviser’s ADV Part 2A for material risks disclosures, linked here.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, nature and timing of the investments and relevant constraints of the investment. Tactive has presented information in a fair and balanced manner. Tactive is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed.

The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.

It’s Time to Throw Out Everything You Know about Portfolio Construction

Evolution benefits those who are adaptive to change. The financial services industry is littered with the remains of once-successful wealth management firms that couldn’t grasp this concept. Many of them expired in 2008. Several more went down during the pandemic. Economics played a small part in both. Resistance to change dealt the killing blow.

Success in finance is measured by returns. Clients typically stay with their advisor when they see consistent gains and leave when they experience losses. It’s a predictive behavior that’s been prevalent in our industry since it first began. Remaining in the black is where the challenge lies. Advisors who evolve their approach when it’s called for can do that. Others fail.

The crux of the problem is in how we’ve been taught to manage money. Traditional portfolio construction and “modern” portfolio theory don’t work in a 21st-century, post-pandemic stock market. What we experienced two years ago was a reset, so historical market movement is no longer relevant. Proving that is a simple matter of reviewing our history.

John Burr Williams and “The Theory of Investment Value”

The most popular belief about the Great Depression is that it was caused by the 1929 stock market crash. That’s a result, not a reason. The primary activity that led to the crash was the panic selling of overvalued stocks. That was followed by a loss of confidence in bank solvency, credit defaults, and fifteen million unemployed Americans.

Speculation in the “Roaring Twenties” enticed millions of people to tap their savings or borrow money to buy stocks. The Federal Reserve Bank, to slow down consumer spending, raised the federal funds rate to 6%. It did not have the desired effect. The country went into a recession, and funding sources started to dry up. That all happened before 1929.

In 1938, three years before the Great Depression officially ended, an American economist named John Burr Williams published a book called “The Theory of Investment Value.” It introduced the dividend discount model (DDM) to more accurately value stocks by taking the sum of all future dividend payments and discounting them back to their present value.

William’s work was groundbreaking at the time because it broke the “casino mentality” that had corrupted the stock market in the 1920s. It also set the table for the discounted cash flow valuation method that is still used today. As for portfolio construction, DDM is a reminder that accurate values are more relevant than speculated prices that can be overinflated.

Harry Markowitz and “Modern” Portfolio Theory

Sorry to rain on your parade. Nothing written in 1952 can be considered “modern” in 2022. Harry Markowitz introduced the concept of investor risk tolerance when he published “Portfolio Selection” seventy years ago. It took nearly a decade for it to become popular, but it eventually became the foundation for portfolio construction in the 20th Century.

Note that we did not include the past two decades in that statement. Modern Portfolio Theory (MPT) worked prior to 2001. Aside from the Black Monday Crash of 1987, the market stayed consistent after World War II. Investors enjoyed an average return of roughly 10% on the S&P 500. MPT relies on that because part of the theory is return percentages level out over time.

Fast forward to the present millennium. We’ve experienced 9/11, the financial crash of 2008, and most recently, the 2020 Covid-19 pandemic. S&P returns for the past twenty years are just 8.91%. Adjust that number for inflation, and it plummets to 6.40%. The Social Security Administration predicts a 9.6% cost of living increase in 2023.

Using MPT to build risk-based passive investment portfolios in this climate is a recipe for losses, not a path to financial gains for your clients. Mathematically, the odds of us getting through the next twenty years without another “black swan” event are not in our favor, so historical returns from the last century are no longer valid. It’s time for portfolio construction to evolve.

Risk, Rewards, and DCF Valuation

We’re going to go out on a limb here and say that the 1938 work of John Burr Williams is more important to us right now than the iconic 1952 classic by Harry Markowitz. Historical performance is skewed by overvaluation. If you use the market cap to GDP ratio, you’ll find that the 2022 stock market, in general, is overvalued by 77%. That distorts risk assessment.

Using dynamic valuation methods like discounted cash flows (DCF) or EBITDA comparison will give you a more accurate picture of a company’s worth than simply tracking share prices or P/E ratios. With an overvalued market, pricing is speculative, not actual. Calculating actual value before adding a holding to your portfolio could help you withstand market corrections.

Safeguards have been put in place to help us avoid another Great Depression, including “circuit breakers” that were added in 1987 to prevent a massive selloff. That doesn’t mean we won’t see losses. With MPT portfolio construction, holdings are expected to rebound over time. That’s not guaranteed. Many advisors are turning to active portfolio management to mitigate losses.

Our Solution: Tactical Portfolios and Active Trading

Harry Markowitz was a 25-year-old grad student when he published “Portfolio Selection.” You may have someone just like him interning at your office. His original work contained ten pages of charts and graphs and only four pages of actual content because he never meant for it to be a comprehensive work. He was simply proving a mathematical theorem.

John Burr Williams was a seasoned economist when he produced “The Theory of Investment Value.” His goal was to find a way to avoid investing in overvalued stocks because he saw first-hand what the result of that was. Unlike Markowitz, whose work wasn’t noticed for ten years, Williams came up with a timely concept for a market that desperately needed it.

We’re not advocating one portfolio construction over the other. Risk tolerance is an important concept. Managing risk by spreading it across all eleven market sectors is not going to work in 2022. We prefer actively managed tactical portfolios that contain accurately valued stocks, ETFs, and alternatives in solid growth markets. We call that combination “Tactive Investing.”

 

Disclosures:
Strategy Marketplace, LLC dba Tactive is a SEC registered investment adviser. Information presented is for educational purposes only intended for a broad audience. The information does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Tactive has reasonable belief that this marketing does not include any false or material misleading statements or omissions of facts regarding services, investment, or client experience. Tactive has reasonable belief that the content as a whole will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the adviser’s ADV Part 2A for material risks disclosures, linked here.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, nature and timing of the investments and relevant constraints of the investment. Tactive has presented information in a fair and balanced manner. Tactive is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed.

The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.