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

Why is Crypto Asset “EMAX” classified as a security in Kardashian case?

On October 3, 2022, the SEC settled a case against celebrity icon Kim Kardashian for promoting a crypto asset (EMAX) without disclosing that she was getting paid to do so. She was fined $1.26 million in “penalties, disgorgement, and interest.” A news release on the case also stated that she’s agreed to cooperate with the SEC’s “ongoing investigation.”

Athletes Antonio Brown, Paul Pierce, and Floyd Mayweather Jr. have also been named in the lawsuit, but they aren’t headliners. Kim Kardashian has 331 million Instagram followers. Anything she does is a top story on celebrity gossip sites. This case was a lead on mainstream and financial news networks. Who benefitted the most from that?

SEC Chair Gensler calls EMAX a security

Former SEC Chair Jay Clayton set a precedent in a 2018 CNBC interview when he clearly stated that Bitcoin (BTC) is not a security. Gary Gensler, who was a former CFTC chair at the time, had just come down hard on Ripple (XRP), declaring that there was a “strong case” to classify them as a security. Policy makers at the SEC have been wrestling with the question ever since.

Gensler, who is now the SEC chair, has stated that the grounds for the Kardashian lawsuit are “a failure to disclose to the public when and how much she was paid to promote investing in securities.” Are EMAX and XRP somehow different from Bitcoin? This is a complicated question that we’ll attempt to explain in the next section. Buckle up. It’s a bumpy ride.

Using the Howey Test to evaluate Cryptocurrencies

The SEC’s litmus test for securities comes from a 1946 Supreme Court case titled SEC v. W.J. Howey Company. The premise was the Howey Company sale of citrus groves to buyers in Florida. They sold the land, then had it leased back to them so their employees could work it and sell the fruit on behalf of the new owners.

The SEC sued, claiming that the Howey arrangement qualified as an (unregistered) investment contract. The Supreme Court came back with new criteria to define exactly what that meant. Their definition, known as “The Howey Test,” is the guideline being used by the SEC today to evaluate cryptocurrency. There are four components to it:

  1. An investment of money
  2. In a common enterprise
  3. With the expectation of profit
  4. To be derived from the efforts of others

Crypto is an investment of money in a common enterprise. That’s fairly clear. It’s when you get to “expectation of profit to be derived from the efforts of others” that this gets a little murky. With Bitcoin, there are no “others” to put effort into it. The crypto asset BTC is completely decentralized and essentially just an algorithm. It’s therefore not an investment contract, aka security.

Despite the name similarity, Ethereum Max is not affiliated with Ethereum (ETH), which should be in the same (non-security) category as Bitcoin. EMAX works differently. There is a team behind the scenes pushing merchandise, hustling games of chance, and “burning” tokens to manipulate the value. That activity, in the eyes of the SEC, makes them a security.

Legislation stalls as SEC voices get louder

EMAX might not pass the Howey Test, but there are still no official guidelines on cryptocurrency classification. Discussions around the “Digital Commodities Consumer Protection Act” (DCCPA) have stalled in the US Senate as we get closer to election season. Meanwhile, the SEC is pushing their “security agenda” through celebrity social media. The loudest voice seems to be winning.

How does this affect serious investors? EMAX holders got a nice 50% price boost when the story first broke. Trading volume also went up, but it’s difficult to attribute that directly to the Kardashian case. The rest of the crypto space is just watching and waiting. What we’re seeing now is politics and positioning. Real changes likely won’t come until next year.

Ask Your Tactive Advisor about Crypto Assets

Tactive advisors embrace holistic investment strategies that incorporate all asset classes, not just stocks and bonds. Contact your advisor today to ask about crypto assets, real estate, insurance, and other alternatives. The world has changed. How we think about investment returns needs to change also. Keep an eye on this space to learn more about that.

 

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.

Does Passive Investing Still Work in Post-Pandemic America’s “New Normal”?

The world has changed. Most people have accepted that we are living in a “new normal” that is very different from what we once knew. Economically, we’re still struggling to get back on track. Psychologically, our mindset is more cautious and defensive. The 2020 pandemic, much like the events of 9/11 twenty years earlier, permanently altered our reality.

Unfortunately, the financial sector hasn’t caught up yet. Many advisors are still using pre-pandemic passive investment models. They point to historical market trends as “evidence” that their clients’ portfolio losses will somehow turn into gains over time. That’s what happened in the last century, so why not now? In this article, we’ll answer that question.

Innovation has changed the stock market

Several significant events in the 21st century have changed the way the stock market works. The first is the evolution of social media. Just last year, we saw a group of traders on Reddit drive the price of GameStop up 600%. That wasn’t possible in the 20th century, and it’s just one example of how social media can influence market movements.

Another innovation in stock trading is the rise of retail investment platforms like Robinhood. Investors there don’t have the same kind of capital that institutional investors work with, but their activity influences stock prices. The retail trading factor is not transitory, despite what declining numbers seem to indicate this year. Retail investors are here to stay.

The third factor to look at is algorithmic trading. According to Wall Street trading data, 60-73% of US equity trading is done with investment algorithms. Trades happen automatically based on mathematical equations that are designed to minimize losses. Unfortunately, those trades can also cause large and often unpredictable price swings, making the market more volatile.

What does all this have to do with passive investing?

Let’s go back to the concept of passive investing for a moment. The premise is that “buying and holding” a mix of stocks, bonds, and ETFs will produce long-term gains for your portfolio. During the 20th century, the S&P 500 averaged a return of 10.34% a year. That’s the number that most advisors use when presenting a passive investment strategy.

It’s not accurate. From 2001 to 2022, the average market return for the S&P 500 dropped to 7.02%. If we adjust for inflation, that number comes down to 4.48%. We’re a full generation into the 21st century, and the projected returns for passive investing models based on the S&P 500 have already been cut in half. That’s our “evidence” that it doesn’t work.

What’s interesting about these numbers is that the market experienced a historic bull market from 2009 till January 2022. It was fueled by tech stocks. While the S&P 500 was declining, the Nasdaq index produced an annualized return of 13.9% from 2011 to 2020. That’s important. We’ll explain why in the next section.

Why passive investing isn’t working

Are you still with us? This is where we bring it all together. Most passive investing models are constructed using a set of guidelines called “modern portfolio theory.” You may not have heard the term, but you’re likely familiar with the concept. It advocates for an investment portfolio that is balanced amongst eleven recognized market sectors. They are:

1. Energy
2. Materials
3. Industrials
4. Consumer discretionary
5. Consumer staples
6. Health care
7. Financials
8. Information technology
9. Communication services
10. Utilities
11. Real estate

The reasoning for this seems sound at first glance. Diversify your holdings across all market sectors, and losses in one should be offset by gains in another. It’s essentially a check and balance system to mitigate losses. That worked well twenty years ago. They didn’t have a post-pandemic mindset, social media, retail investors, or algorithmic trading back then. In addition, bond rates, which acted to offset losses from the equity portion of the portfolio, were much higher than they are today. That hedge no longer exists.

Technological innovations and overinflated valuations of tech companies have changed the landscape. Passive investment models don’t account for that. They rebalance based on the designed model that doesn’t necessarily weigh certain sectors higher than others. Gains in information technology don’t benefit a portfolio if there are losses in all other sectors.

One of the major problems with passive investing is that you are diversified across multiple asset classes to minimize market risk, which only seems to work in an up market. In other words, when the market is going up, there is a difference in returns between risk classes, with the least risky assets going up less than the riskier ones. It is not uncommon to see a difference of more than 300 basis points from the least risky to the most risky investment returns.

When the markets start to correct and go down, the differences compress to as little as 15 basis points, as occurred in the 2008 financial crisis. Another way of looking at this is that diversification seems to be a drag on earnings when the markets are going up and doesn’t provide the needed protection when the markets are going down.

The case for active investing

That’s enough about the problem. Let’s talk about the solution. Active investing, or “Tactive Investing,” as we like to call it, is an investment strategy that advocates active trading when market conditions change. If financials are booming and industrials are in freefall, we dump the dogs and focus on what’s making money right now. Sectors don’t matter. It’s about returns.

Proponents of passive investing will tell you that active investing is risky. Their S&P 500 model is down 13.73% YTD in 2022. Tactive investing strategies take advantage of market conditions and analyses that seek to minimize drawdown. When Coinbase went public in 2021, Bitcoin hit an all-time high of $64,800. Their model doesn’t even have a crypto category.

True diversity in an investment portfolio is more than just moving money around between sectors. Tactive advisors use crypto, insurance, alternatives, and even liquidate to cash when the conditions call for it. Our philosophy is that long-term wealth is built by avoiding significant drawdown. The “new normal” is too unpredictable to use old-school passive models.

Tactive Investing is the “New Way” for the “New Normal”

Modern portfolio theory is no longer modern. It’s outdated. The market moves too quickly for a passive investing model constructed around market sectors to be effective. Tactive is the “New Way” to invest in the “new normal.” Visit TactiveWealth.com to learn more and get started today.

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.

Robo-Advisors aren’t the problem. Your models are.

Author John C. Maxwell is credited with the phrase, “Change is inevitable. Growth is optional.” His words were used to describe the human capacity for growth in an evolving life situation. We’re going to apply them to investing. Change is what we’re experiencing in global equity markets right now. Advisory firms are struggling to adapt to it.

In Maxwell’s book “The 21 Irrefutable Laws of Leadership,” he talks about how everyone has the capacity to change, but many choose not to. Static investment models, which have been the foundation of modern investing since the 1950s, aren’t working. The alternative is to switch to active investing and tactical models, the best option for growth in this climate.

Exercising the option to grow takes courage, especially when your clients’ retirement savings are at stake. In the 20th century, the market could be relied on for a 10% return over time. Since 2000, that number is down to 7%, with the S&P at 5% if you adjust for inflation. The inevitable change has arrived. In this article, we’ll show you how to exercise your growth option.

Why are models ineffective in the “new normal?”

The world was a very different place when Harry Markowitz first introduced Modern Portfolio Theory (MPT) in 1952. An investment portfolio diversified across market sectors to mitigate risk was a new concept that quickly took flight with financial advisors. “Modeling” became the status quo. Those who specialized in it created a brand-new niche in financial services.

One of the core tenets of MPT is the belief that market trends will repeat themselves given enough time. Like the fashion industry, the financial sector has always believed its business is cyclical. Set up a balanced portfolio model and convince your clients to focus on the long-term picture. Those losses will turn into gains at some point. Hopefully.

Fast forward to the 21st century. Markowitz, like Asimov’s Harry Seldon in “Foundation,” did not account for technology innovation that would change everything. We’re talking about the internet, a foundational building block for social media, retail trading, and real-time market analysis. Those developments changed how the stock market works.

Think about this in mathematical terms. An algorithm that can predict an outcome when you change a few variables. The internet added speed and transparency to stock trading. Black swan events like 9/11, the 2008 housing crash, and the 2020 pandemic added volatility. Those variables weren’t part of the original MPT equation.

Rise of the Machines: The Robo-Advisors Revolution

Another glitch in the theory of repetitive market cycles was the development of robo-advisors. The “Rise of the Machines” began in 2008 when Jon Stein launched Betterment. Robos instantly became the scapegoat for struggling advisory firms. Algorithmic trading, which was first introduced in the 1980s, soon accounted for 70 percent of daily activity on Wall Street.

Not to burst your bubble, but Robos aren’t your problem. Don’t blame the bots for lost clients. Robo-advisors use model portfolios too. Clients are leaving advisors because their investments aren’t making them money. Clients get their quarterly report, see that certain positions have been consistent losers, and don’t want to hear that it’s “part of the model.”

Robos, like Betterment, hedge risk by buying ETFs and index funds that track a broad spectrum of different equities. They’re not doing any better than you are with their performance. Robo algorithms don’t initiate trades based on evolving markets. They’re preset to rebalance when the portfolio doesn’t match the inputted model. That’s the same thing you’re doing.

Did a lightbulb just come on for you? Robo-advisors are doing the same thing you’re doing with models and getting the same result. Many firms recognize that and have incorporated a robo-advisors into their practice. The “machine” works in the background while the advisor focuses on client engagement. That’s an excellent idea for scaling, but it doesn’t solve the model problem.

The “Cramer Effect” on Model Portfolio Performance

There are certain client issues that every advisor can relate to. For instance, how many times has one of your clients asked you to make a move because they “saw something on TV” about it? We call that the “Cramer effect.” Jim Cramer, the host of the show “Mad Money” on CNBC, is one of the most influential voices in finance. He’s talking to your clients every day.

Mad Money is financial theater. Don’t take that the wrong way. Jim Cramer is a smart guy and many of his stock picks pay off. The “Cramer effect” we’re talking about is the impact he has on his viewers by being loud, instilling a sense of urgency, and honking a horn to grab your attention. He has a following, and they listen to him. That affects market movement.

Take this to another level. In 2021, meme stock traders used Reddit to drive the share price of GameStop far above what it was worth. That action showed that social media can influence the stock market. If GameStop was in your model portfolio, would you have sold it at its peak or kept it to offset losses elsewhere? Would your robo have rebalanced around it?

Growth can be achieved with Tactive investing

We believe the only way to achieve growth in the “new normal” is to combine active trading with tactical, dynamic investment models. We call it “Tactive investing.” Get used to the name. You’ll be seeing it everywhere in the next few years. We’re not saying that just because we coined the phrase. Tactive investing just makes more sense in modern times.

The key to this concept is flexibility. Model portfolios do poorly because the investor is locked into a mix of specific holdings in a market where the bottom could fall out on any given day. Active trading is the key to getting out on time. Tactical models are the blueprint to get back in. It’s quite simple when you think about it. Maybe Jim Cramer will talk about us someday.

 

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.

How Does “Minimizing Drawdown” Affect Your Long-Term Financial Goals?

Most wealth management firms in the United States subscribe to an investing philosophy called “modern portfolio theory.” In layman’s terms, that’s the idea that diversifying your holdings across multiple sectors will minimize losses and produce long-term gains. It relies on historical performance to predict what will happen in the future.

It worked for years, but it won’t fly in a post-pandemic world. Bringing the world to a complete shutdown has reset the clock. Those “historical trends” can’t be relied upon anymore. Investing in the new normal requires a more tactical approach, one that minimizes losses while they’re occurring, rather than waiting for the next uptrend to begin.

What does the term “drawdown” mean for investors?

Investopedia, which is great source of information for investors, describes “drawdown” as a peak-to-trough decline in an investment during a specific period. Think about those line graphs that your advisor shows you. The “peak” is the high point. The “trough” is where it bottoms out. That drop is known as “drawdown.” It’s why your portfolio is showing losses right now.

Modern portfolio theory (MPT) advocates for a certain tolerance towards drawdown because a loss in one sector should be offset by gains in another sector. For instance, technology stocks could be down, but perhaps manufacturing stocks are up. Prior to 2020, when we were in the middle of an eighteen-year bull market, that would have worked.

A bull market is when the S&P 500 shows consistent gains over an extended period. Have you looked at the S&P performance this year? It’s down 17.18% year-to-date. That means ALL sectors are suffering. MPT is a passive investment strategy where advisors don’t make changes, other than rebalancing the sector mix. There’s no mechanism in place to minimize drawdown.

How does Tactive minimize drawdown?

Tactive does not use modern portfolio theory. Our strategy is tactical investing. In other words, when you start losing money to market drawdown, we sell. Our advisors don’t wait for the market to turn around because you’ll be losing money while that’s happening. There are also no guarantees that the sectors you’re relying on for offsetting losses will produce gains.

Rick Dwyer, COO of Tactive and a big Formula One race fan, has a great analogy for this. “Imagine you’re on the racetrack and your team sees that rain is coming soon. You can pit stop and change tires, or you can keep driving, hoping to avoid a crash. The crash is the drawdown. The pit stop is making the change to avoid it. That’s what Tactive does.”

Another flaw with modern portfolio theory is that it leans towards investment models that are made up of stocks, bonds, and ETFs. The classic 60/40 mix of stocks versus bonds has been a mainstay for traditional wealth management firms for decades. What about crypto? Or insurance? Or real estate? These are all wealth building vehicles also.

Minimizing drawdown means adapting to circumstances and using all the tools available to maximize investor returns. That could mean buying Bitcoin or investing in a REIT. Standard investment models at other firms, which are typically rebalanced by algorithms, don’t have the capability to do that. Diversifying across multiple asset classes requires tactical thinking.

Minimizing Drawdown Protects Your Retirement Savings

Let’s talk about how this affects your retirement savings and disbursements. The savings part should be obvious. By minimizing drawdown in the present, you ensure higher returns and a larger balance in the future when you retire. Making the switch to tactical investing now should help make you more comfortable in your golden years.

The second part of this is the disbursement of funds after you retire. Tactical investment management is just as important in retirement as it is when you’re working. Taking out money while your investments are in drawdown eats away the principle of your retirement savings. This phenomenon is known as “sequence risk” and it’s a real problem right now.

Go back to that model-based portfolio your former advisor put together for you. It’s designed to ebb and flow with the movements of the stock market, but everything is going down right now. Withdrawing from that fund today means taking losses and lowering the balance that’s supposed to sustain you for the next twenty or thirty years.

Tactical investing is the answer to this dilemma. Minimizing drawdown with selective trading will help the retirement fund remain solvent for a longer period. Time becomes a major factor after retirement. You’re no longer producing income to build your 401(k) or pension fund. It’s all about stretching what’s there as far as possible. Tactical investing can do that for you.

Accepting Losses is Not an Investment Strategy

Here at Tactive, we don’t use the term “acceptable losses.” Our clients deserve better than that. Some losses are inevitable. That’s just the nature of investing. The extent of those losses can be minimized. We see it as our job to make sure that happens. Tactical investing and utilizing all asset classes, not just stocks and bonds, is how we do it.

The market is hard to predict right now, so tactical investing is critical to success. Getting started with Tactive is simple. Begin by choosing your financial goal, take a brief quiz so we can understand your investment preferences and risk appetite, then set up your account and watch your investment grow. Our system and our advisors will do the rest for you.

 

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.