Active Investing Strategies

June 11, 2009

Some approaches that distinguish one financial planner from being a passive investor ...


I recently taught an investments class to some talented students at
Colorado College. I was a bit concerned that I might go overboard in suggesting passive investing but, surprisingly, the students pointed out just the opposite.

Here are the four ways they claim I’m an active investor.


Passive investing implies “buy and hold.” While I happen to think that buy-and-hold is far superior to following the herd, I’m a believer in being a true contrarian. That means rebalancing by setting a target equity allocation and sticking to it. It also means you have to sell stock when the market goes up and buy when it’s down.

That’s why when the market was crashing during March, and a local radio guru was on the air talking about the next Great Depression and getting his mother out of the market, I was writing about buying stocks. In fact, during the “lost decade” ending in 2008, a 60 percent equity and 40 percent fixed-income portfolio earned 36 percent, while the stock market tanked. Rebalancing meant selling stocks during 2000 and 2007, and buying after 2002 and 2008.

Simple, yes, but rebalancing is far from easy. Buying in March was like running with the bulls in
and being a slow runner, and then asking for more.

Better Than Bonds

I’ve virtually given up indexing when it comes to bonds. The market inefficiency our federal government has created with FDIC and NUCA (credit unions) allows us small guys to invest $250,000 per account holder through 2013. That’s a sweet advantage we have over the billion-dollar institutions that need risk-free money, since they could only invest in a one-year Treasury Bill earning 0.49 percent, while you and I can get 3.03 percent at Melrose Credit Union. That translates to an extra 2.54 percent annually.

For those who might be thinking these rates are low, I’m going to argue that they are actually quite high. Last year we could earn 4.5 percent which, after taxes, left about a 3 percent gain. With inflation at 3.5 percent, we came out behind in real terms. This year, our 3.03 percent comes out to be about 2.02 percent, which, after taxes and with no inflation, leaves us with a real 2.02 percent return. The best single place to find the best rates is only has those institutions that pay to be listed. Rule of thumb: The more the bank pays for marketing, the less it can pay you.



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