Eight Ways I’m an Active Investor

allan rothI’m known to be a boring, passive investor. My core portfolio consists of cap-weighted total U.S. and total international stock index funds as well as a slug of a total-bond index fund, and that’s what I typically recommend to clients. My favorite holding period is forever and that’s also what I recommend to clients until they reach the decumulation phase of their lives.

But passive investing means buy and hold, and that’s not what I do for my own portfolio or recommend to clients. Here are eight ways I’m an active investor:

  1. I’m a market timer. You read that right. Not because I can predict the market but because I believe in rebalancing an asset allocation between high-risk (like equities) and low-risk (like high-quality fixed income) investments.

The main reason I’m a disciplined rebalancer is to stick to an overall risk target. While bonds had their worst year ever in 2022, a stock index fund has more risk (volatility) in a day than a high-quality bond fund has in a year. Studies that show no rebalancing or even an increasing equity glidepath is superior and fails to correctly consider the magnitude of the failure or behavioral issues. Running out of money mid-way through retirement has different consequences than having to cut a little from spending at the tail end of retirement.

But rebalancing boosts risk-adjusted returns a bit. Many investors are predictably irrational and consistently buy high and sell low. I don’t accept the conclusions of the Dalbar study showing a behavior gap of nearly three percentage points annually. Though the Morningstar Mind the Gap study shows nearly a 1.7 percentage point gap, some of that could be caused by factors other than behavior. Still, there is ample evidence of fund cash flows timed very poorly including advisors as whole.