Eight Ways I’m an Active Investor

Economist and author Micheal Edesess is right that, in the secondary market, the average dollar earned the market return before costs. Investors in the aggregate can’t have poor market timing because someone must buy whatever is being sold. While anecdotal, I can attest that buying equities in March of 2020 was both gut-wrenchingly hard and quite profitable. Rebalancing during the dot com and financial bubbles worked too.

2. I’m a tax-loss harvester. Investing is simple; taxes aren’t. When an investment in a taxable account tanks, I’ll sell to harvest the loss and buy something different enough to avoid the 30-day wash rule. For example, I could sell a total-stock index fund to buy an S&P 500 and an extended-market index. The latter is a completion fund – owning every stock that isn’t in the S&P 500.

The tax-loss harvesting must be done at low cost. I’ve studied and even bought a direct indexing portfolio and reached the conclusion that the tax losses decline rapidly over time, but the fees and complexities remain.

3. I’m active with fixed income. I mentioned that I have a total-bond index fund, but I have other fixed income as well. Banks and credit unions will often offer rates better than bonds. This is a market inefficiency that institutions generally can’t participate in since $250,000 of FDIC or NCUA insurance is virtually meaningless. Some CDs still come with a small early withdrawal penalty that acts as a put option to get out and reinvest at a higher rate. That worked well in 2022. Sometimes nominal Treasury bonds are even better. One doesn’t need to diversify to minimize default risk like with corporate bonds.

4. I’m active with Treasury Inflation Protected Securities (TIPS). People think in nominal terms and are generally happier earning 10% when there is 12% inflation than earning 3% with 2% inflation. That’s irrational, and I advise clients to “get real” as in inflation-adjusted returns. Buying individual TIPS and holding them to maturity provides a guaranteed real return that TIPS funds can’t (except for the new Blackrock Defined Maturity TIPS ETFs). In the past couple of years, TIPS yields have surged from less than -1% to +2.3%. I built a million-dollar TIPS ladder generating a real 4.5% withdrawal rate for 30 years. I describe how I started with $100,000 in this piece.

5. I’m active with cash. I’m not going to leave a large sum of money at bank earning 0.02% when I can earn well over 5%. The same goes with my clients, and it’s not just banks. While Schwab has increased the rate on the default cash account several fold, the 0.45% return is about five percentage points less than other money market accounts. I’m often asking my clients a theoretical question like, “Can I buy an hour of your time for $5,000?” The client always responds in the affirmative, so I reply, ”It would take less than an hour to move the cash and $100,000 is worth $5,000 annually.”

Sometimes high-yield savings accounts pay more than money market accounts, so I’m active in finding the highest safe yield. By safe, I mean backed by the U.S. government.

6. I occasionally buy private investments. With millions of investors looking at companies like Apple or ExxonMobil, I know I don’t know anything the market doesn’t already know. But I’ve been known to buy a real estate investment and even a couple of angel investments on start-ups. Both have generally worked out – maybe partially luck but also due to the criteria I set. They must be a direct investment without commissions or fund-fee wrappers. I use a three-step process in due diligence for both my clients and myself. The vast majority fail the first step, which is how the deal was found – any salesperson offering to let me or a client in on a great deal is an immediate “no.”

7. I buy investments I don’t recommend to clients. This year, I bought a 3-year Mass Mutual MYGA annuity which is similar to a CD but not backed by the U.S. government. It yielded 4.90%, which was about the same as a U.S. Treasury at the time. Why? Because I had a CD at Security Service Federal Credit Union earning 3.20% with three years remaining and it solicited me with an offer to let me out with no penalty if I bought its annuity. So I found the least bad annuity I could. It was also an educational experience for me, as the agent and the insurance company kept blaming each other for all sorts of incorrect information including contracts with the wrong dates and rates.

But I also buy new products I think are okay but perhaps sub-optimal merely to test and evaluate as a possibility to then recommend to clients. These include the Fidelity direct indexing and Schwab Intelligent Portfolio products.

8. I’m a gambler. Though I try to create boring portfolios, I also assure clients that it’s okay to have a little fun with a small amount of their portfolio. My portfolio is so boring that I do an extreme form by buying one or two stocks a year that I think have close to a 50% chance of going bankrupt. The theory is that no portfolio manager wants to own a stock when it files for bankruptcy, so they have already sold, depressing the share price. Most either do become worthless or have only modest returns. But a few have had spectacular returns – one over 10,000%.

The model is not all that different than a venture capital company that hopes to hit one or two home runs for every 10 investments. Of course, if I thought my strategy was so brilliant, I wouldn’t be writing about it.

I use all these active strategies and tell clients they can and, on some, should as well. But I also tell them not to use so-called “passive” strategies that are really active (like most ETFs, with the exception of total-market cap-weighted funds). Irrespective of how you feel about things such as factor tilting and countless versions of smart beta, you are making an active bet on parts of the market to outperform on a risk-adjusted basis.

Allan Roth is the founder of Wealth Logic, LLC, a Colorado-based fee-only registered investment advisory firm. He has been working in the investment world of corporate finance for over 25 years. Allan has served as corporate finance officer of two multi-billion-dollar companies and has consulted with many others while at McKinsey & Company.

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