INVESTMENT: Management Strategies

Posted on November 21, 2024 by Dr. David Edward Marcinko MBA MEd CMP™

By Staff Reporters

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Active investment management strategies are the opposite of passive investment strategies. Active portfolio managers regularly take investment positions that clearly differ from those of the portfolio’s performance benchmark, with the objective of outperforming the benchmark over time.

Passive: https://medicalexecutivepost.com/2024/06/09/active-or-passive-investing-pursuits/

In addition to the upside potential of outperforming the benchmark, there’s also the downside possibility of under performing the benchmark. In an efficient market, there should be roughly the same magnitude of out performers and under performers for any given benchmark. But, markets are not always efficient.

Active non-transparent investment management strategies are Exchange Traded Funds that are actively managed by a portfolio manager or team of managers without daily disclosure of portfolio holdings. Active transparent strategies are daily disclosures of portfolio holdings as an attribute of traditional index-based Exchange Traded Funds (ETFs). Active transparent exchange traded funds are actively managed by a portfolio manager or team of managers. As with index-based ETFs, their portfolio holdings are disclosed daily.

Di-Worsification: https://medicalexecutivepost.com/2024/04/09/what-is-financial-portfolio-di-worsification-2/

NOTE: Absolute return as an investment vehicle seeks to make positive returns by employing investment management techniques that differ from traditional mutual funds. Absolute return investment techniques include using short selling, futures, options, derivatives, arbitrage, leverage and unconventional assets.

CITE: https://www.r2library.com/Resource/Title/0826102549

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“ACTIVE” INVESTMENT STRATEGIES: For Physicians

Posted on May 21, 2024 by Dr. David Edward Marcinko MBA MEd CMP™

And … why doctors are different?

By Dr. David Edward Marcinko MBA MEd CMP

SPONSOR: http://www.MarcinkoAssociates.com

By Dr. David Edward Marcinko MBA CMP™

There are two distinct forms of financial analysis investment strategies often used by medical colleague investors who desire to pursue an active investment strategy.

Technical Analysis: Technical analysts, sometimes referred to as chartists, use historical price data and transaction volume data to identify mis-priced securities. A key belief shared by technical analysts is that stock prices follow recurring patterns and that once these historical patterns are identified, they can be used to identify future security prices. The heart of technical analysis is identifying significant shifts in the macro/micro economic supply and demand factors for a particular securities investment.

Skeptics of technical analysis generally subscribe to the notion that the markets efficiently and accurately price securities. In fact, the weak form of the Efficient Market Hypothesis [EMH] is based on the view that investors cannot consistently earn superior returns using historical data and technical analysis alone.

Fundamental Analysis: In contrast to technical analysis – which relies on historical market returns / transactions data – fundamental analysis focuses on the underlying company’s assets, earnings, risks, dividends and intrinsic security factors to identify mis-priced securities.

Furthermore, investors using fundamental analysis can use either a top-down or bottom-up approach:

  • The top-down investor starts with global economics, including both international and national economic indicators. These may include GDP growth rates, inflation, interest rates, exchange rates, productivity and energy prices. They subsequently narrow their search to regional / industry analysis of total sales, price levels, the effects of competing products, foreign competition and entry or exit from the industry. Often they refine their search to the best business in the area being studied.
  • The bottom-up investor starts with specific businesses, regardless of their industry / region, and proceeds in reverse of the top-down approach. Bottom-up investing is an approach that focuses on analyzing individual stocks and de-emphasizes the significance of macroeconomic and market cycles. In other words, bottom-up investing typically involves focusing on a specific company’s fundamentals, such as revenue or earnings, versus the industry or the overall economy. The bottom-up investing approach assumes individual companies can perform well even in an industry that is under performing, at least on a relative basis.

And so, a medical professional utilizing fundamental analysis is attempting to find securities that are trading at market prices below their intrinsic value. Skeptics suggest this is difficult or almost impossible to achieve.

Thus, while technical analysis focuses on market price history, a security’s intrinsic fundamental analysis is determined independent of the security’s market value. Of course, a combination of both fundamental and technical analysis can also be considered.

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15 YEAR JOURNEY: From Active to Passive Investing?

Posted on May 21, 2024 by Dr. David Edward Marcinko MBA MEd CMP™

By Staff Reporters

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Historical Review

As can now be discerned 15 years later, two trends emerged from the aftermath of the 2008 financial crisis. One was a new type of investment that concentrated capital among a small number of firms. The other was left-wing activism in the style of Occupy Wall Street. Combined, these trends helped empower Wall Street behemoths to push much of the corporate wokeness that is so common today. The financial meltdown precipitated a transition from active to passive investment.

Definitions

Active investment is what one typically thinks of as investing — making risky stock purchases in an attempt to beat the market in the short-term.

More: https://medicalexecutivepost.com/2023/03/06/understanding-active-asset-allocation/

Passive investment, on the other hand, requires much less effort. According to Investopedia, it is a long-term strategy where investors try to “replicate market performance by constructing well-diversified portfolios” (e.g. mutual funds) typically based on a “representative benchmark” like the S&P 500 index.  In other words, it bets on the market rather than against it.

More: https://medicalexecutivepost.com/2015/03/19/more-on-passive-investing-for-physicians/

Dichotomy

Passive investing took off after the financial crisis when investors realized it wasn’t worth trying to beat the market. Why pay a broker a one to two percent fee every year to actively manage your assets, especially when the downturn revealed they often under-performed the regular market returns? Many opted for passive asset management that cost a fraction of a brokerage fee.

More: https://medicalexecutivepost.com/2022/03/09/active-or-passive-investing-pursuits/

Today

In fact, one study found that between 2008 and 2015, active funds lost $800 billion while passive funds gained over $1 trillion in new investment. As of 2019, more money is now invested in passive than in active funds.

Cite: https://www.cambridge.org/core/journals/business-and-politics/article/hidden-power-of-the-big-three-passive-index-funds-reconcentration-of-corporate-ownership-and-new-financial-risk/30AD689509AAD62F5B677E916C28C4B6

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MDs Must Know When it’s OK to be Average

Posted on November 13, 2022 by Dr. David Edward Marcinko MBA MEd CMP™

Should Active Investors Expect to Lose?

Rick Kahler MS CFP

By Rick Kahler MSFS CFP®

When it comes to investing, it’s a losing proposition to try and be anything better than average. Even if you are a doctor.

I was recently reminded of this important investing precept when I attended a presentation by Ken French, a noted professor of finance at Dartmouth College.

Dr. French Speaks

“The theory is institutions are smarter than ‘dumb’ individual and can add value,”

said French.

“That is simply not true.”

His research has found that institutions are no better at trying to beat the market than individual investors. When you pay someone to do better than the market, French told us,

“You should expect to lose. It’s really hard to identify the great managers. You are wasting your time and money trying to beat the market.”

If there’s no point in trying to beat the market through “active” investing, what is the best way to invest? Through “passive” investing, that accepts average market returns. You need to reduce expenses, diversify your portfolio into index funds of various asset classes, minimize taxes, and exhibit discipline.

  1. Reduce expenses. Passive investing generally costs around 0.20% a year in fees, compared to around 1.35% for active investing.
  2. Diversify into index funds. Simply select an index in the asset classes you want to hold. The inherent strategy of the index will determine when to buy and sell. For example, the inherent strategy of the S&P 500 is to own a fraction of the largest 500 companies in the US. Every June, those companies that fell out of the top 500 largest are sold and those that made it into the top 500 are purchased.
  3. Minimize taxes. The limited buying and selling of passive investing tends to reduce investment-related taxes.
  4. Exhibit discipline. Relying on the inherent strategy of an index fund puts some distance between you and buying/selling decisions, making it easier to maintain your investment discipline during market fluctuations.

You may be thinking that, if “passive” is the way to go, you might as well make things even simpler. Why not just put your retirement money in the bank and forget it? While you can certainly do that, the results may be disastrous. If you want more than just Social Security for your retirement, you need your money to grow.

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Considerations

In 1913, nine cents bought a quart of milk. In 1963, the same nine cents bought a small glass of milk. In 2015, nine cents bought seven tablespoons of milk. Clearly, putting money under the mattress doesn’t work for the long term. The culprit of the declining purchasing power of that nine cents is inflation. The moral of this story is to make sure your money grows at least as fast as inflation. That requires investing it.

Example:

It would require $13 today to equal the purchasing power that $1 provided in 1926. Had you put one dollar in the bank in 1926, you would have $21 today. Having invested the dollar in long-term bonds would give you $132. However, invested in the S&P 500 Index (stocks), you would have $5,386.

A Mix

Does that mean you should invest all of your retirement assets in stocks? If you are one year old, probably so. If you are 60 years old, probably not. For most of us, a mixture of index funds that include many asset classes—such as global stocks, global bonds, global real estate, and commodities—is the best strategy.

Assessment

Research supports the value of diversified passive investing as long-term strategy. According to a study by Dalbar, Inc., average passive investors earn 3% to 4% more annually than average active investors. Over time, that makes a huge difference.

Conclusion

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SELLING: Financial Advice!

Posted on March 20, 2022 by Dr. David Edward Marcinko MBA MEd CMP™

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It is All About Sales

Rick Kahler MS CFP

By Rick Kahler MS CFP®

Steve Forbes, editor of the well-respected financial publication Forbes Magazine, once said,

“You make more selling advice than following it. It’s one of the things we count on in the magazine business, along with the short memory of our readers.”

Scores of publications sell advice on their proprietary investing secrets. In addition, hundreds of thousands of active money managers claim they can “beat the market” and give you above average returns. Usually, “the market” this advice refers to is the Standard & Poor’s 500 Index.

Investing in the S&P 500 Index simply means owning a fraction of every one of the largest 500 companies in the US. No skill is involved at all; a third grader can do this.

Accepting average market returns through an index fund is termed “passive” investing, while trying to beat the market is called “active” investing. Enticing as the latter may seem, very few active investors manage to do it.

Dimensional Fund Advisors

A recent study cited by Dimensional Fund Advisors found that only 17% of money managers beat the S&P 500 Index over 15 years. A similar study done by Dalbar, Inc. found that over 20 years, just 3% of money managers beat the S&P 500 Index. In other words, 97% of all money managers didn’t do as well as a third grader who invested in the S&P 500 Index.

In addition, active investors generally pay around 1.35% a year in fees, compared to around 0.20% a year for passive investors. According to the Dalbar study, the average active investor earns 3% to 4% less annually than the average passive investor. That’s a really big deal.

With all the research to the contrary, why does active investing flourish?

There are three reasons:

First, people are confused. Few investors understand that Wall Street has every financial incentive to keep you confused. So does much of the financial press, because passive investing doesn’t sell papers or magazines. We don’t see headlines reading, “What You Need To Do With Your Portfolio Now: NOTHING!”

Second, people tend to be extremely overconfident. Most of what people mistake for outperformance in a money manager is actually just dumb luck. According to Ken French, professor of finance at Dartmouth, it takes 64 years of data to sort through all the random probabilities to assess whether a manager’s short-term beating the market is due to skill rather than chance.

To emphasize this, try an experiment that can make you a stock-picking genius. Select 64 people, preferably not friends. Tell 32 of them the price of a share of Apple will be higher at the end of the month; tell the other 32 it will be lower. Of course, your “prediction” will be true for one group or the other. At the end of the month take the “true” group, divide it into two groups of 16, and repeat the exercise. At the end of the second month, divide the “true” group in half and repeat. Continue the pattern with the remaining 8, then 4, and the last 2. After six months you will have correctly predicted the movement of Apple stock to one person—who will think you are a financial genius.

The third reason active investing flourishes is the superior skill of the top 3%—the Bill Millers and Jim Simons. Such investment gurus provide encouragement that you, too, can beat the market. Yet actually, the fact they exist is exactly the reason why you shouldn’t try. Why?

Assessment

In order for them to do better than the market, they need lots of others to do worse. As Ken French reminds us, trying to beat the market is a zero sum game. 

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Conclusion

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How to Succeed as an “Active-Passive” Investor [Part I]

Posted on November 13, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

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An Oxymoron—Part One

By Rick Kahler CFP® http://www.KahlerFinancial.com

Rick Kahler CFPA fundamental principle I preach is that having a core of passively managed mutual funds is the foundation of successful long-term wealth building. I practice that principle, as well: about 75% of the securities in my personal portfolio are passively selected.

My commitment to this approach has evolved both from my own years of investing experience and from reading reams of research. I’m convinced that “beating the market” over the long term is as elusive a goal as capturing a wild jackalope.

Fundamental Strategy

Does that mean investing is as simple as giving most of your money to passive managers and kicking back? Not quite. Yes, investing in the index funds of a diversified group of asset classes and leaving them alone is a good fundamental strategy that will help you secure your financial future. To be even more successful, however, it helps to actively apply some additional strategies.

Additional Strategies

I was reminded of this by a June 2013 blog post from Bob Seawright of Madison Avenue Securities. Here, inspired by and adapted from his “top ten” list, are some of the factors that strongly affect the success of passive investors. While financial professionals can help with all of these strategies, investors going it alone can also benefit from paying attention to them.

Link: http://rpseawright.wordpress.com/2013/06/04/financial-advice-a-top-ten-list/

Top Ten List

1. What’s the point?

A successful investment strategy starts with establishing clear, objective, and realistic goals. Most people bypass this step, thinking it is unrelated to their investment selection. Yet very few people on their deathbeds focus on how great it was to get a 7% annual return on their investments. Drilling down to what is really important in your life is no simple task, but it is essential. Creating a life worth living means using portfolio returns to support your dreams and desires! Knowing where you are going and why is the first step to establishing a successful portfolio.

2. A written investment plan.

Yes, you need your investment strategy in writing. This both insures that you have one and helps you clarify it. I find that writing things down often helps me find gaps and inconsistencies in what I thought was a complete and rational plan.

A written investment plan should state:

a. Your investment philosophy. Are you a passive or active investor, or both?

b. Your goals and objectives for your funds. This answers the question, “How and when will this money support my life?”

c. Guidelines and constraints you will adhere to in managing your money. What tenure do you want in a manager, what is your upper limit on expense ratios, how much flexibility will you give a manager, what quantifiable factors will take you out of a market or bring you back in?

A written plan will bring structure and discipline to your investment strategy, qualities most investors lack.

3. Manage your behavior.

We all have blind spots, biases, and delusions. How you behave in the face of market declines and advances will affect your long-term portfolio returns more than any other single factor. To make this even more challenging, your brain is naturally wired for investment failure. Identifying and reframing your money scripts can help you rewire your brain for success instead. Working with a financial coach or therapist can be invaluable to help you negotiate your own mind.

4. Financial planning.

Many people think financial planning is limited to investment advice. Yet it is much broader and deeper. Financial planning not only helps you build wealth, but helps you use it wisely to support the life you want.

Doctors

More:

Assessment

Six more keys to successful passive investing will be covered soon in Part II.

How to Succeed as an “Active-Passive” Investor [Part II]

Conclusion

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Passive Investing with a “Steroid Twist”

Posted on August 21, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

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A Core and Satellite Philosophy

By Rick Kahler CFP® http://www.KahlerFinancial.com

Rick Kahler CFP“Keep your hands away from your investments and back away from the market reports.”

That pretty much sums up passive investing, the approach I have practiced for years. I’ve preached it for years, too, and did so in a recent column. The wisest way to build wealth is by investing in a variety of asset classes, setting target allocations in each asset class, and then taking your hands off except to periodically rebalance to the original target allocations.

For most of us, including doctors, the best way to invest in an asset class is to give our funds to a mutual fund manager who will purchase the appropriate investments. Mutual fund managers have a choice of actively or passively managing the money you give them to invest.

Passivity 

Passive managers try to match market indexes, which are groups of companies representing a cross-section of a certain type of investment. The most popular index in the world is probably the S&P 500 index, which consists of the largest 500 companies in the United States. Another popular index is the Dow Jones Industrial Index which is made up of 30 companies. When we consider the US has almost 10,000 companies, we can quickly see that many indexes represent just a segment of the entire market.

Research indicates it is very hard to beat an index, especially with stocks, bonds, real estate investment trusts, and commodities. I prefer to keep about 80% of my investment portfolio in a broad variety of passively managed investments in these asset classes.

Timing or Strategy?

Where do I put the other 20%? In mutual funds with active managers who try to earn returns similar to stocks and bonds and that are not correlated to either.

This may seem to make me a hypocrite. I’ve been saying for years not to be a market timer, and now here I am suggesting you do just the opposite with a portion of your portfolio. Not hypocrisy at all. What I’ve preached for many years is that neither you nor I have any business timing investments. That doesn’t mean no one should ever do it.

So, is it timing or strategy?

Core and Satellite Philosophy

It can be wise to put a small portion [satellite] of our portfolios [core] into various investment strategies with active managers. The key is to find managers who have a disciplined approach that eliminates emotion and who have long-term track records of success. These strategies include managers who attempt to time markets by shorting stocks they think will decline in value and buying stocks they think will rise.

It also includes one investment strategy, managed futures, that I call “timing on steroids.”

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Bull markets

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Rationale

My reason for including some actively managed funds is to have part of my investment portfolio that is not correlated to stocks. I want these investments to have a positive return over a long period, but also to move in opposition to other major asset classes, especially stocks. So when stocks are up, I am not fazed if my managed futures are down. And, when stocks are down, I am thankful when my managed futures are up. If both asset classes earn 6 to 9% over a long period of time, I’m happy.

So, call it … passive investing with a steroid twist.

Assessment

So I stand by my commitment to passive investing. It’s based on research suggesting that timing the markets is a loser’s game.

Yet part of passive investing is having a fully diversified portfolio. This includes having a small portion—20% or less—in mutual funds with disciplined, successful active managers. My job is to research and find those managers. Then it’s okay to let them time their hearts out. I just make sure I don’t try to time the timers.

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Is Passive Investing Right for You?

Posted on August 7, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

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On the “Buy low and Sell high” Strategy 

By Rick Kahler CFP® http://www.KahlerFinancial.com

Rick Kahler CFP“Buy low and sell high.” That was my simple approach when I was a smart young investment advisor. I poured over a company’s balance sheet, earnings statements, and forecasted returns. Then I bought those companies that were bargains and waited for my gains to roll in. More times than not, they did—eventually.

The problem came with the “not” and “eventually.” A majority of my picks did go up in value, but the minority that were “nots” still lost enough to have a negative impact on my bottom line. Even more frustrating, some of my “nots” turned into gains “eventually” after I sold them.

My investment returns were similar to findings from Dalbar, Inc., a financial services research firm. Dalbar’s studies have shown that average active investors barely beat inflation over the long term. They significantly underperform investors who put their money in an index fund of stocks and leave it alone.

So much for my early investment brilliance! Over the past 40 years, I’ve learned that with every passing year I know less than I thought I did the year before. I’ve proven to myself I have no idea where any market is going tomorrow, next month, next year, or in the next 10 years.

This awareness has led me to become increasingly passive in my investments. In passive investing, rather than trying to time the buying and selling of winners and losers, you instead buy a representative sample of the entire market. This is possible in any market: bonds, stocks, real estate investment trusts, or commodities. You simply buy mutual funds and exchange-traded funds (ETF’s) called index funds.

Benefits

The two biggest benefits of passive investing are cost and diversification.

Costs

Index funds have incredibly low costs, with annual fees as low as 0.1%. Contrast that with the average equity fund that costs 1.5%, fifteen times more. According to research, 97% of active mutual fund managers don’t beat the index over 20 years. Even the 3% who do must beat the index by more than the 1.5% fee they charge, in order for their investors to come out ahead.

Diversification

The smaller number of stocks owned – the more my fortunes are tied to those few companies. It’s the old adage, “don’t put all your eggs in one basket.” By owning index funds, I own hundreds or thousands of securities. While I will never hit a home run, I also will never strike out. My returns will be “average.” Investing may be one of the few professions where being average puts you in the 97th percentile of all investment managers.

The NaySayers

Not all of my peers agree with this philosophy. Many very smart investment advisors jumped off the passive investing bandwagon after 2008 and returned to tactical asset allocation, which is another name for timing the markets.

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Harold’ Strategy

A noted investment advisor, Harold Evensky MBA CFP® of Evensky & Katz, addressed this issue at a conference last year. After the 2008 crisis, his firm hired researchers to evaluate whether they could find any tactical strategies that would have avoided the crisis. They found some that, in hindsight, would have worked. Yet he didn’t feel those strategies could be comfortably applied looking forward. Instead, the firm decided to add a 20% allocation to non-correlated alternative investments, something I’ve done since the late 90’s. In other words, they increased their clients’ diversification.

Assessment

The bottom line is that passive investing actually gives you more control. It allows you to focus on reducing costs and taxes, the aspects of investing you can control. It frees you from trying to beat the market and worrying over what you can’t control.

Conclusion

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