We close out 2023 by answering your questions on active vs passive management, market timing, investing for status, what we learned from Charlie Munger, thoughts on a coming recession, worst investment mistakes this year, recent books that changed us, and more.
Topics covered include:
- Investing on the fringe
- Investing on the fringe
Become a Better Investor With Our Investing Checklist
David Stein: Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein, and today is a Q&A episode. It’s something that we do about once a year; I think it was last year we did it.
With me today are my sons, Camden and Bret. They are partners at Money for the Rest of Us, have been for almost a year and a half now. They will read some of the questions, they’ll chime in. But we’re going to start off with some more investing-related questions, and then later we’ll have some more, let’s say philosophical-related questions. So Camden, why don’t you go ahead and get started?
David’s Investment Approach
Camden Stein: Sure. So our first question says “Hi, David and team. Can you please explain how your investment approach differs—if it does—from active management, or market timing, versus a passive buy-and-hold strategy? I’m unclear on this distinction, and I get the impression from your work that you generally believe that investors cannot beat the market with any consistency, yet you pursue strategies such as portfolio tilting to do just that. What am I missing in this seeming contradiction? If you have previously explained this distinction in some other forum, just direct me to the content and that would be fine.”
David Stein: The seeming contradiction is what do we mean by the market. The question refers to beating the market. And financial theory, at the root of passive buy-and-hold investing, is something known as the market portfolio. And this is a theoretical bundle of investments that includes every asset available in the financial markets.
It can include stocks, bonds, preferred stock, equity REITs, public and private assets, potentially. And so that’s the theory, and the idea is that if you’re a passive investor, you own this market portfolio in the proportional weights based on size, but we can’t observe the market portfolio. And that leaves us to figure out what should our asset allocation be?
Now, data confirms that most active stock managers lag comparable index funds, and that’s why I primarily invest in stocks via index funds or ETFs. But how do we decide what other asset classes to include in our portfolio besides stocks? And what should be included, and what are those weights? What do we do about equity strategies such as momentum and value, that historically have outperformed a size-weighted portfolio?
And so that leaves us with our approach at Money for the Rest of Us, which comes out of how I invested professionally, is broad diversification using a variety of assets types, understanding the portfolio drivers of those returns, the cash flow, the cash flow growth, what investors are paying for those cash flows, and look at that data and then make an allocation decision.
Few investors are truly passive, because they need to decide what assets to hold, what the weights should be, and how to rebalance. And so what we do at Money for the Rest of Us is help with that decision, come up with expected returns, provide tools such as Asset Camp to help investors do that. And investing means making changes. Even investors that believe they’re totally passive have to rebalance.
Now, we can distinguish that from market timing, which is much more active, and much more aggressive, in many regards. And it can work, it just doesn’t fit my temperament. The portfolio churn rate can be much higher, and it can be exhausting, and potentially tax inefficient. So our approach is less active. It’s more of a wait and see what flows in with the tide.
We’ve spent a lot of time in the last month or so on the podcast and on Plus membership talking about Treasury Inflation Protected Securities, because there was an opportunity that we hadn’t seen in decades. It was a prudent decision to make an additional allocation there. Equity REITs got as cheap as they’ve been in five years, which means their expected return was higher. It made sense to make an allocation there, like I did in my portfolio.
And so we are allowed to make allocation decisions. Even if you’re a buy-and-hold investor, we make decisions, and it’s just sort of a broad range in terms of how active investors are. But very few investors that I know—unless they’re 100% stocks and never make a change—are truly buy-and-hold investors.
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