Thinking Outside The Street Episode 6 – Investing With Style

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In This Episode:  Paul rambles through trying to identify investing styles using a clever matrix (see below) as a starting point to understanding the important differences in how to manage a portfolio.

  • Strategic Investing has meant to develop an allocation model and then to find asset class representation that closely adheres to a benchmark for that asset class. Typically the portfolio is rebalanced periodically to keep the allocations close to the allocation model.
  • Tactical Investing has meant to adjust the asset allocation model based on certain rules or market conditions.
  • These two approaches can be used together with an allocation model that then looks for asset class representation with funds that use active styles to reduce risk or get better returns.
  • OR, a tactical allocation approach can be used with those actively managed funds. This creates a hybrid approach to portfolio management.
  • Using some tactical models, it is possible to change allocations to various asset classes very often.
  • This is important to understand because the style used to manage a portfolio reflects the underlying investment philosophy of the manager (even if that manager is the account owner who is managing his own account).

Our thanks to Michael Kitces of “Nerd’s Eye View” and Kitces.com for permission to use the graphic below. His full article can be found at http://www.kitces.com/blog/active-passive-strategic-tactical-whats-your-investment-management-style/ and is well worth the read.

Active-Passive-Strategic-Tactical-Investment-Manager-Styles-e1396461695117

Thinking Outside the Street Podcast Episode 4 – Staying Active Can Lead to a Fit Portfolio

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In This Episode:  Paul and Cliff discuss the concept of active investment management and why it offers opportunities to avoid some risk in your portfolio.

  • Even though Buy and Hold strategies can work over time, most investors actively manage their buy and hold accounts by getting in and out at exaxtly the wrong time.
  • The primary goal of active management is to lower the risk of loss in a portfolio…not to maximize gain. Warren Buffet – “Rule 1: Don”t lose money! Rule 2: See rule one!”
  • Not losing is more important than always winning (the math proves it).
  • These days, active management can be found in highly liquid and transparent accounts.
  • The key to good active management is to have a good strategy (multiple strategies are better) and then to have the discipline to follow the strategy rules .

References

  • Mark Douglas. Trading In The Zone. A good book about managing the psychology of trading your account.
  • Van Tharp. Trade Your Way To Financial Freedom – Although much of this book is about day trading (which we think is a very hard way to make money) the principles of strategy development, measurement, and discipline are worth the read. Van Tharp has a website with a lot of resource material. If you are a do-it-yourselfer and like to spend a lot of money on books and DVD’s then you will be excited to visit the site. Otherwise, much of his teaching can be had through his several books which are not too expensive.

Thinking Outside the Street Episode 3 – Caring for Orphan 401(k)’s

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In This Episode:  Paul and Cliff discuss reasons why you might want to rollover your orphaned 401(k) to an IRA

Advantages

  • More investment options.
  • Access to professional management of the IRA account.
  • The opportunity to invest with fewer mandatory holding period restrictions on your account.

Downside

  • Can’t borrow against an IRA but you can borrow against a 401(k) (if your plan allows it).
  • Access to 401(k) funds without penalty can be as early as age 55, but IRA you need to wait till 59 and 1/2.

Be Careful

  • Do a direct rollover and do not take constructive receipt of the funds.
  • Get a plan in place to wisely manage your IRA or hire a money manager to do it for you.