Investment Methodology

Investment Overview:

The Cake Investment Plan shows step-by-step how to follow and copy the long-term performance of highly successful investment pros. Using The Cake Investment Plan investments as a model, we show how an investor will develop a solid plan using a low-cost stock (ETF) strategy.

The Cake Investment Plan  shows a cool way for investors to lower their risk with a money management plan that will reduce the risk of large losses.  We give you simple advice.  The Cake Investment Plan shows investors exactly how to do this.  This will allow them to gain an excellent level of investment success in the process. 

There is a great deal of  uncertainty in the markets today.  The Cake Investment Plan will give the investor the answer to the most often asked question in investing today – “What do I do”? 

Investment Philosophy

The Cake Investment Group philosophy stands on 4 pillars:

Low Cost​

As we will discuss the key part of long-term investment gains is keeping costs low.  This is as true in this business as in any other business.  Most investors underperform because their fees are too high.  This leads us to low-cost investments like ETFs, as we will see.

Simple Strategy

All investment plans should be simple enough for the non-professional to complete.  It will be like a light switch; you don’t need to know how the power grid works, only when to turn the switch off and on.  This plan tells you exactly when to make a move and does so in plain language.

Rule Based

Investors usually play “hunches” and follow their gut.  This is a sure path to making less money. Successful investors use a rule or set of rules that guide their investment actions.  Do not make a plan in the heat of the moment. Choose a plan that makes sense; look at the back testing, then follow the rule.  Rules based investing removes much of the emotions that can ruin an investment plan.

Emotionally Attainable

This is key. All of the previous three pillars are worthless if the investor is unable, emotionally to do it.  Any plan that expects you to ride out awful drops is simply not realistic.  Most investors bailed out during the large drops in 2008-2009, locking in big losses.  Investors have a long history of bailing out near the bottom of market drops due to fear.  The Cake Investment Plan asks that you move your money to the sidelines before most market drops.


Investment Methodology: The Need for Passive Investments

Active investing will require a hands-on approach by a manager.  Passive investing always involves less buying and selling and will result in investors buying index funds or other mutual funds.

The prime example of a passive approach is buying an index fund that follows one of the major indices like the S&P 500 or Dow Jones. Whenever these indices switch up their members, the index funds that follow them automatically switch up their holdings by selling the stock that’s leaving and buying the stock that’s becoming part of the index. This is why it’s such a big deal when a company becomes big enough to be included in one of the major indices: It guarantees that the stock will become a core holding in thousands of major funds.

Key Benefits of Passive Investments

Some of the key benefits of passive investing are:

  • Ultra-low fees:  Nobody picks the stocks, so oversight is much less expensive. Passive funds will follow the index they use as the benchmark.
  • Transparency: It is clear which assets are in an index fund.
  • Tax efficiency: The buy-and-hold strategy doesn’t  result in a massive capital gains tax for the year.

Drawbacks to Active Investments

Active strategies have these shortcomings:

  • Very expensive: Thomson Reuters Lipper pegs the average expense ratio at 1.4 percent for an actively managed equity fund, compared to only 0.6 percent for the average passive equity fund. Fees are higher because all that active buying and selling triggers transaction costs, not to mention that you’re paying the salaries of the analyst team researching equity picks. All those fees over decades of investing can kill returns.
  • Active risk: Active managers are free to buy any investment they think would bring high returns, which is great when the analysts are right but terrible when they’re wrong.

Passive Investment Performance

So, which of these strategies makes investors more money? You’d think a professional money manager’s abilities would be better than an index fund. But they don’t. If we look at performance results, passive investing works best for most investors. Study after study (over decades) shows lower results for the active managers.  This piece from Morningstar goes into more detail.

Cake Investment Plan is designed to take the best from low-cost passively managed funds. We then merge these strengths with our proprietary Cake Trend Identification system to exit markets before losses hit.


Investment Portfolio Construction

Asset Allocation:

Cake Investment Plan subscribers can easily do  as well as professional money managers with the simple Cake Portfolio made of one low-cost exchange traded fund (ETF) designed to follow the returns of those professional managers. This simple copy does not include: (1)  hedge funds; and, (2) active stock picking.  Rebalancing of the Cake Portfolio is unnecessary, further lowering costs.

The two investment areas and their ETFs are:

            Vanguard Total Stock Market ETF (VTI)

           The alternative ETFs for each asset class (for tax wash/harvesting purposes, explained below):

            SPDR S & P 500 ETF (SPY)

The Cake Portfolio then gives a signal based on the Cake Trend Identification Line.  If the ETF is above the line, you are in.  If the ETF is below the line, you are out. This is a simple strategy and uses a simple rule.

The Cake Investment Plan idea is when the signal says get out of the market and into cash, you move your money into SHY (1-3 year Treasury bonds iShare).



Tax loss harvesting is the practice of selling a stock at a loss. By taking, or “harvesting” a loss, investors are able to lower taxes on both gains and income. The sold stock is replaced by a similar one. This keeps the same strategy going and should produce the same results.  An alternative ETF may be used to facilitate this strategy while remaining in the market.  AS ALWAYS SEEK PROFESSIONAL TAX ADVICE

The wash-sale rule is designed by the IRS to discourage people from selling securities at a loss simply to claim a tax benefit. A wash sale occurs when you sell a stock at a loss and then buy that same stock or “substantially identical” stocks within 30 days (before or after the sale date).  The wash-sale rule prevents taxpayers from deducting a capital loss on the sale against the capital gain.

While the IRS has not offered a clear ruling about the definition of “substantially identical” securities it has been agreed that selling one ETF and buying another, i.e. selling VTI and buying SPY, does not trigger the wash rule.

The reason is that the two S&P 500 ETFs have different fund managers.  They also have different expenses.  Also, they may copy the underlying index with a different strategy.  Right now, the IRS does not deem this type of sale as involving “substantially identical” securities and so it is allowed.  However, this may be subject to change in the future as the practice becomes more common.  AS ALWAYS SEEK PROFESSIONAL TAX ADVICE.

As this move is allowed currently The Cake Investment Plan tracks another ETF to copy the main ETF used by the Plan.  In the event of a sell signal being sent by the Cake Trend Identification Line at the end of one month then followed by a buy signal the next, the subscriber may reenter the market without getting hit with a negative tax wash penalty.

Cake Trend Identification Line

The Cake Trend Identification is a measure made from a special balancing of major and minor trends.  It also takes into account momentum indicators and relative strength.  This produces monthly buy/sell signals that allow Cake Investment Plan subscribers to be a part of major upward moves in the market as well as avoiding painful drops.

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