Let’s talk about the Passive vs Active investing!
To remind clients to keep saving for their future selves, we try to make the investing process fun. Instead of solely announcing numbers at clients with multiple pages of legal paperwork, we remind clients to focus on what they can control with their investment accounts. To see how we do this, check out this sneak peek below of a Quarterly Email which we send to clients.
We mix up the themes each quarter, and also personally tailor recommendations for the client’s unique situations. My favorite part of these Quarterly Emails is that we attach a Paid Invoice so clients can understand how Well-Rounded Success gets paid and the amount of money which was taken out of their accounts for our services. As you can read in a previous blog post, the smoke-and-mirrors nature of the Personal Finance industry really grinds my gears, so we try to be as transparent as possible.
If you wish to explore a business relationship so you can receive this type of help, learn more at Well-Rounded Success’ Services.
Email Subject Line
4th Quarter of 2017: Your Quarterly Email from Dan & Well-Rounded Success
Greetings <Insert Name>!
Please allow me to put on my ‘Financial Planner hat’ to discuss the below points as well as personalized recommendations for your investment account. Don’t forget to scroll down to the Tweaks For You section as well as your paid invoice.
Year End Survey Results & Nonprofit Winner
Thank you to everyone who shared their honest feedback and participated in the Nonprofit survey we conducted in December.
Through your feedback, we discovered that clients appreciate the ongoing communications and the accessibility for more in-depth Financial Planning questions. Now, onto the constructive feedback: clients shared desires on how to improve the investment experience with Betterment and one client suggested I become a vegetarian for a year. We will work with Betterment for the suggested improvements and my diet will not change in 2018. Sorry, not all client feedback will be implemented.
Regarding the nonprofit vote, we’re thrilled to start this annual tradition to donate 2% of Well-Rounded Success’ top-line revenue to a nonprofit as voted by our clients.
Last year’s winner is…. Remote Area Medical (RAM)! Earlier this month, we donated over $1,000 to this nonprofit so RAM can help communities recovering from last year’s disasters. Our shared donation specifically goes towards the RAM mobile healthcare units as they assist people in Houston, Florida, and Puerto Rico. Thank you for helping us make a difference for our communities!
You can’t control the markets so we encourage you to focus on what you can control with your investment portfolio. We created a process to address the below themes when we opened your investment account and we’ll discuss all these bullet points in future Quarterly Emails.
- Consistently invest (2017 Third Quarter)
- Keep your money invested during fearful moments (2017 Second Quarter)
- Keep your costs low (This quarter’s theme)
- Be diversified
- Position your portfolio to your risk tolerance and time horizon
- Systemize your portfolio to sell high and buy low
- Efficiently trade for tax efficient opportunities
Let’s discuss Keep Your Costs Low.
Warren Buffett recently received another million dollars. This last sentence doesn’t seem like ‘Breaking News’ since Warren Buffett is one of the richest people to ever exist on our planet. As of 01/15/2018, Warren Buffett is worth $90.3 billion and has also given $27 billion to charities in the last decade. Yet, this recently earned million dollars proves significant because Buffett won this money through a bet made 10 years ago.
Buffett wagered against a hedge fund manager, Thomas Seides of Protege Partners, that passive management was worth more than active management. Buffett recommended to invest in the S&P 500 Index. This prediction then saw an annualized rate of return of 7.1% from 2007 through 2017 while the basket of hedge funds only saw 2.2% during that same time. The way that Buffett and Seides structured their bet proved interesting where the end result allowed Buffett to donate the proceeds of $2.2 million to Girls Inc charity in Omaha, Nebraska. Count this story as a win for Passive Management!
So why is Warren Buffett betting against hedge fund managers in the first place? Warren Buffett is vocal against hedge fund managers who two reasons. First, hedge fund managers charge hefty fees and second, they frequently trade positions thus adding more transaction costs as they try to beat their benchmarks. Hedge fund managers try to beat their benchmarks so they can prove that that they can beat the market.
To follow Buffett’s lead, here are the two major areas to consider when keeping your investment costs low:
1) Avoid excessive management fees
2) Limit transaction costs
* And then there is also: 3) Plan to decrease tax obligations. We’ll address this in a future quarterly email.
Passive management helps you tackle both of these cost cutting areas with slashed management fees and also less transaction costs. Passive management is the boring investment philosophy which has a lot of believers.
It’s principles: Ride the waves of the market, keep your costs low, and buy-and-hold.
These aren’t exciting to tell your pals at a cocktail party but you can give yourself a lot of peace of mind knowing you’re not getting caught up in investment crazes (cough cough… Bitcoin).
Again, remember you can control these aspects when it comes to the prices of your investments.
1) Avoid excessive management fees
Academics and John Bogle, the founder of Vanguard, state that investors are better off investing in low-cost index funds instead of money managers who try to beat benchmarks. As Bogle stated,
“If we go back to 1970, we find that there were approximately 400 funds in business and basically 330 or 40 have gone out of business. It turns out, in that period, there were two mutual funds who beat the market by more than two percent per year. Two! That’s half of one percent of all the funds that started in the business. Those are your odds.”
What to remember, instead of paying 1 – 2% to someone who claims they can beat the market, save the money you’ll pay their investment analysts and have that money go towards your investment account. If you pay someone to get performance, you’ll be amazed at all the random sheets of statistics and charts they can generate to justify their investment philosophies. By investing in passive management, you can also save a lot of paper!
2) Limit transaction costs
Think of the well known S&P 500 Index. This index is made up of the 505 largest US companies which are publicly traded on American stock exchanges. The bigger the companies (like Apple), the bigger their influence on the index. While the smaller companies in this list of 505 businesses – we’re looking at you Footlocker – are given less weight on the index.
Instead of buying 505 different stocks as well as the transaction costs applied for each individual trade, you can purchase one Index fund or ETF to follow the index. This helps you as you keep your costs low and also immediately improves your diversification. Another benefit is that when companies become less profitable (cough cough… Enron), they are removed from the index while another company is added.
As an Investment Management client, we choose to partner with Betterment’s investment philosophy because they believe in investing with low cost ETFs for diversification and for passive management. Through this Betterment strategy we try to keep your investment costs low by eliminating ongoing transaction costs with your portfolio whenever you deposit, withdraw, and/or rebalance your portfolio. Overall, we attempt to eliminate human emotions with Betterment’s technology.
We enjoy helping our clients navigate these areas of the investment world to make this world simpler and to also get your money’s worth. You worked hard for it so have your money work hard for you. Many trends come and go and it’s refreshing to hear Barry Ritholtz, an American author, newspaper columnist, blogger, equities analyst, and Chief Investment Officer of Ritholtz Wealth Management say:
“It seems that every time there’s any major trends, whether it’s towards global investing or passive investing or day trading, it’ll last for a couple of years and then something new and shiny comes along and enough people are interested in it that a substantial portion of the previous trend participants will chase that. However, I will say that the evolution towards low-cost, towards indexing, and towards being aware of how your own behavior impacts your investing, is something that’s going to be here for the foreseeable future.”
For more resources on the benefits of Passive Management over Active Management:
- Freakonomics Podcast episode: The Stupidest Thing You Can Do With Your Money
- Read Burton Malkiel’s book, A Random Walk Down Wall Street: A Time Tested Strategy to Successful Investing
- Eugene Fama’s research on the Efficient Market Hypothesis
Some General Stats: As of the end of the fourth quarter (12/31/2017), the broad-based Morningstar US Market Index was up 6.46% for the fourth quarter and finished up for a total of 21.47% for 2017. The broad bond market (Barclays US Aggregate Bond) was flat 0.39% for the fourth quarter and increased a total of 3.54% for 2017. International Markets (MSCI ACWI Ex US NR USD) improved by 5.00% for the fourth quarter and was up for a total of 27.19% for 2017. For more numbers, check out this link: MorningStar Quarter-End Insights.
Please let me know if you want to check-in about your goals or to refresh anything with your portfolio. I’d be thrilled to chat. I nerd-out about this stuff and it’s an honor to help you.
Tweaks For You
When looking over your account, I identified some tweaks.
- [Personalized Recommendations]
- Reflect if Bitcoin is right for your investment strategy
- In our December monthly e-newsletter, we shared some thought-provoking insights on how to invest in this current investment craze
- Bitcoin: What I’m Telling Clients
To be as transparent as possible, attached to this email is a Paid Invoice breaking down the money that came out of your account for our Investment Management services. This is for your reference only and there is no need for any action.
Your Returns, Quarterly Account Statement, & Tax Forms
Update From Dan
We’re on the move to Fort Collins! My lovely fiancee landed a job in Scottsbluff, Nebraska as a Physician Assistant Hospitalist so we’re moving north to be closer. We enjoy the less-busy vibe of Fort Collins as we prepare for our next life chapter.
How does this affect you? It doesn’t! As many of you already know, we enjoy the On-Demand aspect of Video Conferencing so we’ll continue our meetings in this format. We anticipated a move like this to happen which is why we intentionally designed Well-Rounded Success to be portable. We also enjoy Fort Collins because we don’t have to abandon our Denver lifestyle. This means we can still schedule face-to-face meetings and catch up conversations with our Denver clients and pals.
As for me this last quarter, my family watched my dad’s alma mater, Michigan, at the Big House in Ann Arbor (Instagram Pics), we played in the Harry Potter world of Universal Studios Hollywood (Instagram Pics), my sister married an awesome dude in November (Instagram Pic), and we cheered on my lovely fiancee as she graduated from Physician Assistant school in Omaha, Nebraska (Instagram Pics).
It’s a privilege to help you and please let me know if you have any questions!
Thanks for reading and if you want guidance on how to navigate your personal finances or you want help with your investment strategies so you can receive these personalized quarterly emails, please get in touch with me or learn more at Well-Rounded Success’ Services on the website.
About the Author
Dan Andrews is the Leader & CERTIFIED FINANCIAL PLANNER™ of Well-Rounded Success. Dan enjoys guiding and encouraging millennials through their ‘adulting’ responsibilities. His behavioral-finance style focuses on helping individuals in the Well-Rounded Success community define his/her own definition of success, make good decisions, and to also be philanthropic while along their journeys.
Cover Photo by Carl Raw on Unsplash