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Investment Management

I believe personal indexing can help you reduce your costs of investing and give you a more personalized approach to investing. Which in turn should give you greater potential returns, peace of mind, and a greater belief in your investment strategy for the future.

What has allowed personal indexing to be created?

Quite simply, we are now able to purchase Fractional shares of stocks. What does this mean? Well, let us look at buying a stock in Amazon. On October 26th, 2021, Amazon was valued at $3,370 per share now the problem is what if you want to own amazon but do not have $3371 to buy one share at this time? Let’s say you only have $1,685 to buy amazon. With certain custodians you do not have to buy 1 share you can buy ½ a share.

Most people will say oh that’s nice to know and go on their way to planning for their retirement, but this affords us financial advisors a tremendous tool to help our clients plan for retirement; and if your advisor is savvy enough it, will allow them to save you a significant amount of money, which could give you more money in retirement.

History of investing In Mutual Funds

Most financial advisors use mutual funds and ETFs to invest your money for your future goals. I want to go through why and where the future of investing is going and why personalized indexing should be the wave of the future. To tell this story I need to give you a history of investing.

When I started my career in 1993 as a financial advisor all of us advisors that were focused on financial planning were solely using mutual funds. A mutual fund was great because you did not need a lot of money to start investing and you could get a significant amount of diversification with a small amount of money.

How a mutual fund worked is investors would buy shares of a mutual fund, people in Florida would buy shares, people in Oregon, people in New York and this would create a pool of money and with this pool of money, it gave the portfolio manager the ability to take that big pool of money and go out into the entire world of stocks or bonds and buy the stocks or bonds that he or she felt would do the best to match up to the objective of that mutual fund.

Many times, there was an upfront charge to invest in the mutual fund, and there were operating expenses to manage these funds. Over time many people did not like the upfront charge to paying a financial advisor, so the industry came out with Advisory Accounts. What this allowed the financial advisor to do is create the asset allocation model for their clients, manage the asset allocation model, and the financial plan for an advisory fee. Many people liked this model better because it aligned the financial advisor’s and the client’s interests in the same direction. The better the accounts did the better the client did and the better the advisor did.

One of the problems with mutual funds is that the portfolio managers that had the full resources and research capabilities of wall street still had a tough time beating the Index’s in which they were investing. For example, if you were investing in a Blue-Chip mutual fund this fund would primarily invest in the stocks that would be in the S&P 500 index. After the management fees were taken out of the growth of the mutual fund it was hard for the Mutual Fund to perform better than the S&P 500 index itself. This led many financial advisors to start building portfolios with exchange-traded funds.

History of investing In ETFs

An exchange-traded fund is a pool of money as well, but it usually invests in an index. So, you could invest in the SPDR ETF that matched the S&P 500 index and the management fee would be reduced significantly. The average mutual fund used to have a management fee of about 1-2% whereas an ETF would have fees in the range of .75% to .15%. Making this change allowed the client to save a significant amount of money in fees over time and still work with a financial advisor. In fact, if you paid a financial advisor to create a financial plan and manage your assets and their investment advisory fees were at 1.25% plus the ETF fee of .5% your total fees paid would be about 1.75% of your portfolio.

If your advisory account was invested in Mutual funds and the advisor charge 1.25% and your mutual fund management expense was 1% you would be paying 2.25% of your portfolio out in fee’s and probably would have seen the worse performance. Most people say oh well it is only .5% but let us look at the impact of that .5% difference over 10 years.

If you invested $500k into a portfolio with an average fee of 2.25% for 10 years and let’s say the portfolios are invested the exact same way with an underlying 7% return your portfolio would be worth $803,000 (7% return – 2.25% fee= 4.75% net return). Now if the portfolio we’re in ETF’s $500,000 invested (7% return – 1.75 % fee= 5.25% net return) would grow to $844,000.

So, focusing on the more efficient way to invest would allow you to have an extra $41000 in 10 years. If you look at the impact of this over the course of a 30-year retirement, there would be a difference of $334,000. Now the mistakes you are avoiding by working with a good financial advisor are well worth it in my opinion. If the financial advisor is looking out for your best interest as well, they will usually look for ways to minimize these expenses, wherever possible. But it is always worth looking into.

Personal Indexing - a better investment strategy

Now we can reduce these fees even more and create a better investment strategy. Because we can invest in partial shares we no longer need to invest in a pooled investment like an ETF or Mutual fund and can create a personalized index. This allows us to eliminate all the internal costs of investing. We can recreate a portfolio of the S&P 500 index for example with no management fee because you can buy 500 partial stocks with no less than 1 cent.
We can create the diversification of an ETF with a small amount of money and eliminate the management expense. So now the only fee you have is the financial advisor fee of 1.25%.

The other advantage of this is I am firmly convinced we are at the beginning stages of a series of major disruptions from technology advancements with electric cars, blockchain, gene splicing, crisper, solar, wind, battery technology, artificial intelligence, machine and robotics, and 3d printing. Because we can eliminate some companies from the S&P 500 index or any index or create our own index, we can eliminate any companies from that index that we feel have a future risk of being disrupted.

Also, many people may have ESG preferences of what companies they do not want to support. We can eliminate these companies from your portfolio as well. With the ability to eliminate the disruption, we do not need to wait until these companies shrink in size to where their market cap takes them out of the S&P 500 index. We can just eliminate them from your portfolio.

This process gives us a double advantage of reducing your fees and tailor-making an indexed portfolio for you. I have been amazed at how eliminating the potential disruption from the S&P 500 index has boosted the performance of this index. If you would like to learn more about the extra growth we have been seeing by eliminating the disruption and fees from a portfolio or have any questions about the upcoming disruption and how it can impact your retirement, or any questions about financial planning topics like Income planning in retirement, tax planning in retirement, please feel free to go to to set up a 15 minute time to talk to us.