Actively Oversee Your Passive Strategies Too

By ignoring, you could be leaving returns on the table

While passive strategies – meaning index funds or ETFs – is one course to consider, your advisor still has to actively oversee your holdings for lots of reasons.

Here are some things I do as a financial advisor in order to help my clients fine-tune their passive investment strategies for success.

Asset Allocation

Study after study shows an important determinate in your overall investment success isn't picking the right stocks, bonds or real estate. A good asset allocation strategy can add about 0.5% yearly to your long-term return. Your overall mix of various asset classes has a great impact on your success or failure.

Investing your entire 401(k) in several stock index funds can be as insane as putting everything into bond funds. Even a mix of stocks and bonds, while better, can leave a portfolio over-exposed to the fortunes of one sector or exposed to the failing of one country’s economy.

Manager and Index Selection

Especially if you are over 40 and have retirement in sight, successful passive investing isn’t quite as easy as calling an index-fund company and putting everything in a Standard & Poor’s 500 index fund.

Every asset class has multiple indexes, with managers who differ in philosophy, execution and fees. Some adhere to traditional indexes while others build their own indexes based on their research. Picking the right index with the right manager can add up to 2% over the long haul.

Rebalancing

Once we set your target allocations, I will need to periodically sell off the advancing asset classes to purchase more of the lagging classes. Suppose you want 30% of your portfolio in U.S. stocks and 30% in bonds. If stocks do well and bonds do not, over time you might end up with 35% stocks and 25% bonds.

Selling stocks and buying bonds to rebalance the allocations is a disciplined form of buy low and sell high. Without it, your portfolio misses out on some extra returns and over time takes on more risk and volatility. Research shows that periodic rebalancing can add 0.5% to 1.5% annually over the long term.

Asset Placement and Taxes

Other adjustments need ongoing attention in any portfolio. Asset class location helps minimize tax consequences by matching the assets with the right account. Individual retirement accounts are best for certain asset classes. This matching can add up to 0.5% annually, so getting it right can be a big deal.

It's also important to tweak asset class allocations to adjust for long-term bear or bull markets, significant economic or tax policy changes or changing personal situations. Another necessity is minimizing taxes by efficient and timely matches of losses to offset capital gains.

Keeping it Sensibly Simple

Simplicity for its own sake doesn't always produce the desired benefits. While it's simple to put your whole portfolio into one stock or one mutual fund, the results could end up adding layers of complexity to your life.

You need to diversify your investments, and at the same time avoid making your portfolio so complex that you can’t understand it. The right amount of sensible complexity can turn a good passive investing strategy into a highly successful one.

You see it’s not about just picking a few passive strategies and calling it a day. There is so much more work I do on your behalf as your financial advisor and I’m happy to explain all of it!