There’s good reason why index funds have become so popular. They can offer good value for the money. According to S&P Dow Jones Indices, 80% of United States large cap active funds didn’t beat the S&P 500 after costs over the past five years. Yikes. Some academics argue that the best hope of beating a legitimate benchmark is simply by being lucky instead of smart, but there are managers who have been able to (somewhat) consistently outperform.
As important as performance will always be, we don’t invest solely to “beat” an index. Standard and Poor’s won’t tweet me any congratulations if I beat their numbers. We invest to accomplish specific goals. We want to retire comfortably, pay for college or maybe fund an important philanthropic goal. Index funds can play an important role in accomplishing these goals, but for some, there are strategies and additional investment options that are more closely aligned with their situation than taking a cookie cutter approach of simply buying an index fund and forgetting about it.
Many index funds are low turnover, so they tend not to generate too much in capital gains every year if you continue to hold them. But they won’t suggest when to take tax losses and where to put the money afterward. Another issue is the astounding variety of funds available. There is an astoundingly wide variety of funds and indices to choose from. Many investors just choose the one that’s been performing best at the moment with little regard to how that impacts their overall portfolio. Some do just the opposite and merely put all their money into an index fund that doesn’t suit them.
If you’re one of the fortunate few that have substantial wealth, you might consider including investments outside the usual stocks, bonds, cash and real estate. Alternative investments can provide new ways to either reduce risk or potential upside. Be careful of the ones that are so complex they can’t be easily understood.
Another way you might maximize your own personal rate of return comes from the institutional investor’s playbook. They allocate money according to the likelihood and the time they need to withdraw. We might view all our savings in the same way, but asset rich investors keep as much cash as they need but not much more and buy long term assets with money they won’t need for the immediate future. They buy bonds that mature when they anticipate needing money. Stocks fall somewhere in between bonds and real estate. It’s usually easy to raise cash from your stock portfolio, but the amount that can be raised won’t be as certain.
These are the sort of issues a wealth advisor will address, but an index fund won’t. An advisor will also look for estate planning issues that might have an even bigger impact on your family’s wealth than whatever you save in an index fund, or maybe encourage you to stay invested when you might have panicked and abandoned your plan.
Investment performance is and always will be critical. I don’t shirk that responsibility. And so is minimizing costs. But the most important measures are whether you are progressing towards your desired goals and what could derail your plan. Index funds won’t do that for you or, worse, offer cookie cutter solutions that leave opportunities on the table.
Evan R. Guido is the Founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or firstname.lastname@example.org. Read more of his insights at https://finance.heraldtribune.com/category/ask-guido/. Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through an Avantax affiliated insurance agency. 8225 Natures Way Suite 119, Lakewood Ranch, FL 34202. The views and opinions presented in this article are those of Evan R. Guido and not of Avantax Wealth ManagementSM or its subsidiaries. Past performance does not guarantee future results. The S&P 500® Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The Index is adjusted for dividends, weighted toward stocks with large market capitalizations and represents approximately two-thirds of the total market value of all domestic common stocks. Investments cannot be made directly in an index.