In our last piece, we introduced direct indexing: how it works, why it’s been receiving more media attention, and what potential tax and investment management advantages it might offer over traditional index investing. Today, let’s cover why we’re not as enthused by direct indexing as we are by our funds-based approach to pursuing your long-term financial goals.
Let’s start by taking a step back. Why invest to begin with?
We believe the best reason to invest is to create or preserve enough wealth to fund your future goals, even as inflation nibbles away at our money’s spending power over time. An additional, immediate reward comes from the tranquility you feel today, knowing you have a dependable financial safety net to protect yourself against tomorrow’s unknowns.
This leads to a critical understanding: You and your ideal investments must not only start out strong. They must have the stamina to last.
We’re not yet convinced direct indexing is the best solution for this essential duty. The complexities involved may make it harder rather than easier to build, manage, and stick with your ideal low-cost globally diversified investment portfolio, tailored to reflect your personal financial goals and risk tolerances.
Effectively tracking an index over time isn’t as simple as it may sound. Like trying to walk across a swaying bridge on a spinning planet, everything is in constant motion. Managing all the movement (and reporting it on your tax returns) can leave you dizzy.
With traditional index investing, if you (or your advisor) harvest tax losses or incur taxable gains to rebalance or otherwise manage your portfolio, you’ll trade a few funds, and report the results on your annual return. To accomplish these same tasks with direct indexing, you or your service provider might need to place hundreds of trades, several times a year. Each trade becomes a line item you and your accountant must accurately track and report come tax time.
By building your portfolio using well-managed, low-cost index or similar asset-class funds, you’re essentially hiring a professional to manage many of these complexities for you. The complexities don’t necessarily go away, but most of them happen behind the scenes. Especially over time, this offers a cleaner view of where you’re at and where you’re headed, which can in turn make it easier to maintain your investment stamina.
A quality fund manager can also often add value to your experience. For example:
Investment success comes from investing according to a plan that makes sense to you. It also should make sense for you, given your goals. It should increase your ability to build the wealth you need, while managing the risks involved. As important, it should be simple enough to stick with—basically forever.
At least on paper, direct indexing offers some of these qualities. But why try to dismember an efficient machine into its individual parts? For the vast majority of investors, we can deploy a simpler, cost-effective, funds-based approach to closely track your personal financial goals. As “Fortunes and Frictions” investment blogger Rubin Miller said in an investment lessons post:
“Successful investors architect successful outcomes. An often under-respected element of elite investing is that more effort typically leads to worse outcomes. If you want to be an elite doctor or lawyer – wake up early, study hard, try to attend great schools. But if you want to be an elite equity investor, simply buy the global stock market for a low cost, and get the hell out of the way.”
If you would like to learn more about our evidence-based approach to portfolio management at Shore Point Advisors, contact us today by calling (732) 876-3777.
This post was prepared and first distributed by Wendy J. Cook.
Shore Point Advisors is an investment adviser located in Brielle, New Jersey. Shore Point Advisors is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Shore Point Advisors only transacts business in states in which it is properly registered or is excluded or exempted from registration. Insurance products and services are offered through JCL Financial, LLC (“JCL”). Shore Point Advisors and JCL are affiliated entities.
Let’s take a look at five of the most common financial adages and review why they are often much easier said than done.