Passive Make is a philosophy that embraces critical foundational investment theories that most individual investors would be well to adopt.
Risk management, diversification, low investment costs, tax efficiency and taming bad investor behavior, to name a few. But one aspect may be less apparent than others to those looking to build a portfolio. And that aspect is the quality of simplicity.
Ask any advisor or financial planner, and they can cite numerous nightmare stories about personal portfolios holding as many as thirty, forty, fifty or more individual positions. Its highly likely that these complex patchwork quilts were hastily sewn together, the culmination of years of random acts of finance, absent logical thought or stated objectives, on the skewed notion that more is better, believing that this is how you manage risk through diversification.
A simpler, and far better approach for growth investors is to assemble a smaller, tighter package of ETFs that deliver properly diversified total market exposure, and limits both equity concentration and overexposure, holding the same stock in too many funds. For instance, many investors unwittingly may have an over-concentration in Amazon, since the twenty mutual funds they own all hold Amazon!
Friar William of Ockham’s Razor Theory, also known as the “law of parsimony,” is the problem-solving principle that the simplest solution tends to be the right one.
There is a better way.
By way of example only (this is not a recommendation!), by owning a portfolio of four equally weighted ETFs (iShares Core S&P (IVV), iShares Core S&P Mid-Cap ETF (IJH), iShares Core S&P Small-Cap ETF (IJR) and iShares Core MSCI Total International Stock ETF (IXUS)), an investor can maintain exposure to the domestic and global equity markets in a tax-efficient, cost-efficient and risk-efficient manner. Now, don’t go running off to do this!
Actually investing your money takes personalized planning, and while your optimum portfolio is out there with your name on it somewhere, the preceding example may fit one in a thousand real-life investors.
But the point that remains is this: Passive investing with low-cost, tax-efficient Exchange Traded Funds offers risk-management and diversification more efficiently, more effectively and more cost efficiently than high-priced, complex investment management approaches.
…an intelligently assembled and individually tailored ETF portfolio is the only way to go…
Unlike mutual funds, ETFs trade like stocks, in that they are marketable intraday, so you don’t have to wait until the next day to see what they are worth. And ETFs don’t saddle you with annual capital gains declarations, like mutual funds even when they haven’t made money. And the internal expenses are low, low, low. The four piece ensemble above would have an annual cost of about 8 or 9 basis points, give it take a beep!
If you are an investor who has recognized that their own unrestricted behavior has caused self-inflicted financial damage, good. Behavior identification is a great first step. Congratulations!
Now, if you take steps to modify those damaging behaviors and “first, fix the investor”, then the next natural step is to “fix the investments,” and an intelligently assembled and individually tailored ETF portfolio is the only way to go.
First, fix the investor, then fix the investments!