What Style Can Your Investments “Wear”? It Depends!
You get up in the morning and look in your closet. What will you wear today? It depends. Will you be spending your day inside or outside? What activities do you have planned?
The meteorological elements may change throughout the day. How will the climate you are in or are anticipating impact your plans for the day? What accessories will polish off the look? There are many variables to consider.
Do you want your investments to be attired in an active management style or a passive one? Yes, ladies, your investments can be “clothed” in two different management styles!
Passive Investing: What Is It and What Are the Benefits for Me?
The primary goal of passive or “Index” investing is to earn a “market return.” An index fund is a type of mutual fund, exchange-traded fund, or unit investment trust whose objective is to mimic or replicate the performance of a specific market indices.
There are approximately 5,000 US indices and multitudes more if you look internationally. The main benefits you can expect when investing passively include:
Very Low Internal Expenses
Because there is no managerial oversight, no one is “picking individual holdings,” the cost for passive investing (also known as expense ratio) is much lower.
These investments are always clear on what is held within them. It is always buy and hold within the “Mandate” of the Index fund.
Because they are buy and hold (no turnover), passive investments work like an individual stock. Simply put, the capital gain or loss is not “realized” by the individual until the holding is sold.
Passive investments spread your total risk over a broad market. This does not protect you from systemic market risk, however,
What Makes Active Investing Different and What Does It Give Me?
The primary goal of active investing is that an investor can achieve an overall better return by actively buying and selling securities. Because there is research, analysis, and other considerations, this strategy entails higher expenses.
The benefits of active investing are:
Managers seek out “diamonds in the rough.” They look at an economic environment and discern direction on where the opportunities may lie based on interest rates or sectors of the economy that may be thriving or struggling.
They are doing fundamental research on companies and industries based on national and global economies. They are not bound by an Index of holdings.
You can be dynamic with when to buy or sell holdings. They can tailor tax efficient purchases and sales to mitigate or manage what gets passed on to an investor.
If someone is in the distribution season of life, this can keep more money in your pocket! Active investment can work for or against you based on how closely you are working with your advisor and the underlying investment managers.
Questions to Ask Yourself
Before making any kind of decision, you will be wise to ask yourself the following questions:
What is our current economic climate?
Across the world, right now, I see it as stormy with increasing chances of rough weather! I also know the storms will pass. When? That is uncertain. I do know that innovation thrives in adversity.
The world we have a year from now will look very different and better than the world we live in now. I call myself a realistic optimist.
What Do You Want Your Money to Do for Yourself and Others?
In the fall season of life, the distribution season, you need to address issues around liquidity, lifestyle, longevity, and legacy.
Do You Have Tax Considerations?
Compare our current lower tax rate environment to what your taxation can be in the future, given how much our government is currently pushing into our economy.
The Whole Picture
Choose your perfect outfit and embellishments for today’s weather and the type of activities you are looking forward to. With your investment management style, verify you are looking at the economic, political, and taxation elements you are headed into as well as the life experience you want.
If you are fortunate enough to have clothes in your closet and some bling to choose from, you have a responsibility to do your dollars differently. We are being called on to show up in new ways using our financial resources as a flow of our intentions in a world beyond ourselves.
Have you considered the style of your investments? Do you prefer to be passive or active in your investing? Why? Which benefits do you consider worth pursuing? Please share your thoughts and experiences with our Sixty and Me sisters!