Investors are used to pouring money into index funds and seeing gains. But are those the best retirement bets?
Rising rates, inflation, and geopolitical upheaval have challenged index funds. Investors wonder if index funds will still be the best ETFs and mutual funds and how active strategies will fit into their retirement portfolios.
Retirement Index Funds Are Hard To Beat
Fund managers struggle to beat market indices over time, as is well-known. Last year was the third-worst for active managers, according to S&P Dow Jones Indices’ biannual SPIVA (S&P Indices vs. Active) US Scorecard for 2021.
Despite good absolute returns, 80% of domestic equity funds and 85% of active large-cap funds lagged the S&P 500. Even worse were mid- and small-cap funds. In the meantime, passive funds saw net inflows while active funds saw outflows.
That said, some market areas usually lean toward active management. According to Morningstar Direct, alternative and unconventional equity active funds saw net inflows at the end of March, and so did bank loans and intermediate core bonds.
Active vs. Index Retirement Funds
How should retirees or those planning for retirement compare active and passive index funds?
Active investing gets a poor rap because passive investment supporters don’t consider the reality of the investor situation. And retirement is one where active investing is important.
Simply put, we all are active investors because everyone buys and sells. Rarely does someone buy something, put it in a safe-deposit box, and never change it. So we all become active investors sooner or later. The question is, how active are we and whether it’s a quantitative, disciplined process?
Including Active Investing in Retirement
Active investment should always be part of a portfolio because it’s hard to foresee when to switch. Risk management and reducing losses are crucial for retirees.
If you take a hit early in retirement, you have less money to live on. If you restrict portfolio losses through risk management, you can be reactive to the market and lower overall losses.
For Significant Downturns, Look Beyond Index Funds
Diversification isn’t enough. It helps in short, shallow market downturns known as “baby bears” – corrections of 0-20%. Most retirees’ diversified portfolios can handle it. The concern is the “grizzly bear” – a 30-70% downturn.
All asset classes are connected during these prolonged downturns. Diversification isn’t a grizzly bear market protection. Risk management and active management are designed for grizzlies.
If the grizzly bear hits early in retirement, it punishes you. So, it’s crucial to protect retirement capital.
Combining Active and Index Funds?
Now it’s a perfect moment to explore active versus passive strategies.
Active and passive aren’t mutually exclusive; both are used in client portfolios. Passive investment has cost and market exposure advantages. While active investment can provide a complement or increased market exposure in some sectors you want to be exposed to.
Active can deliver a higher risk-adjusted return in uncertain markets where we are now. Our message isn’t only about returns. Our overall message includes risk, where active gets incorporated. We’re looking for the highest risk-adjusted return.
New Investors Favor Index Funds For New Money
Some of the greatest mutual funds and ETFs are on thin ice, with the S&P 500 down over 10% and the Nasdaq down 18%. Index funds gained $15.3 billion in the first quarter amid overall sluggish flows, while active funds lost $6 billion.
Market weakness likely prompted investors to buy index funds. Areas like alternative investments helped diversify portfolios as markets dropped. Alternative fund assets climbed 9.3% in the third quarter. That’s the third-highest growth rate of any category group since 2011.
Index Fund Active Investing
Investors can employ indexed strategies tactically or actively. Passive doesn’t mean inactive.
Investors can retain a core indexed strategy but pick between a market-cap-weighted or fundamental indexing strategy. Investors can then supplement their portfolios with market-weighted or active funds. Active funds typically handle less liquid areas like fixed income or emerging markets.
Be Aware of Fees
Long-term investing must be disciplined. And that means taking into consideration taxes and fees. People have been calling for active vs. passive investing for a long time, but it hasn’t worked out.
Some things have changed in the past year that haven’t changed in decades. Increasing interest rates to fight inflation is one of those changes. The decades-long easy monetary policy is ending.
The result will finally reward companies for excellent fundamentals, not just momentum. Being active and finding firms with a solid foundation is crucial.
Active investing should now encompass active product-level selection, like active mutual funds or ETFs.
Contact Information:
Email: [email protected]
Phone: 3604642979
Bio:
After entering the financial services industry in 1994, it was a desire to guide people towards their financial independence that drove Aaron to start Steele Capital Management in 2013. Armed with an extensive background in financial planning and commercial banking coupled with a sincere passion for helping people, Aaron has the expertise and affinity for serving the unique needs of those in transition. Clients benefit from his objective financial solutions and education aligned solely with
helping them pursue the most comfortable financial life possible.
Born in Olympia, Washington, Aaron spent much of his childhood in Denver, Colorado. An area outside of Phoenix, Arizona, known as the East Valley, occupies a special place in Aaron’s heart. It is where he graduated from Arizona State University with a Bachelor of Science degree in Business Administration, started a family, and advanced his professional career.
Having now returned to his hometown of Olympia, and with the days of coaching his sons football and baseball teams behind him, he now has time to pursue his civic passions. Aaron is proud to serve on the Board of Regents Leadership for Thurston County as the Secretary and Treasurer for the Morningside area. His past affiliations include the West Olympia Rotary and has served on various committees for organizations throughout his community.
Aaron and his beautiful wife, Holly, a Registered Nurse, consider their greatest accomplishment having raised Thomas and Tate, their two intelligent and motivated sons. Their oldest son Tate is following in his father’s entrepreneurial footsteps and currently attends the Carson College of Business at Washington State University. Their beloved youngest son, Thomas, is a student at Olympia High School.
Focused on helping veterans and their families navigate the maze of long-term care solutions, Aaron specializes in customized strategies to avoid the financial crisis that care related expenses can create. Experience has shown him that many seniors are not prepared for the economic transition that takes place as they reach an advanced age.
With support from the American Academy of Benefit Planners – an organization with expertise and resources on the intricacies of government benefits – he helps clients close the gap between the cost of care and their income while protecting their assets from depletion.
Aaron can help you and your family to create, preserve and protect your legacy.
That’s making a difference.
Disclosure:
Disclosure:
Investment advisory services are offered through BWM Advisory, LLC (BWM). BWM is registered as an Investment Advisor located in Scottsdale, Arizona, and only conducts business in states where it is properly licensed, notice filed, or is excluded from notice filing requirements. BWM does not accept or take responsibility for acting on time-sensitive instructions sent by email or other electronic means. Content shared or published through this medium is only intended for an audience in the States the Advisor is licensed in. If you are not the intended recipient, you are hereby notified that any dissemination, distribution, or copy of this transmission is strictly prohibited. If you receive this communication in error, please immediately notify the sender. The information included should not be considered investment advice. There are risks involved with investing which may include market fluctuation and possible loss of principal value. Carefully consider the risks and possible consequences involved prior to making an investment decision.
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