Recommending Passive Funds
Posted by admin on August 25, 2015
We Recommend Passive Funds
We recommend a diversified portfolio of passive funds
- We recommend that you hold mutual funds rather than individual stocks or bonds – mutual funds are less risky than the individual securities.
- Individual securities are risky.
- Each security’s risk consists of a market or shared component and a security-specific component.
- Investment returns compensate you only for the shared or market component.
- You can “average out” the security-specific component by holding many securities – you can accomplish this very efficiently with mutual funds
- We recommend that you hold a diversified portfolio of mutual funds.
- Diversification – holding multiple assets with returns that are relatively uncorrelated with (unrelated to) each other – offers greater expected return for the same level of risk, or less risk for a given expected return
- You can diversify – hold multiple uncorrelated assets – more efficiently, less expensively, with mutual funds than with individual securities
- Passive funds offer more expected return at less risk than actively managed funds
- Passive funds tend to cost less (have lower expense ratios) than actively managed funds
- On average, probably as a result of their lower expenses, passive mutual funds tend to outperform actively managed funds that invest in the same asset classes
- Passive funds have less risk than actively managed funds – when you buy an actively managed fund, you accept both the risk of the relevant security universe and the manager risk – the risk of how well the manager will perform relative to the relevant universe
It is very important to understand several facts about investing in general, and passive fund investing in particular:
- Past performance may not be indicative of future results. Therefore, you should not assume that the future performance of any specific investment, investment strategy or product that this Website refers to directly or indirectly, or even indirectly via link to any unaffiliated third-party Website, will be profitable or equal to corresponding indicated performance levels.
- Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be either suitable or profitable for your investment portfolio. You should not assume that any information presented and/or made available on this Website serves as the receipt of, or a substitute for, personalized individual advice from the adviser or any other investment professional.
- Historical performance results for investment indexes and/or categories generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee. Incurring investment management fees would decrease historical performance results.
Selecting Specific Mutual Funds
For each asset class, Sensible Financial selects a small number of mutual funds (usually one or two) that follow asset class performance closely at low cost (Sensible Financial accepts no payments of any kind from any mutual fund provider).
Collectively, these funds make up a well-diversified portfolio, because
- They are individually diversified (most hold literally hundreds of individual issues).
- They are diversified relative to each other – there is little overlap between the asset classes and funds.
Types of Accounts
Sensible Financial manages assets in several kinds of accounts:
- Taxable accounts such as brokerage accounts, mutual fund accounts, or savings or checking accounts;
- IRA accounts such as Traditional, Roth, or Rollover IRA accounts. We can also help with SEP or SIMPLE IRA accounts;
- 401(k) and 403(b) accounts. We can manage assets in many 401(k) and 401(b) accounts, and report allocation and provide rebalancing advice for most. See the discussion of custodians above.
- 529 and Coverdell (college savings) accounts. Unfortunately, the most efficient 529 accounts rarely support electronic download of transaction and balance information.
- Trust accounts.
- If you have other types of accounts, please ask – we are quite likely to be able to accommodate you.