As financial planners, we are often asked the question:

“Why not just invest in an index?”

Aside from the obvious reply: “Which index?” there are a multitude of hurdles investors
must cross long before debating the merits of “indexing” vs. “stock-picking.”
Additionally, you cannot invest in an index directly.

First, investors need to identify, quantify and prioritize their various and often conflicting investment goals. Investors also need to fully understand what is the amount of any losses they could tolerate at any given time. Without an appropriate roadmap, any investment strategy, active or passive, is simply a ship at sea, without a rudder or a destination.

Next, investors must understand how indexes are constructed. Indexes represent distinct segments of the world’s markets. At the macro level, selecting among the market’s segments requires both the background of a solid historic perspective and the realistic evaluation of expected future developments of world’s economies. Even index investing involves a high degree of active management.

Finally, at the micro level, indexing is based on the premise that markets are efficient. Paradoxically, markets are pushed towards efficiency by the invisible hand of active money managers trying to outdo “the market.” Some succeed. We believe successful managers have common identifiable traits that allow them to repeat their performance. Without their success, no one would try. If no one would try, the markets would become inefficient, undermining the very foundation of indexing attractiveness.

We have recently published an article in the Journal of Financial Planning. The article presents an in depth analysis of active and passive strategies and how they can play a role in your portfolio. If interested in learning more about active and passive investment strategies, read the entire article.

As always, we stand ready to help you and anyone you believe could benefit from our services. We are well equipped to guide our clients through the entire financial management process, from the initial planning stages, through implementation, to continuous monitoring and any necessary adjustments.