Although indexing can be done on one’s own, there is a high value
to working with a qualified Registered Investment Adviser (RIA). Many
RIA’s have been registered with the Securities Exchange Commission
(SEC) and can provide valuable ongoing advice and education. A study
by DALBAR Financial Services found that active investors who invest
on their own are more apt to attempt market timing and less inclined
to stay invested in a mutual fund for an average of 2.6 years. This
is where the investment advisor can help. A good investment advisor
supports the process of indexing, encourages long-term buy and hold
and rebalancing strategies, advises prudent investing through the ups
and downs of the market, and builds a long-term relationship with the
client.
There are myriad advisory options available to today’s investor.
This plethora of resources can be confusing and disconcerting for the
average investor. It is often difficult to know whom to trust. Many
investors seek advice from stockbrokers, insurance sales reps, or commissioned
financial planners. These types of advisers are customarily paid to
sell products rather than help investors solve problems or make wise
investment decisions. Investors often question whose best interest these
advisors have in mind - their own or the investors’? A commissioned
based pay structure often sets up the appearance of a conflict of interest
to the prospective investor.
In comparison, a fee-only adviser keeps the best interests of the client
in mind, because neither the advisor nor any related party receives
compensation that is contingent upon the purchase or sale of any financial
products. These advisors provide investors with comprehensive and objective
financial advice for a set fee that reflects a percentage of the market
value of a managed client portfolio (often 1%). Since the fee is dependent
on the size of the portfolio, both the adviser and the client make more
money as the portfolio grows.
Index
Funds Advisors (IFA) is a fee-only independent
financial advisor that provides optimized wealth management by utilizing
risk-appropriate, returns-optimized, and tax-managed portfolios of
index funds. IFA founder, Mark Hebner and the team at IFA have done
extensive research as shown on this web site and the #1
ranked book on index funds. This research leads our clients
to the optimal money management strategy, net of our advisory fees and
taxes. IFA completely avoids the futile and unnecessary cost-generating
activities of stock, time, manager,
and style picking.
The IFA advice is based on the highly respected research
indexes designed by Eugene Fama and Kenneth French and documented in their
empirical and peer-reviewed publications, including those ranked
#1, 8 and 9 out of over 10 million downloads on the Social Sciences Research
Network. Our current and independent advice incorporates 79
years of IFA Indexes and Indexfolio risk
and return data, third generation index fund designs and 25 years of refined
passive trading techniques employed by Dimensional Fund Advisors (DFA.)
IFA does not accept payments from DFA or from any other recommended investments.
IFA is exclusively paid by its 967 clients for its advice on the optimal wealth
management of approximately $900 million in assets under management, as of April 2007.
IFA adds value
through matching people with portfolios by carefully
qualifying and quantifying 5 dimensions of an investor's Risk
Capacity and matching it to 5 dimensions of a portfolio's Risk
Exposure. This process produces investor-specific optimal returns
by applying the IFA proprietary concept of 10dRisk™. IFA
obtains academically identified capital market rates of returns
for its clients from about 16,000 public companies in the U.S.
and about 35 other countries around the world. IFA then
designs highly tax-managed and low cost trading strategies, maintains
ongoing proper risk exposures through rebalancing, manages cash
inflows and outflows, and provides monthly
and inception to date detailed measurements of client performance
relative to the IFA Indexes and other traditional benchmarks.
This ongoing reporting on performance, gains, income and tax reporting
is exclusively available at IFA and adds significant value since
measurement is essential to improvement. IFA also provides reports
detailing its clients performance since the inception of the firm
in 1999, compared to the client's risk-appropriate IFA Indexfolios
and the very low dispersion among clients in each Indexfolio.
12.2.2
Dimensional Fund Advisors
Dimensional Fund
Advisors (DFA) now makes their low cost, institutional index funds available
to individual investors through DFA approved registered financial advisors.
This is a great opportunity for investors, because these funds were
previously available only to institutional investors. DFA’s funds
are designed based on the principles of efficient markets, diversification,
asset allocation, and the relationship between risk and return. DFA
works with many of the top academic financial economists who provide
findings and strategies based on empirical research. DFA also minimizes
trading costs that negatively affect portfolio performance.
DFA funds provide
investors with the following benefits:
• Engineered
exposure to risk factors that generate higher expected returns
• Low expenses
• Low taxes, including tax-managed index funds
• Improved trading and engineering that adds value to portfolio
construction
• Low turnover rates due to the passive investing approach
• Asset class persistence; no style drift
Index Funds Advisors
(IFA) is one of the many approved RIA’s approved to offer DFA funds
to individual investors. IFA provides special online services and resources
that educate clients on the principles of investing, including a Risk
Capacity™ Survey that matches individual investors with specific
portfolios that yield optimal returns. This matching is achieved by
carefully measuring an investor’s Risk Capacity™ and risk
exposure. A Risk/Return Calculator and a Portfolio Simulator are also provided to compare the expected
risk and returns of all 20 Index Portfolios to alternative investments.
12.2.3
Rebalancing Portfolios
Rebalancing
a portfolio is very important maintenance strategy to achieve long-term
investing goals. It is best for
an investor to hold a portfolio that matches their Risk Capacity™,
a concept that can best be measured through a Risk Capacity
Survey.
An annual checkup of risk capacity is a prudent time interval. Periodic rebalancing
must be done to maintain a portfolio’s asset allocation or risk exposure and to ensure that the portfolio continues to reflect the level
of risk an investor has the capacity to hold.
For example, after a thorough evaluation
of risk capacity, an investor may be matched to an index portfolio of 65% equities, 35% fixed income. After a year of increased prices, the equity portion of the portfolio rises to 75%, with fixed income
at 25%. Or after a market decline, you may discover that your allocation is now 60% equities and your fixed income is 40%.
These shifts in asset allocation are to be expected, as index values
change at different rates. Rebalancing back to the initial
or target allocation keeps the portfolio at a consistent risk exposure and therefore, at a consistent expected return.
In either examples, a certain set of rebalancing trades would correct the asset allocation back to 65% equities and
35% fixed income.
Rebalancing often involves selling high and buying low. Many investors make the costly mistake of doing the opposite,
buying high and selling low, resulting in a misalignment of risk capacity and risk exposure. Selling indexes that have performed well and buying more of the indexes that have performed poorly is often an emotionally difficult task for investors,
as it seems counterintuitive. This resistance to rebalancing
often leads investors to either do nothing, or even worse, to sell the
losers and buy more of the winners, going completely against the prudent
investment principle of rebalancing. A portfolio that becomes more or less risky due to lack of rebalancing
also leads to less than optimal returns, defeating the purpose of investing
in a risk appropriate portfolio in the first place.
Figure 12-1
There are certain times when it is wise to consider changing index portfolios because of a change occurs in the investor’s capacity
for risk. These times include:
a) when investment goals change
b) when income level significantly changes
c) when number of dependents changes
d) at retirement
e) when life conditions change - medical, emergencies,
marriage, divorce, etc.
To determine the impact of these changes, it is best to take the risk capacity survey again and review the results with an investment advisor.
12.2.4
Rebalancing Formula
The logic behind
rebalancing is that it maintains a consistent level of risk exposure.
There are several rebalancing formulas that are used in the investment
industry. Although rebalancing is necessary to maintain risk,
it can incur transaction fees and taxes.
A good rule of thumb is to test a portfolio quarterly and rebalance
when necessary, which typically occurs about once a year. In addition, an investor's
risk capacity should be measured once a year or upon any significant
change in their lives.
What is considered a “need to rebalance” depends on what
formula is used. One common approach is the 5 percent/25 percent variance
trigger. This rule states that it is time to rebalance when a general asset
class either a) moves an absolute 5% or b) 25% from its original allocation
percentage, whichever comes first. Rebalancing among several taxable
and tax-deferred accounts is a very complicated process, but necessary so that all assets can be considered. Highly sophisticated
software is required with many factors to be considered, such as
the need for liquidity versus the need for reduced volatility. This
information has a significant impact on the tax liabilities generated
by the placement of indexes in different accounts. Rebalancing is made easier when there are routine deposits or withdrawals from the portfolio because
rebalancing can be achieved with the cash flows.
12.2.5 Tax Loss Harvesting
In addition to rebalancing, taxable investors should also consider a tax-savings tool called tax loss harvesting. A market downturn provides you with an opportunity to examine your specific situation and to identify whether you can save on a future portion of ordinary income (as shown below) and on capital gains taxes that are generated each year due to distributions from your mutual funds, rebalancing of your portfolio, or the sale of funds for your cash needs. Each year taxable accounts will generate some capital gains. As noted in an on-line financial dictionary, “For many investors, tax gain/loss harvesting is the single most important area for reducing taxes now and in the future.”
Because of the tax offset value of realized capital losses, investors should consider the following strategy after stock markets have experienced a decline:
1. Sell those index funds in your taxable accounts that have declined in value by approximately 10% or more and have a minimum capital loss of about $10,000, based on your average cost basis. This sale will create a realized short term capital loss on the sold funds held for less than 12 months and a long term capital loss on sold funds held more than 12 months.
2.
Then immediately invest the proceeds of the sale into a substantially
different broad market index fund, such as the S&P 500 (if you
are not selling the S&P 500). Please note that many index funds (especially those without transaction costs) have a minimum holding period requirement. For example, the Schwab S&P 500 funds (SWPPX and ISLCX) carry a 2% redemption fee on shares held less than 30 days. Also, since the exact value of proceeds will
not be known until the close of the market, about 85% of the proceeds will
be invested the same day and the remaining 15% will be invested subsequently.
3.
Purchase the original funds back on or after 31 days from the sale
of the original funds. This 31 day period avoids the IRS
Wash Sale Rule (see p. 55 of this pdf). The IRS Wash Sale Rule states
that a wash sale occurs when you sell or trade stock or securities at
a loss and within 30 days before or after the sale you: 1) buy substantially
identical stock or securities, 2) acquire substantially identical stock
or securities in a fully taxable trade, or 3) acquire a contract or option
to buy substantially identical stock or securities. If you sell stock
and your spouse or a corporation you control buys substantially identical
stock, you also have a wash sale. If you buy the substantially identical
stock in your IRA, you also have a wash sale. (more on this subject)
After the 31 days, your portfolio will also be reviewed and traded as needed for the purchase of the sold funds and rebalancing, so that your overall risk exposure will be in approximate alignment with the asset allocation of your original index portfolio. Whenever IFA invests additional cash deposits or sells funds for withdrawals, we review the portfolio for rebalancing needs.
4.
Report the realized capital losses to your accountant to offset future capital gains and a portion of your income, reducing future tax bills. A gain/loss report from your custodian and/or IFA will indicate the gains and losses for the tax year. Individuals can use up to $3,000 of capital losses to offset their income ($1,500 for a married person filing separately). If you realized $10,000 in capital losses, a taxpayer would be able to apply $3,000 of their net capital loss to reduce their taxable income by $3,000, leaving $7,000 in unused net capital loss. Unused capital losses can also be carried over until they are used up. If net long-term capital loss exceeds net short-term capital gain, the excess becomes long-term capital loss in the following year. If net short-term capital loss exceeds net long-term capital gain, the excess becomes short-term capital loss in the following year. The value of these tax offsets will vary with your income, your existence of long or short term capital gains, changes to the tax code and your state of residence. (see US Income Tax/Capital Gains and Losses)
Tax loss harvesting is not market timing. By transferring the money into another index fund or exchange traded fund, such as an S&P 500 index fund or ETF, investors can remain approximately fully invested (the first day is slightly less because we do not know the exact settlement price of the sales) in a broad market index that is not a substantially identical stock or security. Additionally, certain custodians charge no transaction fees when you buy and sell their specified S&P 500 index fund. However, there are transaction fees to be paid to the custodian (Schwab, Fidelity or TD Ameritrade) for the sale and purchase of most mutual funds or ETFs. No additional compensation or fee is paid to the investment advisor (IFA).
While tax loss harvesting is a valuable tool, there are some risks associated with it. As such, one should carefully consult with a financial advisor prior to making the decision to tax loss harvest. Examples of such risks include:
1. If you sell funds at a 10% long term capital loss, buy the S&P 500 index fund and it increases by more than 5% during the 31 day interval, the value of a 10% realized long term capital loss could be offset by a 5% realized short term capital gain from the sale of the S&P 500 fund (assuming a 35% tax rate on short-term gains and ordinary income, and 15% on long-term gains, but not considering your additional state tax, if any). There is about a 20% probabilty of this occuring, based 50 years of monthly S&P 500 data. For this reason we will only sell funds, or combination of funds, that have losses of about 10% or more.
If you have a 10% short term capital loss from your sale, a 10% short term capital gain from the S&P 500 index fund will be required to offset the tax benefit and it is extremely unlikely that the S&P 500 will increase by 10% in one month. In fact, over the last 50 years, the S&P 500 index has increased 10% in one month only 1.7% of the time.
2.
During the minimum 31 day interval required to keep the loss, the
S&P 500 index fund, or other substitute broad market fund, will
almost certainly obtain a different return than the funds you sold,
because they are different indexes and not substantially identical
stocks or securities. This risk is the only reason the IRS allows
this loss to be kept by investors. Due to the short interval of 31
days, the difference in value should be small, but there is a risk
of it deviating more than 3%, which may be in excess of the tax benefit
of the harvested loss, depending on your state residence. The chart
below shows the frequency with which various asset classes beat the
S&P 500 by 3% or more, based on 50 years of monthly returns. Over
the last 50 years ending 2007, Index Portfolio 90's (an
allocation of 11 equity indexes) average monthly return has been
1.14%, with a standard deviation of 4.01%, while an S&P 500 index
fund has averaged 0.95% with a standard deviation of 4.13%. On a
purchase of $100,000, you would expect the S&P 500 fund to earn
about $190.00 less than Index Portfolio 90 over a 31 day period,
with a variance relative to the standard deviation of the monthly
returns. However, it would be rare that the variance exceeds $2,400,
which is the approximate tax credit value of a $10,000 harvested
long term capital loss for a California resident (other states will
vary). If that occurs, the tax loss harvesting trades would have
been done with no benefit to the investor and possibly at a cost.
You should be aware of this risk before you pursue any tax loss harvesting.
Figure 12-2
3. There are transaction fees to be paid to the custodian (Schwab, Fidelity or TD Ameritrade). No additional fee is paid to the investment advisor (IFA).
Despite the risks mentioned, IFA frequently advises clients to harvest losses under the conditions described above. Of course, your decision to tax loss harvest should be carefully weighed and discussed with your accountant and a qualified fee-only advisor who carries the fiduciary standard to act in your best interest. If you would like to take advantage of IFA’s expertise in tax loss harvesting, or simply learn more about whether such action is appropriate for you, please call 888-643-3133 to speak with one of our many qualified investment adviser representatives.
Any tax or legal information provided is a summary of our current understanding and interpretation of the current income tax regulations and is not exhaustive. Investors should consult their tax advisor or legal counsel for advice and information concerning their specific situation. Neither Index Funds Advisors, Inc., nor any of its representatives, may give legal or tax advice.
12.2.5a Mutual Fund Distributions
Once you are invested and relaxed, an understanding of distributions of dividends and capital gains is important for taxable investors.
Dividend distributions normally occur quarterly for equity funds (monthly for fixed income funds) and the final quarter of the year is the highest because it also includes capital gains distributions. Fortunately, index mutual funds have a lower tax impact than actively managed mutual funds, so it is relatively less of a concern. The tax implications are only important for taxable accounts. The dates that affect distributions from mutual funds are as follows:
Record Date (for example: 12/09/08) - If you owned the fund making a distribution on this date, the Ex-Dividend Date and Payable Date amounts will apply to you.
Ex-Dividend Date (for example: 12/10/08) - This is when a particular fund makes adjustments for its planned distributions to Shareholders. The value of your account temporarily declines because the NAV (Net Asset Value) of each fund is reduced by the planned amount of distribution on the Payable Date.
Payable Date (for example: 12/15/08) - This is last date when the fund is required to pay the distribution to shareholders, although is most often actually paid earlier. The distribution amount is reinvested automatically in additional shares of the fund (unless you have chosen to receive them in cash).
1) Your account net value will be unchanged because the NAV for each fund is temporarily reduced on the Ex-Dividend Date, but then distributions are reinvested in additional shares (at the lower NAV) on the Payable Date, resulting in an account increase amount equal to the distribution, so it is "a wash" for the value of your account.
2) (For Taxable Accounts Only) Your taxable gains are increased by the distribution amounts whether paid in cash or reinvested. Even if you bought the fund shortly before the taxable distribution, the tax applies to you. This is the process that mutual funds are required to follow to pass along profits to shareholders. Because you are paying taxes on distributions, a positive result is that your cost basis increases by that amount so that future taxes are lower if you eventually sell the fund.
It is IFA’s practice to withhold purchasing those funds in taxable accounts whose estimated tax hits exceed their average return (over the last 50 years) for the time period in question. The estimated tax hits are calculated from the estimated distributions provided by the mutual fund company. For the DFA funds used by IFA, the currently anticipated 2008 “stop buy” dates are as follows:
November 10th: Two Year Global (DFGFX)
November 17th: Five Year Global (DFGBX) and Global Real Estate (DFGEX)
November 24th: Five Year Government (DFFGX) and One Year Fixed Income (DFIHX)
December 8th: All remaining DFA Equity Fund
This is not intended to be a complete explanation of the distribution process, or tax guide, and you should consult your Tax Advisor for your specific situation. (See more information here.)
12.2.6 Financial Advice
Financial
advice is a prescription that guides investors to make decisions that
best serve their interests. This advice is most effective when the following
are carefully taken into consideration.
1. An accurate analysis
of the cognitive and emotional strengths and weaknesses of the clients
that relate to making decisions.
2. The client's
occasionally faulty assessment of their own interests and desires.
3. The relevant
facts about investing that the client may be ignoring.
4. The limits of
the client's ability to accept advice and to accept the results of the
decisions made over time.
In the article titled
Aspects of Investor Psychology by Daniel Kahneman and Mark Riepe
that appeared in a 1998 edition of Journal of Portfolio Management,
a very good checklist of the responsibilities of investment advisors
was provided. It is useful in evaluating which advisor may be best for
you. The authors asked, "How frequently do advisors do each of
these items?"
1. Encourage clients
to adopt a broad view of their wealth, prospects and objectives.
2. Encourage clients
to make long-term commitments to investment policies.
3. Encourage clients
not to monitor results too frequently.
4. Discuss the possibility
of future regret concerning the outcome of their investments.
5. Ask themselves
if a course of action is out of character for their client.
6. Verify that the
client has a realistic view of the odds, when a normally cautious investor
is attracted to a risky investment.
7. Encourage the
client to adopt different attitudes towards risk for small and for large
decisions.
8. Attempt to structure
the client's portfolio to the shape that the client likes best (such
as insuring a decent return with a small chance of a large gain). This
can be accomplished in a well prepared Risk Capacity™ survey.
9. Make clients aware of the uncertainty involved in investment decisions.
10. Identify the
aversion of clients to the different aspects of risk and incorporate
their risk aversions when structuring an investment program.
It is clear from
step one that if investors want to discover their most likely deterrent
to successful investing, they need only to look in the mirror. Advisors
who are aware of the above psychological factors are most likely to
provide value to their client's investing experience. (See this additional article on Behavioral Finance)
12.3.1 Active
Investors Procrastinate
It is often said
that investors procrastinate when it comes to changing their investments.
Once a prudent strategy has been identified, investors need to take
action and move their investments to the new strategy that meets the
four acid tests of expected risk, expected return, expenses, and taxes.
12.3.2
Active Investors “Go It Alone”
A second problem
is that investors get in their own way of success. As the legendary
investor Benjamin Graham stated, “The investor’s chief problem,
and even his worst enemy, is likely to be himself.” An investor
may want to consider the fees paid to an index fund advisor as a casualty
insurance premium, insuring the investor against himself.
12.3.3
The Media Wants Investors to Worry
The media has a
propensity to alarm investors with hyped messages of gloom and doom
and make people feel they need to rely on financial news shows and investment
gurus for minute to minute updated information on the stock market.
It benefits the media to have investors hooked into financial and economic
news stories and articles.
This 12-Step Program teaches investors that index funds investing does
not require constant vigilance, following daily returns, or listening
to today’s star money managers. Readers have learned that prudent
investing means not worrying about the ups and downs of the market.
It means being able to invest and relax.
Asset
Class Allocation
Research has shown that asset class allocation is the most important
factor in determining a portfolio’s expected return level. In fact,
asset allocation is 100% responsible for the variance in investment
performance. Since an index fund is invested solely in the securities
or fixed income (positions) that comprise a discrete asset class, it
possesses the same rules of ownership, characteristics, and expected
performance of the comparable index.
Indexing makes it easier to rebalance and maintain a consistent asset
allocation over time, rather than participate in the style drift of
active management. An actively managed fund generally does not stay
invested in the same asset class, so it cannot reliably capture the
performance of any particular asset class. Active managers often buy
and sell their fund’s securities due to the pressure to outperform
the market, which results in high trading costs and the adverse effects
of style drift.
Minimization of Investment
Costs
Index funds have minimal investment costs. They do not have the high
annual operating expenses of active funds. These consist mainly of investment
advisory fees that compensate an active fund for its manager’s
efforts at stock picking and 12b-1 fees that reimburse it for its sales
and marketing costs. Index funds also do not have the high trading costs
characteristic of many active funds. Most of these costs are due to
the efforts of active fund managers to implement their stock picking
ideas to beat the market. Finally, very few index funds charge commission
loads, while most active funds carry some type of load.
The investment costs associated with active funds have generally increased
over the last decade, while those of index funds have decreased steadily.
Although there is always the natural possibility that this gap will
narrow in the future, all evidence indicates just the opposite. The
investment advantages of low costs do not depend on Lady Luck.
Minimization
of Taxes
By maintaining low portfolio turnover, index funds minimize realized
capital gains, which keeps capital gains taxes low. Minimization of
capital gains taxes results in a comparatively small difference between
an index fund’s pre-tax and after-tax performance. This makes an
index fund a tax efficient investment. In fact, investing in index funds,
especially tax-managed index funds, results in such low taxation that
it is almost like putting your entire portfolio into an IRA. The best
way for a taxable-basis investor to minimize taxes and thus more efficiently
compound investment wealth is to assemble a portfolio of index funds
and keep it for life.
Managers of active mutual funds typically manage money as if taxes don’t
matter. As a number of studies have shown, however, taxes do matter.
They actually have an enormous negative impact on investment performance.
Investors who ignore this and invest in active funds are relinquishing
money to Uncle Sam that could otherwise be available to compound into
future wealth.
Reliable
Investment Performance
An investor who holds a portfolio of index funds is assured of the reliable
investment performance of free and efficient financial markets. An index
fund invested in an asset class will always earn the returns of that
asset class. Thus, indexing is an investment strategy that delivers
what it promises to investors.
In comparison, the returns of active funds are erratic and less reliable
than index funds, sometimes outperforming the market and sometimes underperforming
it. These variations in performance are caused by the market’s
unpredictability. They can also result from style drift, when the fund
manager modifies the fund’s asset class mix.
Both U.S. and international financial markets are becoming more efficient,
which indicates that investors and money managers who engage in stock
picking and time timing must take greater and greater risks to beat
the market. The more educated investors become on the efficiency of
markets, the more that active money managers will have to defend their
investment strategies to try to beat the market.
A
Simple and Understandable Investment Strategy
Since indexers realize they cannot beat the market, they can focus on
building wealth over the long run by holding efficient, globally diversified
portfolios. Passive investors stay with their investments and rebalance
only when necessary in comparison to active investors who constantly
seek ways to beat the market, spending a lot of valuable time reading
investment newsletters, reports, magazines, and other media driven publications.
An
Easier Way to Track Investment Performance
Tracking the performance of index fund portfolios against their respective
benchmarks is simple, since the return earned by an index fund reflects
the return of the comparable index. On the other hand, the performance
of active funds is more difficult to track against any benchmark. Although
many funds are compared to the S&P 500, it is not an accurate comparison.
Increased
Leverage and Compounding of Investment Wealth
Indexers can leverage their funds and thus more efficiently compound
investment wealth. Since index funds carry no cash reserves, indexers
are invested 100% in the market at all times. Indexers are also better
able to leverage their funds because they can keep the money invested
that an active investor would need to pay the commissions and high annual
expenses and taxes associated with active mutual funds. Seemingly small
amounts of money continually compound through the years and help to
accelerate the accumulation of wealth for indexers.
Invest
like Institutional Investors
Large institutional investors such as corporate pension plans and educational
endowment funds that invest billions of dollars can certainly afford
to hire any money manager in the world. Yet they continue to index a
significant portion of their investments. Individual investors can follow
the example of these institutions and reap the same benefits by investing
in DFA funds.
Invest in Index
Mutual Funds
The 12-Step Program
to Index Funds has been written for investors who are engaged in any
active investing practices, including stock picking, time picking, manager
picking, or style picking, with the intent of educating and motivating
the active investors of today to transform into active investors of
yesterday.
This Program has provided research and education about the advantages
of indexing over active investing. The information that has been presented
shows clearly why index funds are best for achieving investors’
goals. With index funds, the stress and pressure of investing melts
away, allowing the investor to receive the market returns of a diversified
portfolio that is matched to Risk Capacity™, all at a very low
cost. Stepping off the emotional roller coaster of active investing,
a recovering or reformed active investor experiences a new peace of
mind. Instead of panicking, an index funds investor can now invest,
relax, and go to the beach.
In order to invest,
Index
Funds Advisors would be honored to assist you. Because
we have demonstrated our understanding of Modern Finance, we have
been approved by DFA to purchase their mutual funds for our clients.
These funds are not available directly to individual investors.
They are designed and priced for large institutional funds. We
think of it as an investment club for the "really
smart money."
Through our custodians, Charles Schwab, Fidelity Investments or TD Ameritrade,
we can purchase these funds for your brokerage or 401k account.
We will need to speak to you, deliver the necessary documents to you,
such as our ADV, and assist you in establishing an account with us.
Each quarter we will review your portfolio and rebalance the asset
allocations as needed. If you have any questions, please call us toll
free at 888-643-3133.
With index funds, the stress and pressure of investing melts away, allowing
the investor to receive the market returns of a diversified portfolio
that is matched to risk capacity, all at a very low cost. Stepping off
the emotional roller coaster of active investing, a recovering or reformed
active investor experiences a new peace of mind. Instead of panicking,
an indexer can calmly invest without fear or tension.
Just like with the original 12-step program, the first step is to admit
you’re powerless and your life has become unmanageable. In this
case, the admission of powerlessness is a lack of control or prediction of the market movements. The climbing of the 12 steps leads investors to the light
of intelligent risk management and a realization that active investing
is a losing game. The painting below depicts this journey.
Painting title: Journey to Tradeless Nirvana
When investors reach this pinnacle of investing insight, they are well on their way to entering what we like to call "Tradeless Nirvana."
Congratulations on completing the 12-Step Program! It’s now time
to take action, so you can invest and relax.
1. Which is NOT a fundamental principle of prudent investing?
a)
stock picking
b) the need to build efficient portfolios
c) the importance of long-term investments
d) passive investing with index funds
2. Why should
a portfolio be rebalanced?
a)
To keep risk exposure matched with Risk Capacity™
b) Market changes may change the balance of
the portfolio
c) An investor’s financial situation or
investment goals may change
d) Because all the day traders think it’s
a good idea
e) a, b, and c
3. The most
efficient way to invest is:
a)
Pick your 5-10 favorite stocks and trade on these as frequently as possible.
b) Buy the stocks that have performed the best
over the last six months.
c) Join an investment club.
d) Invest in a globally diversified portfolio
of index funds, and invest for the long run.
e) Invest only in Treasury bills and Certificates
of Deposit.
Now that you have completed
the 12-Step Program for Active Investors, you can send an e-mail with your phone number to
info@ifa.com. We will
call you to review your Risk Capacity™ Survey and to better understand
your complete circumstances relative to your portfolio.
