Index Investing

There are many ways to invest, but Index Investing continues to grow in popularity.  An index investor decides what market they want to invest in and can buy a fund that is designed to mimic the performance of that market. There are index funds that track the entire stock market, broad sectors of the stock market, as well as niche areas of the market.  There are also index funds that track international stock markets and many different areas of the bond market.

Construction of most index funds is based on market capitalization – larger companies have a greater weighting in the index.  However, there are many other ways to construct an index.  For instance an index can be created by weighting its constituents equally or by certain other financial characteristics.  These strategies are referred to as Smart Beta or Factor-based investing. 

Building a portfolio with index funds doesn’t mean being completely passive.  How a portfolio is allocated among the various asset classes needs to be continually reevaluated.  With an eye on the long-term, frequent shifts should be avoided. 


What are the advantages of Index Investing?
Low Fees Average fees for index funds are substantially lower than for comparable “actively” managed funds – typically about 75% lower!
More Control Each index fund is designed to closely track its benchmark index so you know what you are buying – an active manager can invest in unexpected areas.
Better Performance Research continues to show that index funds outperform active funds over the long-term.
Tax Efficiency Index funds don’t trade their holdings very often so they typically don’t generate as many capital gains as comparable active funds.
Diversification Through an index fund you can gain diversified exposure to specific area of the market.
Lower Trading Costs Index funds don’t trade their holdings very often so they typically have lower trading costs than comparable active funds – trading costs are built into fund performance.
Give us a call today to learn more about how we can help you incorporate Index Investing into your portfolio.

Socially Responsible Investing

SRI can also be referred to as Sustainable & Responsible Investing, Impact Investing, or Environmental Social & Governance Investing (ESG).

A lot has changed in Socially Responsible Investing (SRI) since it appeared on the scene decades ago. It was developed in response to certain investors (mostly large institutions) looking to avoid companies whose products or activities were involved in “bad” businesses, such alcohol, tobacco, gambling, pornography, or weapons production. Today, SRI is muearth-661447_640ch broader and is gaining popularity among all types of investors. Not only does SRI still involve avoiding certain businesses, but it also favors companies that exhibit positive practices with regards to a variety of environmental practices, social issues, and corporate governance.

SRI Facts

  • Mainstream – SRI has moved beyond just institutional investors as there is clearly increased interest among individual investors. Millennial investors will only make sustainable hands-1345059_640investing more popular.
  • Investment Choices – The array of choices for SRI has expanded beyond separately managed accounts geared for institutional investors and now includes mutual funds and low-cost exchange traded funds so any investor can participate in SRI.
  • Doing good AND doing well – Evidence exists that a broad-based SRI strategy does not mean sacrificing performance or taking on additional risk compared to traditional investment approaches. See attached recent study by TIAA-CREF.


Socially Responsible Investing

Issues Avoid Favor
Environmental Practices Environmentally insensitive companies Companies that develop and utilize “green” technology
Social Issues “Sin” stocks (alcohol - tobacco - gambling - weapons) Companies with fair labor practices - safety policies - support for local communities
Corporate Governance Companies with low ethical standards Companies with diversity and transparency
SRI encourages companies to adopt a higher level of social and environmental responsibility. Are you ready to participate in SRI? The Investment Connection can incorporate SRI principles into a customized investment approach for your accounts and does not charge an extra fee!  Contact us to learn more.

Alternative Investments

Evidence exists that adding alternatives to a traditional portfolio of stocks and bonds can enhance long-term returns and reduce risk.  Alternatives can mean focusing on certain niche areas of the investment universe, such as real estate, Master Limited Partnerships (MLPs), commodities, or other areas.  It can also mean utilizing a specialized investment philosophy, such as covered calls, global macro, long-short equity, merger arbitrage, credit long-short, and other non-traditional strategies. dollar-coin

Historically, investors had to use hedge funds to gain alternative exposure despite their problems – only available to accredited investors, high cost, illiquid, investment secrecy, and little regulatory oversight.  Today, alternative exposure can now be obtained via ETFs or mutual funds.  These vehicles are available to most investors at reasonable cost with daily liquidity, are fully transparent, and are subject to a high level of regulatory oversight. 


Alternatives: Myths vs. Reality

Myth Reality
Alternative investments are more volatile than stocks It depends. Alternatives have the potential to reduce a portfolio’s volatility because they behave differently than traditional investments
Alternative investments are a unique asset class Sometimes. Certain alternatives (real estate - master limited partnerships - commodities) can be considered unique asset classes while other alternatives (covered calls - global macro - managed futures) are really just specialized investment approaches
Investing in one alternative fund will diversify my portfolio Yes - but an approach using several alternative strategies will provide a greater diversification benefit
Investors cannot access their money if they invest in alternatives Many alternative investments are available through a mutual fund or ETF that provide daily liquidity
Only institutional and ultra-high-net-worth investors can access alternative investments Even individual investors will small portfolios can access alternatives via mutual funds or ETFs
Alternatives failed to protect investors during the financial crisis Many alternative investments saw smaller losses than stocks in 2001 and 2008
Alternatives are too expensive They are typically more expensive than traditional investments; however fees for alternatives are more reasonable when accessed via mutual fund or ETF compared to hedge funds
Excerpt from Alternative Investments: Myths & Misconceptions, Blackrock, 2016 (see attached).

All investors can benefit from increased diversification. The Investment Connection can incorporate alternatives into a customized investment approach for your accounts and does not charge an extra fee.  Contact us for a review of your portfolio diversification and to see how alternative investment might help you meet your financial goals.