There is a fine balance when you entrust your money to your financial manager, advisor, and/or planner. You might want to be hands off when it comes to your investments and trust those decisions to an expert, but it’s still a valid question: How do you invest my money?
Over the past decade or so, investors have seen a huge increase in the vehicles available for investment in their portfolios.
It wasn’t always that way. In the early days of investing, if someone wanted to make an equity investment, they purchased individual shares of stock, and achieved diversification by purchasing shares of a number of different stocks.
Similarly, if an investor wanted exposure to debt, they purchased individual bonds, and achieved diversification through purchasing bonds of various companies, with varying maturities.
If an investor had a lot of money, a well-diversified portfolio could be created with individual stocks and bonds, but investors who either had less to invest initially, or who made small contributions to their portfolios over a long period of time, found investment with individual stocks and bonds to be an inefficient way to approach to creating wealth.
The Emergence of Mutual Funds
The mutual fund industry emerged as a way for the average investor to purchase stocks and bonds more efficiently and to be able to achieve broad diversification with smaller amounts of money. As the mutual fund industry matured, investors get more choice:
- Index funds: These funds are invested in various indexes which are not actively managed, and thus have low expenses.
- Actively managed funds: Allow investors to benefit from the expertise of successful money managers. Since these funds are actively managed they generally have higher internal expenses than index funds.
- ETFs (exchange traded funds): In recent years, ETFs have become very popular, and allow investment in various indexes and market sectors throughout the world. ETFs trade like stocks, but offer the diversification of a mutual fund. They are generally inexpensive to trade, and are well suited to more active trading strategies, such as the risk-based strategies we employ.
Each of our client situations is unique so we decide accordingly. Having said that, most of our clients have both mutual funds and ETFs in their portfolios. This allows for the diversification and active management by some of the best investment managers in our industry, while providing the flexibility and ability to respond quickly to changing market environments.
Please let us know if you have questions or would like to discuss further.