Why Index Investing Isn’t So Simple, Especially for Ultra High Net Worth Investors

Making a case for exchange-traded fund (ETF) and index fund investing is pretty easy.

And in fact, Pillar has made the case many times (such as this guide) because of the much lower costs and fees associated with index investing, including a mutual fund.

STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION

 

7 Secrets To High Net Worth Investment Management, Estate, Tax and Financial Planning

 

The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.

Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.

But if we stop there, that leaves many high net worth investors wondering: If all I have to do is use index funds for my investments, what’s the big deal about financial planning?

The short answer is: Nothing is that simple. Index fund investing is no different.

For a more in-depth exploration, let’s look at some questions and principles related to index fund investing that expose some of the underlying complexity, as well as the inadequacy of assuming you can use index funds and exchange-traded funds (ETFs) and ‘set it and forget it.’

Index Fund Diversity – Not All Indexes Are Created Equal

There are several stock index funds that you should know about, such as:

• Dow Jones Industrial Average

• Vanguard 500 Index Fund

• S&P 500

You should get our guide, The Art of Protecting Ultra-High Net Worth Portfolios and Estates: Strategies for Families worth $25 Million to $500 Million. It will greatly assist you in learning about your investment performance.

Choosing to invest using index funds and ETFs is easy. But choosing which indexes and ETFs to invest in is much more challenging. Why?

Because just like any investment category, some options will perform much better than others. Some investment vehicles entail more risk but greater potential reward. Some are more conservative and stable. Some are more volatile due to specific industries or companies they focus on. Some (like the DOW) are just plain overrated. The DOW only includes 30 companies. Investing in an index fund tied to the DOW entrusts your money to the vicissitudes of a pretty small slice of US companies, albeit large ones.

Even more, difficulty arises when an index or ETF experiences some internal upheaval.

For instance, what happens if a key sector or group of companies in your chosen index fund falls out of favor? Will you stick with that index or look for a new one? And what percentage of your investable assets should you allocate to each index fund you choose?

Two common myths about index funds, according to US News & World Report, state that they are safe and always perform consistently. They aren’t, and they don’t.

Index funds rise and fall with the market. If the market crashes, so do the index funds. And sometimes, the equities comprising a fund may have been assembled based on questionable assumptions about prior performance. Not all indexes are equally safe. And some have higher expense ratios and more turnover, which increases your costs.

Choosing the optimal index funds for your situation requires in-depth analysis. For ultra-high net worth index investors, this single choice can mean a difference of millions of dollars over the life of your investments.

You don’t want to get it wrong.

Asset Allocation Trumps Index Investing Every Time

If index investing were so simple, why not just stash 100% of your money in the same index fund? As an index, it should be inherently diversified, right?

The problem is, asset allocation and diversification are distinct concepts. Yes, 100% investment in the same index is technically diversification. But it’s not a healthy allocation because if the market collapses, that index fund will collapse with it, and you have no buffer to protect you.

Therefore, you need a more nuanced allocation that combines a variety of equity investments as well as bonds and cash.

But which indexes? Which bonds? How much should be in each? And what if you own substantial real estate? How should that affect your investable asset allocation?

 

What Happens When Your Index Funds Perform Well?

Healthy asset allocation also demands regular rebalancing.

Suppose you have 55% of your money invested in equities, almost all in indexes and ETFs. And then you have 30% in bond index funds and 15% in cash. A fiduciary financial advisor who has actively managed your funds and knows exactly your investment performance and financial security for the rest of your life can determine the exact asset allocation you need.

To see what Pillar Wealth Management and its fund managers can do for you, schedule a free Wealth Management Analysis meeting.

Supposing your advisor determined 55/30/15 to be the right allocation for your lifestyle, optimized investment performance, and long-term security. If your equities perform well, that 55% will eventually grow to 60% and continue to grow higher.

Left unchecked, you will eventually become out of balance and develop an unhealthy (for your situation) asset allocation. The solution is to rebalance by shifting the growth from the equities back into the other sectors.

But how much do you shift from each index fund you have invested in?

Make the wrong choice, and your performance will suffer, and you might fall below that 55% equity allocation. Then, you’d be forced to rebalance again, but in the other direction.

This little ‘rebalancing’ dance needs to happen consistently if you want to achieve the highest, most optimized performance. Unless this process is managed by a wealth advisor who has developed a customized plan that optimizes your investments and exceeds ALL your long-term goals, such as retirement planning, estate planning, managing credit scores, and so on, and lifestyle plans – you will likely fall short of your goals by making misinformed choices.

Strategic investment planning and performance depend entirely on the plan that directs them.

Who will help you develop your own customized plan? Just throwing money into index mutual funds that seem good to you isn’t a plan. It’s a gamble.

How Much Money Do You Want to Leave Your Heirs?

Suppose you have $10 million and want to leave $12 million to your heirs when you die. But you’re 50 years old right now. You’ve got a lot of spending and living and investing to do.

A lot will happen between now and when you die.

Do you have a method to ensure you will still have $12 million left when you die? No matter what happens in the stock market, the global economy, your own family, or your business?

Customized high and ultra-high net worth investment planning helps you answer this fundamental but rarely-asked question with specificity and reliability.

We find index fund investors need something other than an all-index investment portfolio for most of our clients. Each situation is different because each life is different. What you need will not be the same as what the next investor needs.

That’s why talking about your investment preferences at cocktail parties is pretty useless. What does the person you’re talking with have in common with you?

Are their kids the exact same age as yours and facing the exact same life situations?

Are your parents and their parents in the exact same predicaments?

Does your family have the same health status as theirs?

Are your lifestyle plans and hopes the same as theirs?

Do you share their philanthropic goals?

Hopefully, you realize the futility of pursuing an investment strategy simply because it’s working for someone else. Simply sharing the ‘high net worth’ classification with someone else only puts you at the same cocktail party. But it does little more than that when it comes to your investment planning.

More Questions that Complicate Your Investment Planning

What if you end up facing several large, unplanned major distributions?

These could be things like long-term care costs, medical bills, business expenses, unexpected major life setbacks, or many other things.

What if you live far longer than you expect? Or the reverse, but your spouse outlives you by a couple of decades?

Here’s a question much more down to earth:

How much do you want to spend each month to sustain your desired lifestyle?

Can you afford that level of spending? Maybe it can be even higher. How can you determine with certainty the highest level of spending that still ensures your long-term financial security and that won’t leave your heirs hanging out to dry?

Simply investing in index funds and ETFs answers none of these questions or the many more we could pile on if you remain unconvinced.

The index-only, set-it-and-forget-it investment approach denies the reality of the complexity and unpredictability of life. Life will intrude on your plans. Your goals will change. This is one of the few guarantees about investing. No one’s goals remain unchanged for the rest of their life. No one.

And when those goals change, of necessity, your investment plan must change with it, or it becomes obsolete and useless.

Suppose you face a major unplanned distribution and have to liquidate one-tenth of your assets.

How will you adjust your portfolio in the aftermath?

Or what if the reverse happens, and you receive an unexpectedly large inheritance?

What will you change in your investment plan as a result?

What if the market collapses two years after you retire?

Index Investing Is Just One Highway on the Map

Motley Fool once said that “Never invest in any idea you can’t illustrate with a crayon”. Therefore, wealth planning that ensures your long-term financial security involves far more than just choosing to invest in index funds. That’s just one segment of the financial road you’ll be on from today through the end of your life. Hopefully, you’ve now gained a greater appreciation for why that’s true.

Your next question should be, how can I answer all the questions I’ve just read?

There is a way.

Sign up for a free Wealth Management Analysis meeting

In this meeting, you will be shown how your current investment plan and asset allocation will perform for the remainder of your life. You’ll be given tax minimization and estate planning strategies. You’ll be shown how randomized ‘what-if’ scenarios affect your investment performance, even decades into the future.

Choosing an index for your investment is similar to maintaining social media. It seems easy but also difficult at the same time. You need to think carefully about the risk, return, and market changes you may face in the future. Like social media, you need always to pay attention to the audience insight, the content measurement like choosing the index, measure ad performance including measure content performance, content profile including the ads profile, and many more. To do index investing, you also need to pay attention to the product development that has the best return. This can also be seen from the geolocation data of certain indexes that the situation can influence the market. However, if you hire a wealth manager, you can determine the content choices you need to make before deciding which index is the best for you. Wealth managers also have different ways of investing in your wealth. That is why it is also similar to making your online platforms accessible by any device.

But most importantly, you will be shown – with a proprietary data-based process behind it – what you can do to achieve lifelong financial security.

In other words, you’ll find out which of those five areas of control you need to adjust and by how much to ensure your new financial plan stays healthy for the remainder of your life.

You’ll get the answers you need.

It’s a free meeting. You have nothing to lose and many years of financial serenity and enjoyment to gain. Pillar WM and their partners process data that you submit on the website to get the best answer you need. Click the button below to schedule your Wealth Management Analysis meeting.

Show Me the Answers to My Questions!

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Authors

To be 100% transparent, we published this page to help filter through the mass influx of prospects, who come to us through our website and referrals, to gain only a handful of the right types of new clients who wish to engage us.

We enjoy working with high net worth and ultra-high net worth investors and families who want what we call financial serenity – the feeling that comes when you know your finances and the lifestyle you desire have been secured for life, and that you don’t have to do any of the work to manage and maintain it because you hired a trusted advisor to take care of everything.

You see, our goal is to only accept 17 new clients this year. Clients who have from $5 million to $500 million in liquid investable assets to entrust us with on a 100% fee basis. No commissions and no products for sale.

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