Category: Blog

The financial world is teeming with buzzwords, strategies, and tactics. However, few investment approaches have garnered as much attention and acceptance in recent years as passive asset-class investing. But what exactly is this popular strategy, and why might it benefit you?

Understanding Passive Asset Class Investing

At its core, passive asset class investing is a strategy that seeks to replicate the performance of a particular market index, rather than attempting to outperform it. This approach is very different from active investing, where managers often buy and sell securities to predict market movements.

Key Components of Passive Asset Class Investing

1. Index Funds and ETFs: These are the most common tools in passive investing. They track specific market indexes, allowing investors to gain broad market exposure at a fraction of the cost of active management.
2. Diversification: By following market indices, passive investment naturally offers diversification across sectors, reducing individual stock risk.
3. Low Costs: Without the need for constant buying and selling or high-priced fund managers, passive asset-class investing tends to have lower fees. Over time, these savings can make a significant difference in overall returns.

Benefits of Passive Asset Class Investing

1. Simplicity: Without the need to frequently monitor or make changes to your portfolio, passive investing is relatively hands-off.
2. Transparency: Since the aim is to match an index, you know exactly what you’re invested in at all times.
3. Consistency: While you won’t typically “beat” the market with passive investing, you won’t significantly underperform it either. This brings about more predictable returns.
4. Tax Efficiency: With fewer trades and turnovers, passive funds usually generate fewer capital gains, potentially reducing your tax liability.

Is Passive Asset Class Investing Right for You?

While passive asset class investing offers many benefits, it’s essential to determine if it aligns with your investment goals and risk tolerance. Passive investing can be an ideal choice for those looking for predictable returns and a hands-off approach with lower fees. An active strategy might be better if you desire to outperform the market and are comfortable with higher risks and costs.

Conclusion

Passive investing is gaining popularity because of its effectiveness and investors’ preference for simple, low-cost strategies. Passive investing is important for both experienced and new investors. It helps build a strong financial base for the future. Remember, regardless of your approach, always consult with a financial advisor or investment professional to ensure your strategy aligns with your objectives.

Our partnership with Dimensional Fund Advisors gives us the best opportunity to construct well diversified, passively managed portfolio for our clients.

Prudent Man has an on-going relationship with a low-cost institutional fund manager, Dimensional Funds Advisors (DFA). Their funds’ construction and the corporate investment philosophy provides us with the best opportunity to construct a well diversified, passively managed portfolio for our clients.

Since this is not a retail fund company, we have a pre-approved relationship that allows us to use their funds and we also hold the distinction of being one of the 1st advisory firms to work with DFA. We have found that DFA provides Prudent Man with the best opportunity to capture specific asset class return at a lower cost than the typical retail fund. More information regarding DFA can be found on their website at www.dfaus.com.

Call Prudent Man at 303.436.1577 or Schedule an Appointment Online to speak with a Prudent Man advisor more about Dimensional Fund Advisors.

We have a new article and video to share with you. Both of these pieces do a nice job of reiterating points that some may be familiar with (or recently introduced to) regarding our investment strategy, in addition to discussing the research/information we use to validate our approach on an ongoing basis. The article, in particular, assists in articulating the distinction between passive indexing and asset class investing. While we believe both are superior to the active approach, we do subscribe to the additional value added by the flexibility, patient trading, lower costs and true diversification asset class investing provides. There is always so much more we could discuss.

In full disclosure, the video was produced by a passive management firm that uses DFA (Dimensional Fund Advisors) funds; however, we believe the biases are at a relative minimum, and the facts speak for themselves. You be the judge. Enjoy! It is 54 minutes, broken up in 8 chapters.

Video Link: Passive Investing: The Evidence 
Article Link: Forbes Article: “Getting Over Investing With A Better Way”

A piece from the Wall Street Journal we thought would be a good reminder regarding behavior and its unintended results as the media continues to talk about market tops, and the ever present call for market declines.  We are constantly stressing, and trying to inform and remind clients that markets are very difficult, if not consistently improbable, to time in general – even more so on both sides of the equation (top and bottom).  This article discusses that fact and some results of trying to do so, when it is clear by the data over the past 15 years that a globally diversified, disciplined and rebalanced portfolio over the long term does pay off.  

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