How Customization Can Add Some Zest
Since 2003, I’ve been singing the praises of index investing through Exchange Traded Funds (ETFs) — and trust me, it’s not just because I love a good acronym. After all these years, I’m still a big fan, and here’s why:
Lower Costs: Index funds are like the Costco of investing — great value with fewer markups. Lower expense ratios mean more of your money stays invested.
Diversification: Think of index funds as the ultimate sampler platter, offering broad market exposure and reducing the risk of putting all your eggs in one stock basket.
Simplicity: No need to play the stock market guessing game. Index investing is the “set it and forget it” approach, saving you time and stress.
Transparency: With index funds, what you see is what you get. They regularly disclose their holdings, so you always know exactly where your money is going.
Tax Efficiency: Less turnover means fewer tax surprises. Index funds are like that thoughtful friend who never forgets your birthday — and works to save you money.
Predictability: The performance of the fund will likely be similar to the performance of the underlined index
But here’s the twist: the only constant in life is change. As your account values hit new highs and your financial situation evolves — like after selling a business — it might be time to consider a shift from a passive index strategy to something more tailored. This doesn’t mean you’re turning your back on the virtues of index investing. Instead, it’s about recognizing that when you reach certain milestones, customization can offer some pretty compelling benefits. Let’s take a look.
The Magnificent 7:
When Market Concentration Becomes a Concern
Let’s talk about the “Magnificent 7” — no, not the movie, but the seven companies that have become the superheroes (and maybe the supervillains) of the S&P 500. Apple, Amazon, Google (Alphabet), Meta, Microsoft, Nvidia, and Tesla have driven a huge chunk of the index’s returns lately. If you’re invested in the S&P 500, a lot of your gains are tied to just these seven companies. The problem? While these giants are flying high, many of the other 493 stocks in the index aren’t exactly winning any popularity contests. This means your portfolio might be riding on the coattails of a few stars while the rest of the market is a bit of a mixed bag.
Tax Loss Harvesting:
Making Lemonade from Market Lemons
If you’ve been investing in the S&P 500 over the past decade, you’ve likely enjoyed some sweet gains. But here’s the catch: with the index’s steady climb, it’s become harder to find opportunities to sell at a loss for tax benefits. Enter the customized portfolio, where you can cherry-pick individual stocks. By doing so, you can strategically sell off those underperformers, harvest the losses, and offset gains elsewhere. It’s like making lemonade out of the market’s lemons, which can be especially tasty in those high-growth periods when the broader index is cruising.
Sector Tilts and Social Responsibility:
Investing with a Conscience (and a Strategy)
Index funds are great, but they’re also a bit like a buffet — you get a little bit of everything, whether you want it or not. If you’re passionate about, say, renewable energy or ESG (Environmental, Social, and Governance) investing, a customized portfolio lets you load up on the good stuff. Want more clean energy in your portfolio? Go for it. Care about social responsibility? You can tilt your investments to align with your values. Customization gives you the power to put your money where your heart (and strategic mind) is.
Municipal Bonds and Interest Rate Risk:
Keeping It Steady
When it comes to fixed income, nothing says “steady” like a municipal bond held to maturity. These bonds offer tax-free income and can be a safe haven from the storm of rising interest rates. While other bond investors might be sweating over market value declines, you can kick back knowing that your principal and interest payments are locked in. A customized approach lets you handpick bonds that fit your tax and income needs, providing reduced risk in your portfolio.
Fees vs. Net Returns:
The True Cost of Investing
Yes, actively managed accounts often come with higher fees than index funds. But here’s the thing — what really matters is your net return after taxes and fees. If you’re at a point where customization can lead to better tax efficiency, targeted sector exposure, or tax-free income, those higher fees might just be worth it. The goal isn’t to pay the least — it’s to make the most after everything is said and done.
Conclusion:
The Case for Customization
Index investing is a great strategy, but if you’ve got a larger portfolio or specific financial goals, a managed account could offer some extra perks. Whether it’s more tailored risk management, better tax efficiency, or alignment with personal values, a customized approach can provide tools that broad index funds might miss. So, if you’re looking to maximize your after-tax returns and meet your unique financial objectives, it might be time to consider adding a little customization to your investment mix.
David Rosell is the President of Rosell Wealth Management in Bend. RosellWealthManagement.com. He is the author of three books. Find David’s books at local bookstores, Amazon, Audible as well as Redmond Airport. Investment advisory services offered through Valmark Advisers, Inc. an SEC Registered Investment Advisor Securities offered through Valmark Securities, Inc. Member FINRA, SIPC 130 Springside Drive, Ste 300 Akron, Ohio 44333-2431. (800) 765-5201. Rosell Wealth Management is a separate entity from Valmark Securities, Inc. and Valmark Advisers,
Inc.Indices are unmanaged and do not incur fees, one cannot directly invest in an index. Past performance does not guarantee future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss. The information provided has been derived from sources believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete analysis of the material discussed, nor does is constitute an offer or a solicitation of an offer to buy any securities, products or services mentioned.
