TRANSCRIPT:
With the legalization of sports betting in Florida, sure, every once in a while I like to bet a few dollars on my Bruins, but I certainly don’t gamble with my own retirement funds nor my clients, so why would you? Discover the key to successful investing by understanding your unique investment style. Join me as we explore the active versus passive investing debate and uncover strategies to optimize your investment approach. Hi, I’m Hunter Brockway, founder of Boca Retirement Strategies, here to guide you to a successful, stress-free retirement while spending more and avoiding being killed in taxes. When it comes to investing, it’s crucial to start with your own unique goals. Who are you? What is your time horizon? What are you looking to achieve? These are the questions that should guide your investment decisions. For instance, when saving and investing for retirement, there are still some common debates.

The top two are active versus passive investing and direct versus indirect investing. Understanding your own goals and risk tolerance can help you navigate these debates and make the right investment choices for you. Let’s start by demystifying the active versus passive investing debate, a pivotal decision that can significantly impact your financial future. So what is passive or active investing? Said simply, active investing is attempting to time the markets, guessing the exact top and bottom peaks and troughs of the market. Passive investing is buying your holdings and ignoring the market for years and years. The biggest con to passive investing is not taking advantage of opportunities in the market when they present themselves.

The biggest con to active investing is thinking that you’re smarter than the markets and that you can time market fluctuations perfectly. Odds are you’re never going to hit the exact peaks of the market and the more you try, the more emotional you are likely to become, which is the number one killer in portfolios. It is also shown that the best days in the market follow the worst days. So even if you happen to perfectly time selling holdings ahead of a market decline, there’s a high probability you are going to miss the subsequent increase in value of stocks to be forced to buy back in at a higher price point. Check out this slide from the research done by JP Morgan. So if the S&P 500 averaged 9.7% year, what this means is that you just missed 10 of the best days of the market out of the entire year. Your investment returns would have dropped from 9.7% to 5.5%. Extend that out to missing 40 of the best days, your return turns to a negative 1.2%. So there’s a lot to be said for passive investing, but passive isn’t quite the right answer in my book either.

We should still put a little bit more effort into it than that. Personally, I like what is called the modern portfolio theory, which is simply a blend of active and passive investment. It is passive in that we are never trying to time the markets. We purchase quality companies of the Americas and the world where we see long-term value and we don’t get hung up on the inherent ebbs and flows of the market that we know since World War II, one year and five, are about to decline 30%. So there’s something we can work on with historical data there. Markets do decline, but they are also much higher overall since World War II. Here’s where we can mix in a touch of the active management side. If those quality companies we saw value in start to become historically overvalued, we may pare back somewhat on what we are holding with the purpose being to add cash to our war chest. We always want to have cash in our war chest for those declines that are bound to happen, at which point we can purchase quality companies at a discount. So again, we are removing emotion investing for the long term, and purchasing quality companies when, not if, they go on sale.

And now how does direct vs indirect investing play into this for you? Briefly put, direct investing is owning individual shares of a company such as buying shares of Apple or Amazon. Indirect investing is purchasing funds that lump together and hold companies like Apple or Amazon. Different ETFs and funds weight holdings differently. Without nerding out and going off on a different lecture here, you have market cap, weighted, equal cap, and fundamental. Market cap is the size of the company in the market, so with the purchase of an ETF that uses this, you’ll have more underlying shares of big companies than of small companies. Equal weight is as it sounds, the same amount of underlying shares for all companies. Fundamental is more like market cap, but uses fundamental financial valuations. Direct investing is a phenomenal solution or a DIYer or someone in the beginning accumulation stages.

As a professional investor, I prefer to involve my clients more in a direct investing approach. That’s not to say certain indirect investments aren’t a good tool inside of certain portfolios. Again, going back to the beginning of this conversation, what are your goals? What are we solving for? But generally speaking, direct investing gives you much more opportunities. As I mentioned, you can individually purchase shares of the same exact companies that may be in a fund. Implementing direct investing in a moderate portfolio theory takes longer and requires more time to monitor and manage. My number one throw of buying directly is being able to buy more of the winners and sell more of the losers. A fund will eventually cycle out companies that do not meet their performance criteria, but when you own individually, you can be faster and more flexible. Another point for planning, when you own individual shares of a company, it presents unique opportunities for gifting strategies. F

or example, let’s say you’d like to start gifting money to an heir. If you have a number of shares of an individual company that have gone up in value, rather than selling portions of a fund to free up money and paying taxes on the capital gained, you can gift the shares of the company directly. A tax strategy while gifting. When living off of your portfolio in retirement, there will come a time when you need to sell holdings to free up cash. With direct investing, we can decide which companies we wish to sell more of. It may be a company which has grown and we feel it is becoming overvalued. It may be a company that we no longer like for any other reason. You can sell that particular company and free up cash that way without being forced to sell shares of a company we still see growth value in. The last big point, with direct investing there are no additional fees. Mutual funds and most ETFs have fees to own action items, I leave you with a question.

If you can beat the market every year, if you beat it by 2% every single year, but you run out of money at age 80, did you win? Take action. Create an investment philosophy to match your goals and needs. Remove emotion from your investing and subscribe to our YouTube channel. If you would like to see how we tailor investment portfolios to ensure our clients do not run out of money while living through retirement, you can schedule a brief phone call on our website at BocaRetirement.com or send us an email at contact@BocaRetirement.com. Enjoy your successful retirement and thank you for watching. Bye.