FUNDS AND INDEXES: LET SUITS STEER THE SHIP?

FUNDS AND INDEXES: SUITS STEERING THE SHIP?

Drew@SharkInvest

In 2020, there was an estimated $90 TRILLION invested across the global stock exchanges, with

about 30% in the NYSE, 15% in the NASDAQ, and a smattering of international exchanges. There is a further estimated $19 TRILLION in assets held across bank accounts and money markets.

THE RISE OF PASSIVE INDEX FUNDS

Here’s a trend that helps sharks - PASSIVE funds now top $10 TRILLION / 14% of the market – a double up in the last two years. Passive funds, such as those that track the S&P500, although they have criteria for inclusion and rules around their holdings, this is more a case of the sharks (and I used this term loosely here) having their heads stuck up the Whale’s blowhole. There are also many different funds which track the DOW or S&P500. When you put your money into these you are essentially saying, hey – take my money and spread it around like chum in the water. Okay, I’m not a fan of index funds. In spite of the generally low rate of return, these finds have actually been outperforming many managed funds recently. These are generally considered a parking lot type investment where you look for stability and predictable (albeit minimal) returns.

THE TOP TUNA – MUTUAL FUNDS

The numbers are in: $21 TRILLION held in mutual funds across nearly 8K registered funds in the USA. This represents a 23% share of household financial assets. What does this indicate? Most people are content to let the suits on Wall Street chart the course via locked in 401Ks and mutual fund purchases at tax time. I have held mutual funds from time to time, and actually have about 5% of my holdings in these funds. The reason? Many employers have 401K matching program where they match employee contributions, sometimes up as much as 7% of their paycheck. These programs incentivise employees to plan for their future. It’s a good way to impose some financial discipline on yourself and pick up some additional funds in the process. The downside here is that the contributions are almost always required to be held in the company’s mutual fund selection, but there is generally an opportunity to select a portfolio for your funds based on a risk tolerance matrix. We discuss this in more detail in our eBook “9 STEPS TO FINANCIAL ADULTING.” Here are a few good books on 401Ks and getting started with retirement planning if you want to check them out:

ACTIVE EXCHANGE-TRADED FUNDS

These actively managed portfolios have recently passed $250 BN are bringing in young investors en masse. These are a bit of a case of the SHARKS riding the whales – where investors pay a fee to a brokerage to actively manage the fund. Many young people are also choosing to move funds from traditional mutual funds to actively managed ETFs in order to stay up with developing innovation trends – example: ARK INVEST ($50 BN, up 1000% since 2018). I’m actually not bothered by this. I think ETFs are a good way for new investors to get some money in the market and gain exposure to analysis and diversification for a minimal fee in some cases. Keys here are to know the fees, and really invest your time in following the fund’s research and trades. ARK stands out in this regard with their daily trading reports and frequent podcasts and active twitter presence. Even if you’re not buying the fund, the information is available for FREE and can help you learn how to grow and cultivate a portfolio.

STOP ACTING LIKE A MUTUAL FUND

Hey Sharks – if you don’t like the look of the market, you can SELL IT ALL with a flick of your fins. One of the most important competitive advantages a shark has in the wild is their ability to sense danger and clear the scene. Mutual funds are dealing with a vastly greater number of holdings across stocks, bonds, or other funds. They move slowly and they are highly regulated. YOU however, you are a freaking SHARK with access to a vast array of trading tools, analytics, and the ability to buy and sell as you please. There are plenty of new investors who have both under and over utilized this fact. Never sold a share before? Try it. Get used to taking profits. Buying and selling every day? How about trying to find a company you can hold for a few months based on a longer-term thesis? It’s important to develop and execute a variety of strategies as you look to maximize your gains and protect your funds. You are the chairman and CEO of YOU INCORPORATED after all! Flex your financial muscles and swim freely!

Drew @ Shark Invest