Tag Archives: expenses

Does Active Management Have a Place in the Modern Investment Portfolio?

As index funds have become more and more popular a rising question has been, does active management still make sense for the average investor? Answer is of course not simple enough for a yes or no answer. However there are a few pros and cons we can look at for the two options. First let’s look at the advantages of passive management:

1) Relative autonomy 

Time is often saved from having passive investments. While of course there is initial research that goes into selecting the underlying ETF’s or mutual funds, once set up your strategy you will have relatively low time costs going forward.

2) Lower expenses

With passive management comes low expenses. Over the long term expenses can eat into  a large portion of your returns so paying close attention to this is crucial.

3) Lower taxes

Active management usually means less trading and less trading means both less transaction costs and less capital gains tax. Both of these add up in the long term.

Now that we’ve covered a few of the pros of passive management let’s dive into some of the pros of the alternative…

1) Potential for greater returns

By definition a passive manager can’t meaningfully beat their respective benchmark. However with active management everything changes. There is also ways a chance for outperformance. Of course the flip side of this double-edged sword is that you can underperform, which is often the case.

2) Lower volatility

Depending on the management style you are able to experience lower volatility in your investments from active management.

So which should you choose? After everything is said and done the thing that matters the most is your returns relative to the corresponding benchmark index. For example if you’re comparing a large-cap active fund verses and S&P 500 index fund.

Once you’ve selected your funds for comparison you need to determine if a) your fund has outperformed the benchmark in the past enough to cover expenses and additional active costs and b) will the fund continue to perform this way or better in the future.

If you can answer yes for both of these questions you may have a great candidate for an active portion of your portfolio.

The last option you have available is to execute the active management your self. This is a whole different story that deserves it’s own separate discussion for a different post. For the time being focus on comparing returns both pasts and potential for the future.

Combining Your Passion and Values With Income

Often when students or even middle-aged employees are considering which career path to choose they run into a dilemma. “Should I choose a greater income or sacrifice money to do the things I love?” many ask themselves. Even as a college student I have met and spoken with many older folks who find themselves still in a situation of questions.

Countless people go through their life without truly finding something that is both enjoyable and lucrative (or at least enough to pay the bills). Most people have heard of the classic situation of an artist or writer who lives in their parents basement. But what about the countless others out there who are in similar, yet less extreme situations?

Teachers a good example of this. Many of them make just enough to pay the bills, yet work long hours and stressful lives. Assuming they are doing something they enjoy (which I believe many of them are), how do teachers continue to do what they love while keeping the financial strain at a minimum?

There’s no easy answer to this question. I’m going to simplify a process I have used in my own life (before even exiting college) that has allowed me to understand myself better going into my “working years”. If your financial situation isn’t stable, you may have to work a J-O-B while you get these questions figured out.

1. What do you value?

Ask yourself, if you had only 24 hours to live, what people, places and activities would you care about? What would make your last 24 hours feel “full”? The answer to this can be revealing. As soon as you have grasped the things that matter most to you, begin looking at the things you want to pursue that match those values….

2. What do you love to do?

Everyone likes to do something. Maybe you love math. Or maybe writing or reading are your favorite. Or maybe science has always been a blast. There are numbers things you could find enjoyable. Find some of the top things and list them.

3. What are you good at?

This can be hard to know just looking at yourself. It may take honest questions with people who know you well to pinpoint what you’re good at. Maybe you are a eloquent or articulate writer. Or maybe you can organize things efficiently and effectively. Or maybe you are a natural leader. Or maybe you always have found analyzing numbers and facts easy. Whatever thing(s) you find stand out, those are some things you should double down on.

With these three questions answered you now have set the parameters. Your values dictate where you will never work. For example if you value family, your probably won’t work for a drug gang that breaks up families. Or if you value moral integrity, you probably won’t become a jail robber, even if your greatest skill is stealth and deception.

With values as your parameter, your passions are the arrow, pointing you towards a career field. Lastly your abilities and talents are the final part of the puzzle in determining what position best suites you.

For example what if you value family. You’re also highly interested in personal finance. As you become interested in the subject, you realize that you’re best at analyzing data and making good decisions. Upon looking at these three angles you will determine that becoming a personal financial planner suites you best!

I used the example of myself but you can use these questions for any situation or interest. Overall, these questions are simple, but they may take time to answer completely. And as if often the case, they may lead somewhere that doesn’t pay well. In that case you can either work somewhere on the side, take a pay cut or continue looking for that thing that is both fulfilling and pays the bills. Good luck in your journey!

3 Things to Have in Your Wallet

While most Americans are saddled with credit card debt, student loans, and monthly car payments, the underlying issued usually relates to how we view money in general. Most people would like to say they are responsible with their finances, but their actions tell a different truth.

Out of this basic mentality toward money often comes many damaging habits we see today. For example the uncontrollable, erratic spending that characterizes consumers can go back to the root cause of lack of responsibility.

Responsibility over every area of your financial life, especially what is in your wallet, comes from an understanding that personal finances are a crucial area to match with your values.

When someone takes responsibility over their wallet they should be aware of three items:

1. Cash

Most have heard the saying “cash is king” whether on the Dave Ramsey show or elsewhere. But is cash really that powerful? The truth is that sometimes yes and sometimes not so much.

For example if you’re buying a table on craigslist, cold, hard cash will probably be the most powerful negotiator. However if you’re buying a home, pulling out cash might make you look a lot like a drug lord…

Make sure to always have a good amount of cash in case an expense comes up that you can’t use your cards for.

2. Debit cards

Even more important than the credit card is the debit card. A debit card gives you access to your bank checking account and can often be the most popular means of payment. While you certainly don’t need to have multiple debit cards and different banks, there is certainly a case to having at least one.

3. Credit cards (maybe)

Some of the most daunting debt in the US is the credit card loans. According to the NY post, credit card debt in the US is approaching $1 Trillion. Why would you want to have a credit card?

When it comes to credit cards I believe that about half of people should not have them because of lack of discipline. The other half of people should have a few quality cards that are used regularly but sparingly to build credit. There might be some points or cash back in there, but that’s just icing on the cake.

Ultimately your use of credit cards should depend on your discipline and self-control. Everyone should have debit cards. And everyone should carry an adequate amount of cash in both fives, ones and a ten (maybe $50 total?).

Besides the payment-related items there are of course things like ID and insurance cards but I hope you have enough common sense in those areas. I hope this helps your spending habits on your financial journey for many years to come.