#184 - Passive Investing: What You Should Understand

Passive investment management has taken over the world. Nine of the top ten mutual funds are based on passive investing. On this episode, I explain what passive investing is and how it works, the top two indices that most funds are based on, and the advantages and disadvantages of investing based on those indices. I also take some time today in the Practical Planning Segment to answer listener questions. Listen in to expand your understanding of passive investing and hear answers to questions that you might be asking. The two indices that most passive investment portfolios are trying to model Eight of the top ten passive investment funds are focused on the S&P500 and the Total Market Index. On this episode, I describe asset allocation within these funds and how the funds are weighted. Is this model an efficient way to for you to implement a passive investment strategy? I’ll fill you in on the advantages and some of the questions around these funds on today’s episode of The Retirement Answer Man. Are market indices focused on a smaller segment of the market than it first appears? The S&P 500 and the Total Market Index have, respectively, 500 and 3600 individual equities. So at first it appears that passive investments that mimic these indices would be spread out among those equities. On today’s episode, I explain how the equities are weighted and the percentage of the indices that are in large or giant companies. Listen in to get a clearer picture of these two popular indices and to think about whether or not that is an efficient way for you to implement a passive investing strategy. Index rebalancing on fixed dates is like the Nike store on Black Friday. Have you seen the videos, or experienced in person, what it is like to shop for great deals on Black Friday? When the indices rebalance on fixed dates three times each year, any funds invested to mimic the index will be moved as quickly as possible. Everybody is running in the exact same place at the same time. Kind of like the Nike store on Black Friday. On this episode, I talk about this downside of passive investing based on the two most popular indices. Listen in to learn why I’m a fan of passive investing but wonder if there could be a more thoughtful way of doing it. Answers to listeners’ questions I’m always glad when listeners send in their questions. On the Practical Planning segment of today’s episode, I respond to questions that have recently come in. “What about the ‘Equal Weight’ S&P 500?” “What happens with a 401K loan if your company switches you to independent contractor status?” “Should I adjust my asset allocations as I head into retirement?” and “Should I empty my retirement account to pay off my credit card debt?” Listen in for answers to these questions and an invitation to send in questions of your own. OUTLINE OF THIS EPISODE OF THE RETIREMENT ANSWER MAN [0:24] Black Friday madness [2:33] Disclaimer - Don’t take advice from me on this show. [2:50] Today’s topic: Mutual Funds that mimic indices HOT TOPIC SEGMENT [3:22] Passive investment management has taken over the world. [5:13] What hypothetical portfolio is a passive investment trying to model? [7:13] If we accept that passive investing makes sense, what passive investment strategies make the most sense for us? [8:00] Understanding the Total Market Index [9:45] Understanding the S&P 500 Index. [11:46] Index rebalancing on fixed dates is like the Nike store on Black Friday. [14:43] Does passive investing have to track one of the most popular indices? PRACTICAL PLANNING SEGMENT [16:24] The “Equal Weight” S&P 500 index gives you broader exposure, but here’s why I’m not a fan. [19:31] Be aware of 401K loan penalties if you leave employment or change to independent contractor status. [22:00] A balanced approach to taxable and non-taxable asset allocations for retirement. [27:53] Paying off credit card debt without dipping into your retirement account. TODAY’S SMART SPRINT SEGMENT [31:16] Go to RogerWhitney.com and ask a question. THE HAPPY LAB SEGMENT [32:09] Do what’s right for you, not what’s expected of you. RESOURCES MENTIONED IN THIS EPISODE Ask a question Work with Roger 3-Video Series: 5 Minute Retirement Makeover Roger’s retirement learning center The Retirement Answer Man Facebook page