Weekend Reading – Building your own index
Welcome to one of my final Weekend Reading editions for the 2022 calendar year, about building your own index.
Before we tackle that, a few recent articles:
Last weekend, I referenced a BlackRock global outlook study that mentioned a worldwide recession is coming in 2023.
Since I can’t accurately predict the future (!), I took Retirement Manifesto’s 5 important factors to heart when it comes to my decision to semi-retire.
You can take the same simple quiz/five questions to answer in that link above yourself 🙂
Weekend Reading – Building your own index
Should you consider building your own index?
You probably already know my decision but before I get back to that, my inspiration for this week’s theme came from this MoneySense article:
“Direct indexing” is not so much about DIY investing, via buying and holding and/or updating your preferred basket of stocks over time, rather, it’s the newest financial industry term for promoting “…advisors to brew up their own portfolios for clients using quant/other metrics and pick up the benefits of direct investing like tax loss harvesting. It’s an interesting way for advisors to add some value.”
Further in the article, Roger Paradiso, executive chairman of Franklin Templeton’s O’Shaughnessy Asset Management, goes on to say:
“Advisors are drawn to bending client portfolios to their specific needs, whether it is taxes, values based and/or concentrated stock positions. We believe that trend is only going to grow.”
Ya, it should.
I mean, why work with any advisor that doesn’t work on a needs-based premise? My goodness.
And herein lies some of the rub for me, why I became My Own Advisor and why the author behind that MoneySense article (Jon Chevreau) also follows some core and explore – amongst many other (a growing list…) of DIY investors: it makes sense and it meets his objectives.
I’ve learned over the years:
- Nobody will ever care more about your money – than you do.
- Lower fees, all things being equal when it comes to money management, are better. Why would I want to pay for someone else’s yacht? This means the less fees I fork out to others, generally speaking, the more money I should keep for me/us.
- While index investing (i.e., the passive investing approach whereby you own a low-cost index fund that tracks a reputable index) is good, it’s not perfect. With indexing you have to hope for your self-made dividends via capital gains. Indexes do not provide protection from market corrections. There are other ways to invest. Index funds own studs and duds at the same time. If you don’t believe me, then look at tech sector returns in 2022. It has been hammered. Look at this asset quilt below: broad-market stocks held within the often-touted S&P 500 index don’t always thrive. Different sectors let alone markets around the world can shine from time-to-time.
- The concept of being a passive index investor is wonderful, in theory, but living through the daily or yearly market volatility is something else entirely. Emotionally-driven decisions could lead to long-term under-performance. A better solution IMO is to develop the same strong emotional temperament that some successful active investors have to develop – a DIY hybrid investing approach can help with that. If you are a DIY investor, while potentially more risk on your shoulders, you can also be a bit more tailored and selective to your needs, which means: personal finance is forever personal and therefore you need to invest in a manner that meets your goals/objectives, manages your risk, and helps you remain invested over time. That may or may not tied to a “direct indexing” financial product.
In The Psychology of Money, gifted writer Morgan Housel wrote:
“…few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are. The main thing I can recommend is going out of your way to identify what game you’re playing.”
And U.S. financial planner, and investment sketch-guy, Carl Richards, has a nice image I use from time to time to cement this point:
Please don’t let any financial advisor or money manager tell you otherwise…
In closing, I believe:
- The best answer for you when it comes to your money management decisions will usually be: “it depends”.
- The best investing strategy is not an index-investing approach or absolutely nothing. I believe the best investing strategy for you will ultimately be your high, sustained savings rate and a financial plan that meets your investing objectives – nobody else’s.
- Cashflow is always king and second to that, keeping some cash is wise to navigate any market volatility or financial surprise.
- Managing debt before debt manages you is always a good thing.
- You don’t have to be a great investor. You just have to be a good one by avoiding many big financial mistakes.
You can check out how I invest as a hybrid investor on these key pages here:
More Weekend Reading…beyond building your own index
On Cashflows & Portfolios we shared our best posts from 2022, including links to a few free retirement income case studies and much more!
Gotta like these Canadian bloggers that support craft beer! Keep up the great work, Brandon!
Benjamin Tal, Deputy Chief Economist at CIBC, talks with Financial Post’s Larysa Harapyn about how this could be end for Bank of Canada hikes.
What do you think? I suggest the answer is “we’ll see”…
If rate hikes do go up in 2023, Dale Roberts has some advice for you in his Sunday Reads article.
Check out my upcoming event with TD! Free!
Check out my upcoming chat with the folks at TD Bank where some of these Laws of Wealth factor into my retirement income drawdown plan.
And last but not least…
How does dividend growth investing work in a bear market?
I hold a few defensive stocks purposely for a year like 2022.
A reminder a more complete listing of dividend stocks that rock can be found via my deep lifetime discount with Dividend Stocks Rock (DSR). Head on over to the top of my Deals page and to save a whopping 33% on your DSR subscription – making sure you only own dependable dividend growers and performers during any market cycle.
Lots more snow in Ottawa this weekend but I’ll still get out to enjoy the weather.
Have a great weekend!