508-277-5847 [email protected]
Active vs Passive Investing

Active vs Passive Investing

Active vs Passive Investing

Tim Hayes AIF®, CRPS®, AWMA®, CFS®, APMA®, CAS®

Warren Buffett once said of Jack Bogle, the founder of The Vanguard Group and inventor of index investing, ‘If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle.’ Sadly, Jack Bogle passed away in January of 2019.

With index investing, investors buy a basket of stocks or bonds. (Investors cannot directly invest in an index.) The most popular index is the Standard & Poor’s 500 (S&P 500), which tracks the 500 largest companies on the NYSE or NASDAQ.

Moreover, most stock market indexes, including the S&P 500, are market-cap weighted: the bigger the company, the more representation it gains on the index, and hence, in your investment option. Today, the largest holding represents approximately 3.7%, and the second-largest holding represents 2.6% of that index.

And, it is not just blue-chip stocks. Virtually any asset class can be invested in with an index that includes small-cap stocks, bonds, high-yield bonds, foreign stocks, commodities, and more.

However, Jack Bogle was not a fan of exchange-traded funds (ETFs), believing Wall Street would create an index for everything and that the trading aspect of ETFs ran counter to the long-term benefit of index investing.

During the coronavirus-induced selloff, many ETFs experienced large differences between their net asset values and their market prices. The Federal Reserves, as it seemingly always does, stepped in, promising to buy ETFs, which helped bring those two prices back in alignment.

The opposite of index investing is active management, which entails a portfolio manager or managers constructing a portfolio one security at a time. By dissecting the prospects of a company’s stock or bonds, the manager hopes to create a portfolio that can outperform the market and indexes.

Over the last ten years, however, $1 trillion of investors’ money has moved from active management to index investing. A big reason for this is that, during that same period, most active managers underperformed lower cost-index options.

Worse yet, during the Great Recession, when one hoped active management could reduce a portfolio’s losses (even though the S&P 500 Index lost approximately 50%), active managers did not perform a whole lot better, suffering losses similar or, in some cases, worse.

The significant long-term advantage of index investing is lower costs, as the fees charged to investors are significantly less than those in active management. This is because index investing has no managers to pay; no one is researching and picking the securities.

However, what Buffett and Bogle fail to recognize—or, at the very least, acknowledge—is that those active managers trying to beat the market are what makes the market efficient: because of them, most individual securities get priced correctly. Thus, with no bargains for active managers to grab, investors might as well buy a lower-cost index.

Plus, with the Federal Reserve buying assets during market downturns, prices never get cheap enough for active managers to buy. Even Buffet, during this latest downturn, stepped back from buying after the Fed stabilized the markets. Buffet believed the Fed was doing the right thing.

So, while Buffett praises Bogle and indexing, he minimizes the importance of active management to the outperformance of indexing. Plus, if more investors switch to index investing, less research and active management will get done. This could create more bargains and set the stage for the investing world to flip back to benefitting from the security selection once highlighted by Buffett’s mentors, Benjamin Graham and David Dodd, in their famous 1934 book, Securities Analysis.

Sources:

Braham, Lewis. “A Seismic Shift is Happening, and Billions are Pouring Into These Index Funds and ETFs.” CNBC, April 17, 2017. http://www.cnbc.com/2017/04/17/a-seismic-shift-is-happening-and-billions-are-pouring-into-these-funds.html

Graham, Benjamin, and David L. Dodd. Security Analysis. Sixth Edition. Foreword by Warren E. Buffett. New York: McGraw Hill Education, 2008.

Levy, Rachael. “Warren Buffett Just Said This Man has Done the ‘Most for American Investors’.” Business Insider, February 25, 2017. http://www.businessinsider.com/warren-Buffett-praises-vanguards-jack-bogle-in-annual-letter-2017-2

“S&P 500 Companies by Weight.” SlickCharts. 2017. http://slickcharts.com/sp500

Light, Larry. “ Why Index Fund Creator Jack Bogle Hates ETFs.” Chief Investment Officer, January 17, 2019. https://www.ai-cio.com/news/index-fund-creator-jack-bogle-hated-etfs/

These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice. 

Book an Appointment

July 2020
SunMonTueWedThuFriSat
2829301234
567891011
12131415161718
19202122232425
2627282930311

No Cookie-Cutter Solutions

As an independent financial advisor, I have access to many financial products, including mutual funds, ETFs, stocks, bonds, and annuities. I use them to build custom portfolios, trusts, and retirement plans for people and organizations.

Fee-Only or Commission What Standard of Care is Best for You?

Inheriting an IRA

Inheriting an IRA

Inheriting an IRA

Tim Hayes AIF®, CRPS®, AWMA®, CFS®, APMA®, CAS®

The worst part of being a financial advisor is seeing a client pass away. Last year was especially tough for me, as two long-time clients of mine passed away.

It is difficult to talk with beneficiaries, some of whom I meet for the first time after they suffer such a terrible loss. I can do my small part by making sure that my client’s beneficiary designations are in order, and when the time comes, I can help the beneficiaries through their maze of options.

For example, when someone inherits an IRA, the particular relationship between the individual who passed away and the beneficiary dictates the available choices. When the spouse is the sole beneficiary, that person can either remain a beneficiary or become the owner of the IRA.

To avoid paying the 10% penalty on withdrawals, spouses under the age of 59½ who need access to the IRA should consider remaining a beneficiary, as any withdrawals made by beneficiaries are exempt from the penalty. If it makes sense to become the owner in the future, they can always do so at a later date.

Spouses over 72 should also consider remaining beneficiaries. When they reach that age, the government requires the IRA’s owner to begin taking distributions from it. For example, if a spouse passes away at 65, and the surviving spouse is over 72, then, by remaining a beneficiary, the surviving spouse has a six-year window before they are required to take a distribution because they are using their spouse’s age.

Spouses are the only beneficiaries who can become owners. They can move the inherited IRA into their own IRA, 401(k), or 403(b). Just remember: If a spouse becomes the owner, then that person’s age becomes the yardstick that determines whether a withdrawal is subject to the 10% penalty. The age also determines when distributions are required to take effect. This could benefit a younger spouse who wants to put off distributions for as long as possible.

One big caveat: The option for a spouse to become the owner is allowed only if the spouse was the sole beneficiary.

The least likely choice for spouses is to disinherit the IRA, thus becoming neither owner nor beneficiary. This might happen in a wealthy family in which the spouse does not need additional taxable income but instead wishes to change places with the contingent beneficiary and provide withdrawals over a longer period to the children or grandchildren.

When anyone other than a spouse inherits an IRA, that person’s only choice is to be a beneficiary. In that case, recipients must make a trustee-to-trustee transfer of the inherited IRA, and make sure to title the new IRA in the deceased owner’s name for the benefit of themselves as a beneficiary. This is used to provide recipients the option of stretching the withdrawals out over their lifetimes, hopefully lessening the tax burden.

However, the Retirement Secure Act pushed back when stating that an IRA holder must begin taking distributions from age 70 1/2 to 72. It also decreased the time a non-spouse must distribute any inherited IRAs from over their life down to ten years.

Under the new law, a non-spouse beneficiary who is ten years younger than the previous IRA owner must withdraw the account by year ten. However, they don’t need to take annual distributions.

What About Current Beneficiaries?

Beneficiaries taking RMDs based on the previous rules can continue using the old law, but the non-spouse recipient of someone who passes away post-January of 2020 will be under the new regulations—making this a good time for 401k, 403b, or IRA retirement plan owners to review their current beneficiaries as well as any trusts with your attorney.

These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice.

About Financial Advisor Tim Hayes

Tim Hayes

Financial Advisor

CLICK TO CALL

No Cookie-Cutter Solutions

As an independent financial advisor, I have access to many financial products, including mutual funds, ETFs, stocks, bonds, and annuities. I use them to build custom portfolios, trusts, and retirement plans for people and organizations.

Fee-Only or Commission What Standard of Care is Best for You?

403b Retirement Catch-Up Options for Public School Employees

403b Retirement Catch-Up Options for Public School Employees

403b Retirement Catch-Up Options for Public School Employees

Tim Hayes AIF®, CRPS®, AWMA®, CFS®, APMA®, CAS®

Public school educators, including university professors and administrators, can save more pre-tax than any other public or private-sector employee.

That’s because educators are eligible for two retirement plans, both with unique catch-up options.

In 2020, educators can save $19,500 into a 403(b) and a 457 plan. Those 50 years of age or older can also contribute an additional $6,500 into one of the two programs.

The 403(b) catch-up allows educators with low 403(b) savings who have worked 15 years with the same employer to save an additional $3,000 per year for five years.

One problem with this catch-up is that any contributions over $19,500 are credited first against the 15-year rule, so a teacher aged 50 or older could use up their 15-year catch-up without knowing it.

The 457 plan has a more considerable catch-up. It allows eligible employees to contribute $37,000 per year for three years before their “regular retirement date.”

The 403(b) catch-up can be used in conjunction with the age of 50 catch-up and a 457 plan. However, the 457 plan catch-up cannot be used with the age of 50 catch-up, although the employee could still contribute to a 403(b).

Not everyone can afford to save the maximum; however, it is good to know that educators have a well-deserved potential benefit.

Your school system provides you with a list of 403(b) companies. The 457 plan is different. The city/town usually provides one company. Both typically give you a broad range of investment options.

Massachusetts Public Employees & Social Security Eligibility

Sign Up Today For a 403(b) Plan and Start Paying Fewer Taxes Tomorrow

Since 1990, I’ve been a financial advisor specializing in helping educators set up, invest in, and service their 403(b) plans.

I have accumulated a reservoir of knowledge on the retirement system, the social security offset/windfall elimination, 403(b) plans, and other financial issues specific to public employees.

Because I am an independent financial advisor who provides flexible payment options (fee-only, hourly rate, or commission), I can work with most companies in your school system’s 403(b) plan. A partial list of companies I work with includes Fidelity, American Funds, Putnam, MFS, Aspire, Security Benefit, Axa, and Oppenheimer.

Notes:

  • School systems should think about eliminating the fifteen-year catch-up from their 403(b) plan, especially if there is no tracking system in place when the catch-up contribution starts.
  • Any employee who is saving the maximum in a 403(b) plan and wants to save more money can usually open up a 457 plan.
  • Remember, if you are eligible, you can use the 457 catch-ups with the 403(b) plan, plus the age fifty catch-up, making it an excellent option for any educator who wants to defer sick buybacks.

These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice. 

“PLEASE NOTE: The information being provided is strictly as a courtesy. When you access this link you are leaving our website and assume total responsibility for your use of the website you are linking to. We make no representation as to the completeness or accuracy of information provided at this website. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, websites, information and programs made available through this website.”

About Financial Advisor Tim Hayes

Tim Hayes

Financial Advisor

CLICK TO CALL

No Cookie-Cutter Solutions

As an independent financial advisor, I have access to many financial products, including mutual funds, ETFs, stocks, bonds, and annuities. I use them to build custom portfolios, trusts, and retirement plans for people and organizations.

Fee-Only or Commission What Standard of Care is Best for You?

How the New Retirement Secure Act Impacts You

How the New Retirement Secure Act Impacts You

How the New Retirement Secure Act Impacts You

Tim Hayes AIF®, CRPS®, AWMA®, CFS®, APMA®, CAS®

Congress recently passed, and President Trump signed, the SECURE Act. Among other things, it pushes back from age 70 1/2 to age 72 the age when someone is required to start taking their minimum distribution from their IRA, 401k, or IRA. It also allows individuals to contribute to an IRA past age 70 1/2 and makes it easier to generate annuity income from their retirement plan.

The most significant change, though, is how it treats non-spouse beneficiaries. Previously, non-spouse beneficiaries could “stretch” their required withdrawals over their lifetime. For example, a 40-year-old successful doctor who received a substantial sum from their mother’s IRA could take their required amount over their lifetime.

Thus, they could spread out their tax liability and invest those proceeds aggressively, as the Beneficiary IRA had a 30- or 40-year time horizon.

Soon, under the new law, a non-spouse beneficiary who is ten years younger than the previous IRA owner must withdraw the account by year 10. However, they don’t need to take distributions every year.

Planning Ideas

Some beneficiaries might need to adjust their thinking, maybe taking less risk with their inherited IRA to reflect the shorter time when they need to deplete the account.

Others might want to maximize their retirement plan at work to offset the higher taxable withdrawals during those ten years. These higher potential taxes, for many, come on top of the loss of SALT tax deductions from the 2017 Tax Reform Act. So, maybe you could pay down your mortgage with the proceeds if you no longer itemize.

Investing In an Overpriced Stock Market

What About Current Beneficiaries

Beneficiaries taking RMDs based on the previous rules can continue using the old law. But the non-spouse recipient of someone who passes away post-January of 2020 will be under the new regulations — making this a good time for 401k, 403b, or IRA retirement plan owners to review their current beneficiaries as well as any trusts with your attorney.

These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted upon as individualized investment advice.

More About Tim

Expert and highly personalized financial planning, retirement planning, and independent investment solutions, when you need an independent financial advisor in Massachusetts — Boston and Greater Boston, Salem or the North Shore, Hingham, or another town on the South Shore, Andover and the Merrimack Valley, the Metrowest including Foxboro, or the Southcoast, Martha’s Vineyard, Nantucket, and Newport RI from my Dartmouth office.

About Financial Advisor Tim Hayes

Tim Hayes

Financial Advisor

CLICK TO CALL

No Cookie-Cutter Solutions

As an independent financial advisor, I have access to many financial products, including mutual funds, ETFs, stocks, bonds, and annuities. I use them to build custom portfolios, trusts, and retirement plans for people and organizations.

Fee-Only or Commission What Standard of Care is Best for You?

Fee-Only or Commission What Standard of Care Is Best for You?

Fee-Only or Commission What Standard of Care Is Best for You?

Fee-Only or Commission What Standard of Care Is Best for You?

Tim Hayes AIF®, CRPS®, AWMA®, CFS®, APMA®, CAS®

Many financial advisors are registered as both representatives of a broker-dealer and as investment-advisor representatives of an investment advisor.

Investment advisors are fiduciaries who owe the client a higher oath of loyalty. They must act in their clients’ best interest and disclose any conflicts of interest.

Registered representatives are not fiduciaries. The advice they offer the client must suit the client’s particular situation. However, they do not have to disclose any conflicts of interest.

ERISA

If that is not confusing enough, there is a third standard, a fiduciary advisor who falls under ERISA, the law governing retirement and pension plans. Unlike investment advisors who can have conflicts of interest as long as these are disclosed, an ERISA fiduciary advisor must eliminate all conflicts.

Which Registration Is Right for You?

I do most of my wealth management business (90%) as an investment advisor representative (fiduciary). I charge the client a level or a fee-only, usually based on their portfolio’s size and complexity.

If the client has a smaller account, such as a Roth IRA or a 529 Plan, or is a teacher saving in a 403(b) plan, I opt to receive commissions as a registered representative. Most of these clients end up paying less with a commission-based product. Moreover, maybe they do not need as much time as those who pay an annual fee.

A Uniform Standard of Care

​Under the 2010 Dodd-Frank Act, Congress directed the Securities and Exchange Commission (SEC) to study the need for establishing a new, uniform federal fiduciary standard of care for brokers and investment advisors.

Having a uniform standard would make it easier for investors, as many are unaware that there are two standards and that the same financial advisor could wear both hats.

The New Rule from the SEC

Beginning June 30, 2020, broker-dealers will start operating under a new standard called Regulation Best Interest. This requires brokers to better align their interests with those of their clients by eliminating conflicts of interest, such as proprietary product requirements, sales quotas, or sales contests.

Registered representatives will now be called financial professionals. Any advisors who are fiduciaries can continue calling themselves financial advisors.

Some critics complain that the new standard does not meet the uniform standard’s original intent.

These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice. 

More About Tim

Expert and highly personalized financial planning, retirement planning, and independent investment solutions, when you need an independent financial advisor in Massachusetts — Boston and Greater Boston, Salem or the North Shore, Hingham, or another town on the South Shore, Andover and the Merrimack Valley, the Metrowest including Foxboro, or the Southcoast, Martha’s Vineyard, Nantucket, and Newport RI from my Dartmouth office.

About Financial Advisor Tim Hayes

Tim Hayes

Financial Advisor

CLICK TO CALL

No Cookie-Cutter Solutions

As an independent financial advisor, I have access to many financial products, including mutual funds, ETFs, stocks, bonds, and annuities. I use them to build custom portfolios, trusts, and retirement plans for people and organizations.

Fee-Only or Commission What Standard of Care is Best for You?

If you’re concerned about your financial future, let’s talk