March 13, 2024

Passive Strength, Active Insights: Navigating the Investment Ocean

Forget the rigid labels of "active" and "passive." Today's investment landscape beckons for a nuanced approach, a blend of passive strength and active insights that harnesses the power of the market, while navigating its currents with informed precision.

Riding the Market Tides, Not Fighting Them:

Think of the stock market as a vast ocean, its surface churning with waves of change. Traditional active investing is like battling against this tide, searching for hidden pockets of calm or predicting unpredictable surges. While some may succeed, many find themselves exhausted and disoriented: a 2023 S&P report found that over the past 5 years, 87% of actively managed large-cap US equity funds underperformed the S&P 500 index. Similar trends hold true across asset classes and geographic regions.

Passive investing, on the other hand, is like riding these waves, trusting the ocean's inherent rhythm and its long-term upward trend. Instead of fighting the flow you hop on a sturdy vessel like an index fund, a diversified basket of securities mirroring a specific market segment. 

Avoiding Uncharted (or Unintended) Waters:

While index funds offer a low-maintenance approach, it's not entirely set-and-forget. Just like a sailboat needs occasional adjustments to stay on course, index funds may slowly drift from their intended allocation over time. This "drift" typically occurs due to market movement: this is when individual securities within the index can experience different rates of growth, causing their weightings to change naturally. For example, if a particular company in an S&P 500 index doubles in value while others remain stagnant, its percentage of the overall fund will increase. This leaves your investment not entirely in line with where you intended to be when you started. 

To combat this, a traditional index fund will rebalance on a predetermined and publicly announced schedule, which allows markets to anticipate which funds will be added or removed from the index. Stocks being added to (or seeing an increase in weight inside) an index tend to go up in price prior to rebalance, while deletions (or those seeing a decrease in weight) tend to go down. This means that rigid index investors end up buying additions at high prices and selling deletions at low prices.

The Active Edge: Beyond Guesswork, Towards Informed Choices:

Knowing that rigidly investing in an index has its perils, we find that an investment process with the flexibility to rebalance continuously through time can maintain the desired exposures more consistently, potentially capturing premiums more reliably and potentially avoiding unnecessary costs.  

This is where the "active edge" comes in, not in chasing fleeting trends, but in harnessing the valuable information embedded within market prices. These prices reflect more than just random movements; they inform about companies' underlying characteristics like value, size, and profitability. By systematically analyzing these factors, we can identify opportunities to potentially enhance portfolio performance over time, within the framework of tax-advantaged ETFs and mutual funds.

Imagine it like adjusting your sails to catch the most favorable winds. Just as a skilled sailor uses the breeze to propel the boat, we can actively construct portfolios using funds that tilt towards factors historically associated with stronger long-term returns. This approach combines the stability and diversification of indexing with the potential for improved growth, offering a compelling option for modern investors seeking long-term success.

Investing for the Future, Not Just Today:

Remember, this passive strength with an active edge isn't about the thrill of short-term wins or chasing the next hot stock. It's about harnessing the market's power for your long-term goals, whether that be building your retirement nest egg, savings for your children's education, or achieving financial independence. By blending efficient market exposure with informed insights, you can have confidence as you face the turbulence and enjoy the journey towards your financial aspirations.

Feel free to reach out with any additional questions; we are always happy to discuss why we believe in this investment philosophy, and we love to dive into the data that backs it up. 


Dimensionsal Fund Advisors “Beware the Hidden Costs of Indexing”: 

S&P “SPIVA US Scorecard Mid-Year 2023”:


Stock investing includes risks, including fluctuating prices and loss of principal.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Download the free retirement timeline checklist

A short guide to understanding what happens at different ages throughout retirement - for example:

  • Age 50 - Catch-Up Contributions for 401(k)s, employer-sponsored plans, and IRAs begin. $7,500 for 401k ($30,000 total), $1,000 for IRAs ($7,500 total)
  • Age 55 -Certain employer-sponsored retirement plans allow distributions without penalty beginning at age 55. HSA contributions are now eligible for a $1,000/year additional catch up for those over age 55.
  • And more