Investment management is the ongoing work of deciding what you own, why you own it and when to change it. That sounds simple, and the first part usually is. Most people can pick a reasonable fund. Where portfolios tend to go wrong is in the quieter parts of the job: what everything costs, how taxes are handled, and what happens the next time the market drops 20%.
What Investment Management Actually Covers
A complete approach handles four jobs, not one:
Setting the mix. How much sits in stocks, bonds and cash. This depends on when you will need the money and how large a decline you can live through without changing course. The mix drives more of a portfolio’s behavior than any single holding does.
Choosing the holdings. The individual stocks, funds or ETFs that fill each part of the mix.
Controlling cost and taxes. Fund expenses, trading costs, advisory fees and the tax bill from buying, selling and withdrawing.
Monitoring and adjusting. Rebalancing when markets move the mix away from its target, and revisiting the target itself when your life changes.
Active or Passive: Why the Label Matters Less Than the Cost
Passive investing tracks a market index at low cost. Active investing selects holdings in an attempt to beat an index or to manage risk differently. The debate between the two gets a lot of attention, but the more useful question is what you are paying for each decision and whether that decision serves your plan.
That matters because cost compounds. Industry studies such as S&P’s SPIVA reports have found that most actively managed stock funds trail their benchmark index over long periods once fees are counted. Paying more is not automatically a mistake, but it should buy something specific.
Three Places Money Quietly Leaks
1. Fees. As a hypothetical example, take $500,000 invested for 20 years. At a 6% annual return it would grow to about $1.60 million. If one extra percentage point a year goes to costs, so the return is 5%, it would grow to about $1.33 million. The difference is roughly $277,000 from a single percentage point. (This is an illustration only, before taxes, and not a projection of any actual investment.)
2. Taxes. Two investors with identical holdings can keep very different amounts. It depends on which investments sit in taxable accounts versus IRAs and 401(k)s, whether losses are used to offset gains, and the order in which accounts are drawn down in retirement.
3. Behavior. The most expensive decision many investors make is selling after a sharp drop and buying back after the recovery. A written plan and an advisor who knows your situation make that decision less likely. We wrote more about it in why you should not panic sell during a down market.
How We Approach It at Toomey Investment Management
Cost first. We use a proprietary portfolio construction process on a platform that lets us trade all US equities without commissions or transaction fees. No one can guarantee rates of return, but we can be completely transparent about your all-in cost of investing with our firm.
Tax planning built in. Our advisors prepare tax returns every year, and tax planning is part of every client’s financial plan at no additional charge. Investment decisions are made with your tax return in mind, not in a separate silo.
A mix matched to you. We work from a range of portfolio models, from conservative to aggressive, and choose based on your time horizon and comfort with risk rather than a one-size-fits-all default.
Part of a bigger plan. Investment management sits alongside retirement, insurance, tax and estate planning. You can read more about our fee-based asset management and the rest of our financial services.
Questions to Ask Whoever Manages Your Money
What do I pay in total each year, including fund expenses?
How was my stock and bond mix chosen, and when was it last reviewed?
How are taxes considered when you buy, sell or take withdrawals?
Are you required to act in my best interest? (Our article Do I Need a Financial Fiduciary? explains why this matters.)
If those answers are hard to get, that is useful information in itself. To talk through how your portfolio is managed today, call our Wallingford office at 203-949-1710 or contact us.
If you are weighing whether to manage your money yourself, see Wealth Management vs. DIY Investing, and for how investments fit into a full plan, read Why a Financial Plan Is More Than a Portfolio.
This article is for general information only and is not individualized investment, tax or legal advice. All investing involves risk, including possible loss of principal.