Leave it to Wall Street to turn a good idea inside out and come up with an investment product that benefits the financial industry at the expense of the individual investor.
In 1976, John Bogle, then chairman and founder of the Vanguard Group, created the first stock index fund available to retail investors. Although his idea was subjected to harsh ridicule by the Wall Street crowd (why buy the market when you can beat the market?), eventually Vanguard’s S&P 500 index fund (symbol VFINX) grew to be the largest stock mutual fund in the business.
In 1993, the financial industry revolutionized the world of index funds by creating the first Exchange Traded Fund, commonly known as ETF. These investments are similar to traditional index mutual funds with one significant difference: ETFs are bought and sold throughout the day on stock exchanges like the New York Stock Exchange. Traditional mutual funds can be purchased or sold only once, at the day’s closing price, either through a mutual fund supermarket like Charles Schwab, or directly with the fund company.
The first ETF was identified as the “spider” (symbol SPY), referencing its tracking of the S&P 500 Depository Receipt. Following the enormous popularity of this unique investment, Wall Street soon introduced complimentary ETFs to track the value, small and international dimensions of the market.
Regrettably, Wall Street couldn’t leave well-enough alone. The industry has gone on to create a smorgasbord of ETFs to mirror the performance of what seems like every conceivable industry, sector and investing fad imaginable.
The phenomenal growth of index funds over the last 40 years is a testament to the questionable value that stockpickers and mutual fund managers bring to the investment advisory and wealth management business.
To counter their growing insignificance in the advisory business, stockbrokers and financial planners are turning away from picking stocks and now suggesting that “your” financial well-being is determined by “their” ability to buy and sell the top performing ETF sectors and industries throughout the day.
Nothing could be further from the truth. Your financial well-being has nothing to do with beating the stock market through top-performing industry ETFs. On the contrary, by engaging in this type of market trading activity, you are almost certain to underperform the broad market over time, and by a significant margin.
The unfortunate part of this whole scenario is that, as a result of the markets’ performance the last two years, more investors than ever before could benefit from intelligent professional investment advice.
How much risk is appropriate for your portfolio and how are you going to allocate your assets based on where you are at in your life? Do your saving or spending levels need to be adjusted to reach short and long term financial goals? Are your assets properly located so that your portfolio grows in a tax efficient manner?
These are just a few of the important questions you should be addressing with your financial advisor. Turning your attention away from industry and sector-based ETFs allows you to do just that.
Bill Schultheis, author of The Coffeehouse Investor – How to Build Wealth, Ignore Wall Street and Get on with your Life, is a financial advisor with Soundmark Wealth Management in Kirkland. He can be reached at bschultheis@soundmarkwealth.com, or 425.820.1769.
On April 23, Bill Schultheis will hold a seminar, “Surviving and Thriving in Volatile Markets.” More information is available at bschultheis@soundmarkwealth.com.
