Index Investing: How I Came to Prefer It

The 1980s were a wonderful time. Markets were rising, the economy was expanding, and Ronald Reagan made us feel like the sky was the limit.  I started in financial planning with great hopes for my future in financial services—and I haven’t been disappointed.

I began my career with a wonderful company that was an early adopter of what we would today call “Wealth Management”: a holistic approach to a family’s financial situation, rather than the compartmentalized approach of an accountant, attorney, broker and insurance agent. We called the prior approach “piecemeal planning”, and I still believe to this day in that philosophy.  And yet I’ve chosen a route of specialization, rather than spending full time being holistic.  Why?

Both markets and people evolve with time, and I am no different.  I still provide holistic financial reviews where it is appropriate, desired and needed.  My Certified Financial Planner(R) designation remains active, I keep up my continuing education.  Yet I have zeroed in on primarily index investing, with multiples of upside potential and less downside risk. How did I come to this?

Rather than bore you with 40 years of storytelling, and all of the twists and turns that come with such a tale, I’ll boil it down to two things:  being tired of asset allocation and active managers disappointing, not creating alpha, holding back my overall results; and wanting to hold a beachhead.

The manager/asset allocation part is simple.  Most managers do not outperform their own benchmarks.  When one does (and for more than a near-term window), it’s nice to ride that performance with investors.  But that has been more rare than just using index positions themselves, which give investors wide exposure and market-level results, by definition.  

Asset allocation has also been turned on its head. I’ve written previously about small cap investing in public markets:  how it has been co-opted by private equity and venture capital, leaving the poorer performers as the remaining options, with performance being half that of the best-performing companies for the last 10 years at least. If a small company shows real promise, it’s gobbled up by larger companies or investors before its full promise is realized.  

International investing, until this year, has also had a long underperformance run. Enough said. 

US-listed companies, especially large cap growth (e.g., technology), have been where the money is made.  We are in a revolutionary time, where the Industrial Era is ending and the Technology Era is expanding—especially with the advent of AI; to ignore this underlying fact would be like holding onto agriculture stocks as the steam engine and railroads changed the world. 

And so, focusing money on the S&P 500 or the NASDAQ 100 has been more successful for me than classical asset allocation theory and active management selection.

But the beachhead part—what is that about? 

I read a book many years ago called “Guerrilla Marketing”. It’s about being a small player in a crowded field, and competing against very large players. That’s what I’m doing. To do so successfully, you must have something truly different, attack a limited, narrow market, and hold that beachhead, like an invading military force.  Again, that’s what I’m doing.  It was very successful for me throughout my career, including in building a successful company with offices in 35 states and billions under management. I’m just applying that theory to my current work.

Structured Positions create multiples of market upside with less-than-market downside.  I’ve taken the structured products world and enhanced what can be done by removing profits from the equation—it’s the classic “remove the middle man” strategy.  The big banks won’t be happy about it, as I provide more value to their prospects (in my opinion).  But I’m not going to take a large enough share of their market for them to worry; I don’t need to—I just need a small beachhead to be successful, as I define success.

40 years is a long time, but there’s still lots of time ahead. My dad retired at 87, and I would like to surpass his record.  He lived to be almost 92, and my mother is now 90; longevity is in my genes. 

What can I do with another 30 years?

Contact me and find out. :)