What caught my eye this week.
Passive investing is a solved problem. Invest regularly into index funds or their ETF equivalents, allow your money to compound for 30 years, and then enjoy the fruits of the market’s return by spending down your portfolio in your later years.
Well maybe. It’s been hundreds of years since much of anything stayed the same for long. So it seems likely to me our kids and grandkids (maybe future Monevator readers?) will be doing it their own savvy way.
Live and direct
Direct indexing seems very likely to replace index funds in time, for a start.
The idea is simple. Rather than put your money into an index fund, a robo-platform basically buys the index for you via the appropriate mix of shares (or fractions of shares). This approach cuts out the middleman and makes you a direct shareholder in all the companies in the index (rather than via a proxy, such as Vanguard).
One advantage if you do this outside of tax shelters is more opportunity to defuse capital gains and exploit capital losses to reduce your tax bill, since you’ll hold the index’s winners and losers at the individual level.
But I believe it is the push towards ESG1 investing that will drive the industry towards direct indexing.
I don’t want that one!
I’ve sat through at least a dozen start-up pitches over the past few years from fintechs arguing that millennials and their younger siblings want a way to invest that’s as easy as buying an ETF but without having exposure to a fossil fuel producer or an arm’s manufacturer.
Fair enough, target ESG investing towards them then. But understand that ESG is a moving target.
For instance in the past month, fast fashion darling BooHoo has been painted as a ruthless exploiter of workers after some investigations into aspects of the UK garment industry.
I’m not convinced this picture is fair – and I own shares in BooHoo – but I don’t intend arguing the toss today.
The point is, if I was an ESG-minded investor than a company I might have considered as previously no problemo I might now wince at owning.
I’m not saying that’s a very rationale way to think about shareholder democracy. I’m saying it’s how millions of people do think.
With a traditional ESG fund – active or following some ESG index – you’d have to wait weeks or months for a third-party to kick out BooHoo of the fund, assuming they do at all.
All the time your money in the company, ruthlessly exploiting away on your behalf…
But with direct indexing, you could do it yourself. You could own the market minus BooHoo after just a couple of clicks.
Everyone of us is different. You might believe that BP and Shell are transitioning to green energy, but you hate pharmaceutical companies for what you see as high drug prices – and you want extra-exposure to High Street retail because you believe it’s important for local communities.
Good luck getting an ESG fund to reflect that view!
However start with the index, dial up energy companies and retail exposure, dial down pharma, press the ‘Direct Index Me Up’ button and you’re away.
According to some, direct indexing could do for investing what Napster and the iPod did for music – and sooner rather than later.
Quoted in an article on MarketWatch this week, Dave Nadig, an index industry veteran, said the technology to do this is already available for the rich or institutional, and it will soon reach oiks like us:
“All that’s changed over time is the thresholds for accessing an index have gotten lower and lower.
It’s just a software problem. And the technology required to produce that customized account has plummeted to the point where it’s almost retail.
It’s not quite mom-and-pop, but it’s heading there.”
I doubt Vanguard and Blackrock and the other big passive fund investors are quaking in their boots just yet.
For direct indexing to truly take off it will need to be as easy to do as buying a tracker fund. And people will need to understand what they’re doing, too, which adds an educational burden. (Think how long it took to get investors to shift towards a passive mindset. Decades.)
Also, the potential for financial services industry chicanery is high.
I therefore expect it will take a while before the landscape is one where direct indexing is really challenging our favourite passive fund approach. But be aware you might well retire investing differently to how you first got started.
Have a great heatwave weekend, everyone!
Investing for beginners: Why do we invest? – Monevator
From the archive-ator: How to start a fund – Monevator
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!2
Bank of England says rate cuts from this level are now ‘less effective’ – ThisIsMoney
Surprise as UK house prices set record after four months of falls – Guardian
US payrolls increase by nearly 1.8 million, topping expectations despite virus resurgence – CNBC
UK greenlights £1.3bn to ‘shovel-ready’ infrastructure and housing spending – City AM
London and Birmingham top cities residents wish to leave in pursuit of green space – ThisIsMoney
Bitcoin’s main rival, Ether, is having an even better 2020 – via Abnormal Returns
Products and services
Travel and quarantines: Your rights on refunds and insurance – Guardian
Monzo reports annual losses of £113.8m: are your current account and savings safe? – Which
Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade
Property fund investors face six-month lock-up in new FCA proposals [Search result] – FT
Homes for sale in a national park [Gallery] – Guardian
Comment and opinion
Don’t be that investor – Humble Dollar
Why markets don’t seem to care if the economy stinks – Yahoo Finance
We need to talk about investors’ problem with vaginas – Wired
Academically verified investment strategies that failed – Advisor Perspectives
The ten big questions for achieving financial independence [Video] – Humble Penny via YouTube
Does the market see a bridge to a vaccine, or to nowhere? – Investing Caffeine
Why would anyone own bonds right now? – A Wealth of Common Sense
The most important number in personal finance – Of Dollars of Data
CEO stress, aging, and death – Marginal Revolution
Gold 3: The return of inflation expectations – Abnormal Returns
Naughty corner: Active antics
Knowing when to ignore the numbers – Klement on Investing
Hedge funds might charge 2-and-20, but investors are paying a lot more – Institutional Investor
It’s directional, depending on a vaccine – The Reformed Broker
Creating anti-fragile portfolios – Factor Research
Technology stocks are among the big losers, too – The Irrelevant Investor
Good news from Italy… and Sweden – Bloomberg
Melbourne now back in Stage 4 lockdown – Forbes
Japan is seeing a record rise in Covid-19 cases too – Guardian
Two cruise ships hit by coronavirus just weeks after industry restarts – Guardian
American Death Cult: Why has The Republican response to the pandemic been so bad? – NY Mag
How to evaluate Covid-19 news without freaking out – Scientific American
Kindle book bargains
Influence by Robert B. Cialdini – £0.99 on Kindle
How to Own the World: A Plain English Guide to Thinking Globally and Investing Wisely by Andrew Craig – £0.99 on Kindle
I Will Teach You To Be Rich by Ramit Sethi – £0.99 on Kindle
Super Thinking by Gabriel Weinberg and Lauren McCann – £0.99 on Kindle
The sweet spot – Mr Money Mustache
Five steps to becoming insanely successful or… whatever – Mark Manson
Action creates motivation – Get Rich Slowly
Off our beat
Unlearn – Indeedably
I’m traveling, even though I’m stuck at home – The Atlantic
Reframe how you think about self-care – Harvard Business Review
Statement by Jeff Bezos to the US House Committee on the Judiciary – Amazon
In China, the panopticon is already here – The Atlantic
“That ‘temporary’ arrangement essentially remains in place 50 years later. The world has been operating without an agreed monetary standard, with varying degrees of ‘floating’ and ‘fixing’, and with the dollar still the global reserve currency.”
– Paul A. Volcker, Keeping At It
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