Passive vs. Active Investing: Keeping Your Costs Low

investing

Passive vs. Active Investing: Keeping Your Costs Low

Warren Buffett probably doesn’t need an introduction but, as CEO of Berkshire Hathaway investment group, he’s one of the richest people to ever exist on our planet. As of writing, Buffett is worth $90 billion and has also given $34.5 billion to charities since 2006. But Buffett winning money isn’t something you hear about every day.

More than a decade ago, Buffett wagered against hedge fund manager Thomas Seides that passive management of investments would offer better returns than actively managed investments. Buffett recommended investing in the S&P 500 Index. This prediction then saw an annualized rate of return of 7.1% from 2007 through 2017 while the basket of hedge funds only saw 2.2% during that same time. The way that Buffett and Seides structured their bet proved interesting with the end result allowing Buffett to donate his winnings of $2.2 million to Girls Inc charity in Omaha, Nebraska. Count this story as a win for Passive Management!

So why is Warren Buffett betting against hedge fund managers in the first place? He’s vocal against hedge fund managers for two reasons: First, hedge fund managers charge hefty fees and, second, they frequently trade positions. This adds more transaction costs as they try to beat their benchmarks in attempts to prove that they can beat the market.

To follow Buffett’s lead, here are the two major areas to consider when keeping your investment costs low: 

1. Avoid excessive management fees.
2. Limit transaction costs.

Passive management helps you tackle both of these cost-cutting areas with slashed management fees and also fewer transaction costs. Passive management is the “boring” investment philosophy, but it has a lot of believers. 

It’s principles: Ride the waves of the market, keep your costs low, and buy and hold. 

These aren’t exciting to tell your pals at a cocktail party, but you can give yourself a lot of peace of mind knowing you’re not getting caught up in investment crazes (cough cough … Bitcoin).

Again, remember you can control these aspects when it comes to the prices of your investments.

1. Avoid excessive management fees

According to John Bogle, the founder of Vanguard, investors are better off investing in low-cost index funds instead of money managers who try to beat benchmarks. As Bogle said,

“If we go back to 1970, we find that there were approximately 400 funds in business and basically 330 or [3]40 have gone out of business. It turns out, in that period, there were two mutual funds who beat the market by more than two percent per year. Two! That’s half of one percent of all the funds that started in the business. Those are your odds.”

What to remember: Instead of paying 1-2% to someone who claims they can beat the market, save the money you’d pay for their investment analysts and have that money go toward your investment account. If you pay someone for performance, you’ll be amazed at all the random sheets of statistics and charts they can generate to justify their investment philosophies. By investing in passive management, you can also save a lot of paper!

2. Limit transaction costs

Think of the well-known S&P 500 Index. This index is made up of 505 stocks from the 500 largest U.S. companies that are publicly traded on American stock exchanges. The bigger the companies (like Apple), the bigger their influence on the index while the smaller the companies, less weight they have on the index. 

Instead of buying 505 different stocks as well as paying the transaction costs applied for each individual trade, you could purchase one index fund or exchange-traded fund (ETF) to follow the entire index. This helps you as you keep your costs low and also immediately improve your diversification. Another benefit is that, when companies become less profitable (cough cough… Enron), they are removed from the index while another company is added. 

We enjoy helping our clients navigate these areas of the investment world to make it simpler. You worked hard for your money, so why not have your it work hard for you? 

Many trends come and go, and it’s refreshing to hear Barry Ritholtz, an American author, newspaper columnist, blogger, equities analyst, and Chief Investment Officer of Ritholtz Wealth Management say:

“It seems that every time there’s any major trends, whether it’s towards global investing or passive investing or day trading, it’ll last for a couple of years and then something new and shiny comes along and enough people are interested in it that a substantial portion of the previous trend participants will chase that. However, I will say that the evolution towards low-cost, towards indexing, and towards being aware of how your own behavior impacts your investing, is something that’s going to be here for the foreseeable future.”

Ready to schedule your next meeting?

Simply head to the Meeting page where you can find and schedule a convenient time to discuss whatever is on your mind.

For more resources on the benefits of Passive Management:

To read some more of our thoughts on investments:

Photo by Carl Raw on Unsplash

Dan Andrews
dan@fpfoco.com

Dan Andrews is a CERTIFIED FINANCIAL PLANNER™ professional and the Director of Estate and Financial Planning at Financial Planning Fort Collins. Helping clients since 2012, Dan aims to make the financial planning process less daunting. Even though he also has extensive knowledge in estate planning, Dan enjoys financial planning with a professional yet light-hearted approach. To learn more about Dan, read his blogs or the articles he’s been featured in.



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The minimum initial investment for the Invest:FOCO platform is only $5,000 per account. This minimum can be met via transfer of an existing account or with new funds.
ANNUAL FEE
1.00% of assets under management ($100 per $10,000 managed). Debited from your account(s).
FINANCIAL PLANNING
Strategy:FOCO financial planning services are ongoing, and include unlimited phone, email, web and in-person meeting and consultation time. Pricing is based on the unique circumstances of each client situation. Generally, there is a one-time plan development fee ranging from $500 - $2,000 and a monthly fee of $150 - $500; cancel anytime. Clients utilizing investment management services with portfolios of $500,000 or more will typically receive financial planning services for no additional fee.
INVESTMENT MANAGEMENT
Assets Under Management (AUM)Annual fee as a % of AUM or flat-dollar
$0 - $249,999(See Invest:FOCO)
$250,000 - $499,9990.90%
$500,000 - $999,9990.80%
$1,000,000 - $1,999,9990.65%
$2,000,000 - $2,999,9990.50%
$3,000,000 - $3,999,999$15,000
$4,000,000 - $4,999,999$20,000
$5,000,000 or more$25,000 + $2,000 per additional $1mm
MINIMUM ACCOUNT SIZE
There is a minimum initial investment of $100,000 per Strategy:FOCO client household. This minimum can be met via transfer of existing accounts or with new funds. A client household may generally include accounts for a head of household, a significant other, dependents, and any controlled organizations or entities.

Minimums do not apply to inStream proactive financial planning as a stand-alone service.
ANNUAL FEE
Assets Under ManagementFee as a % of AUM
$100,000 - $249,9991.00%
$250,000 - $499,9990.90%
$500,000 - $999,9990.80%
$1,000,000 - $1,999,9990.65%
$2,000,000 or more0.50%

inStream proactive financial planning as a stand-alone service: $1,000/year or $100/month
MINIMUM ACCOUNT SIZE
There is a minimum initial investment of $100,000 per Strategy:FOCO client household. This minimum can be met via transfer of existing accounts or with new funds. A client household may generally include accounts for a head of household, a significant other, dependents, and any controlled organizations or entities.

Minimums do not apply to inStream proactive financial planning as a stand-alone service.
ANNUAL FEE
Assets Under ManagementFee as a % of AUM
$100,000 - $249,9991.00%
$250,000 - $499,9990.90%
$500,000 - $999,9990.80%
$1,000,000 - $1,999,9990.65%
$2,000,000 or more0.50%

inStream proactive financial planning as a stand-alone service: $1,000/year or $100/month
MINIMUM ACCOUNT SIZE
The minimum initial investment for the Invest:FOCO platform is only $5,000 per account. This minimum can be met via transfer of an existing account or with new funds. Invest:FOCO is currently available for Individual, Joint, Traditional IRA, and Roth IRA registrations.
ANNUAL FEE
0.65% of assets under management ($65 per $10,000 managed)
MINIMUM ACCOUNT SIZE
The minimum initial investment for the Invest:FOCO platform is only $5,000 per account. This minimum can be met via transfer of an existing account or with new funds.
ANNUAL FEE
0.65% of assets under management ($65 per $10,000 managed)
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Invest:FOCO clients are eligible for a 10% discount on income tax preparation services offered through Fort Collins Tax Service, LLC. This discount applies to the base cost for return preparation as well as Schedules B & D. More details can be found here.
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There are no minimums when utilizing inStream proactive financial planning as a stand-alone service.

When investment management services are desired, there is a minimum initial investment of $125,000 per Strategy:FOCO client household. This minimum can be met via transfer of existing accounts or with new funds. A client household may generally include accounts for a head of household, a significant other, dependents, and any controlled organizations or entities. inStream proactive financial planning is then included at no additional cost.
ANNUAL FEE
inStream proactive financial planning as a stand-alone service: $1,250/year or $125/month

Assets Under ManagementFee as a % of AUM
$125,000 - $249,9991.00%
$250,000 - $499,9990.90%
$500,000 - $999,9990.80%
$1,000,000 - $1,999,9990.65%
$2,000,000 or more0.50%
TAX PREPARATION
Strategy:FOCO clients are eligible for a 50% or 100% discount on income tax preparation services offered through Fort Collins Tax Service, LLC. This discount applies to the base cost for return preparation as well as Schedules B & D. More details can be found here.
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Stay in the loop with our Monthly Economic Update. It's a great way to catch up on the things effecting your financial plan in an easy to read and relatable format.

We promise to only use your name and email address for sending our Monthly Economic Update. We will not sell, rent, lease, loan, or use your name or email address for any other purpose, internally or externally. You can easily unsubscribe at any time.
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Minimums do not apply to always-on, real-time financial planning as a stand-alone service.

For investment management services there is a minimum initial investment of $125,000 per Strategy:FOCO client household. This minimum can be met via transfer of existing accounts or with new funds. Investment management fees are generally debited from the accounts to which they apply. Financial planning services are included for Strategy:FOCO investment management clients at no additional charge.
ANNUAL FEE
Always-on, real-time financial planning as a stand-alone service:  $125/month or $1,250/year

Assets Under ManagementFee as a % of AUM
$125,000 - $249,9991.00%
$250,000 - $499,9990.90%
$500,000 - $999,9990.80%
$1,000,000 - $1,999,9990.65%
$2,000,000 or more0.50%
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FINANCIAL PLANNING
Financial planning services are ongoing, and include unlimited phone, email, web and in-person meeting and consultation time. Pricing is based on the unique circumstances of each client situation. Generally, there is a one-time plan development fee ranging from $500 - $2,000 and a monthly fee of $150 - $500; cancel anytime. Clients utilizing investment management services with portfolios of $500,000 or more will typically receive financial planning services for no additional fee.
INVESTMENT MANAGEMENT
Assets Under Management (AUM)Annual fee as % of AUM or flat-dollar
$0 - $249,9991.00%
$250,000 - $499,9990.90%
$500,000 - $999,9990.80%
$1,000,000 - $1,999,9990.65%
$2,000,000 - $2,999,9990.50%
$3,000,000 - $3,999,999$15,000
$4,000,000 - $4,999,999$20,000
$5,000,000 or more$25,000 + $2,000 per additional $1mm
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Your fee is determined by the complexity of your needs and situation. The primary proxy we use for complexity is your investable net worth, which is generally your total net worth, excluding your primary residence. Your investable net worth includes the value of cash, bonds, stocks, mutual funds, rental real estate, and other business or financial interests. This aligns with the holistic nature of our comprehensive services. You can use the chart below to estimate your fee based on your investable net worth. In some circumstances, your fee may be more than the minimums in the chart below.
Annual Fee Investable Net Worth (INW)
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$6,000 (minimum for couples)Up to $1,000,000
$8,000Up to $1,500,000
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ESTIMATE YOUR FEE
Your fee is determined by the complexity of your needs and situation. The primary proxy we use for complexity is your investable net worth, which is generally your total net worth, excluding your primary residence. Your investable net worth includes the value of cash, bonds, stocks, mutual funds, rental real estate, and other business or financial interests. Our transparent pricing aligns with the holistic nature and value of our comprehensive services. You can use the chart below to estimate your fee based on your investable net worth. In some circumstances, your fee may be more than the minimums in the chart below.
Annual Fee Investable Net Worth (INW)
$4,000 (minimum for an individual)Up to $500,000
$6,000 (minimum for couples)Up to $1,000,000
$8,000 - $12,000$1,000,000 - $3,000,000
+ $1,000per additional $1,000,000 of INW