Aug 27, 2024
For would-be retirement investors, the dilemma looks like this: You know you have to do it, but sussing out the details can get maddening and even frightening. What is loss harvesting anyway? Or dollar cost averaging? Or options puts and calls? Wouldn’t it be easier to make cash dumps like you do at the bank and call it a day?
Enter passive portfolio management, commonly known as “set it and forget it.” By tying your investments to indexes — the S&P 500 or Nasdaq, for example — you simply put your money down and follow the bouncing ball. Or egg, as in: If the index goes up, so does your retirement nest egg. And if it goes down, don’t get too down. Established indexes usually regain momentum over time.
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Investing in an index or its close cousin the exchange-traded fund (ETF) makes it effortless to buy a basket of stocks after evaluating their collective track record over time. If you can read a line graph and fill out an online form, then you’re on your way.
Yet just as markets are living, breathing things, keeping a passive portfolio doesn’t imply that you freeze it in amber. As with any retirement investment, you’ll want to diversify your holdings — perhaps creating a basket of baskets of stocks! — and evaluate things as you go.
Flexing your index muscle
The index strategy avoids the guesswork of trying to pick winners and losers and instead lets you cast your lot with the market’s overall health. What’s more, passive funds are marked by low fees. Vanguard’s index funds are typical, with an expense ratio of 0.05%.
ETFs work in much the same way, though their categories often get more granular, with stocks grouped by categories that run the gamut from a particular nation to a single cryptocurrency. The first “spot bitcoin” ETFs appeared in January after the U.S. Securities and Exchange Commission, compelled by court action, gave the greenlight.
ETFs can also be bought and sold multiple times over a trading day, whereas index funds only settle when trading ceases. This popular investment type got its start in January 1993, when State Street Global Advisors launched its SPDR S&P 500 ETF Trust (SPY). It’s a juggernaut today, with $565.2 billion in assets under management.
From that one fund, there are now more than 3,100 U.S.-based ETFs as counted by the Investment Company Institute. Meanwhile the global ETF market in 2024 passed the $12 trillion mark, according to ETGI. The amount surpasses the combined GDP of the U.K., France, Italy and Canada combined.
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When passive gets too aggressive
Now given all the industry growth, absence of fees and lack of pushy salesmen, it might seem like a bullish passive portfolio strategy is the way to go — and in many instances it is. Yet relying on “set it and forget it” entirely will mean missing out on some smart opportunities. Value investors are particularly adept at sniffing out no-brainers: stocks that are undervalued and poised to rise.
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What’s more, investment priorities change as people age. Investing a pile in the tech-heavy Nasdaq might work at one stage of life but as investors near retirement, getting more conservative is highly advisable, experts say.
ETFs and index funds can still be part of the overall picture, but bonds and high yield savings have a place there as well. You could call one popular portfolio mix for near-retirees the “50-50-50”: an even split between SPY and bond funds for people in their 50s.
Still you could stick it out with a bonehead simple passive strategy and still wind up OK. Arguably, the greatest testament to passive portfolio management comes from the top investor alive. In his take on set it and forget it, billionaire Warren Buffett certainly didn't forget his wife Astrid. In his 2013 letter to Berkshire Hathaway shareholders, Buffett explained how he’d set up his will to ensure she would benefit from a fundamental investment strategy.
“My advice to the trustee could not be more simple,” he wrote. "Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. ... I believe the trust’s long-term results from this policy will be superior to those attained by most investors.”
As investment counsel goes, unforgettable.
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Lou Carlozo is a freelance contributor to Moneywise.
