The funny thing is that an individualized or personalized index fund is, effectively, what investors can put together on their own, simply buying-and-holding individual stocks and funds in a mix built to mesh with their values and investment preferences.
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Imagine naming your own personal stock index; you could name it after your children or your favorite sports team, your favorite menu item, your pet, or for its purpose.
But whether you call it the Jennifer Index or the Fido Portfolio, the Patriot Fund, “Benchmark alla Carbonara” or “My Personal Value Index” is much less important than what you put into it and how you manage it and how you decide the “right” stocks or funds to buy.
Built around your personal rules — say you like companies that pay reasonable dividends and have little to no debt on the balance sheet, and consistent top-line revenue growth — you could set guidelines for a personal index, and then implement a low-cost, long-term buy-and-hold strategy that lets indexing do its thing, delivering long-term results reflective of the parts of the market you want to invest in.
With the news from the Index Industry Association that there are roughly 3.3 million indexes being run by financial-services companies — and with indexing technologies being more available and accessible every day — personalized indexing is not far-fetched. In fact, plenty of the indexes in the trade group’s tally are proprietary benchmarks, house models being run by firms that have yet to decide if they have a worthwhile index.
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Personalized or group-driven indexing can’t be far behind, not when research firms like Morningstar have published reports saying that companies could use readily available data about, say, a group of employees to come up with optimal investment choices for a company’s retirement portfolios.
Employee household and personal data could be gleaned to create an ideal life-cycle fund for the company’s workforce; likewise, demographics could enable a religious organization to offer an investment pool tailored to the beliefs of its congregants, or an alumni association to build lifestyle funds that fit various generations of alums.
It may seem far-fetched and comical, but it’s the logical evolutionary progression in a world that seems to believe that indexes can be built to solve every investment puzzle.
This is not to say that long-term low-cost index investors using Vanguard funds and other brand names will give up what they have to build their own.
But as indexing has taken over the investing world, it also has been corrupted in different ways. Many money managers now are “actively passive,” meaning they use index funds (passive) that they move into and out of regularly (actively) based on short-term market factors and conditions.
That may look like passive investing — the investments are entirely index funds — but the layer of active management added on top of the funds has the potential to undermine the benefits of indexing. It adds costs and turnover, two key elements that contribute to the shortcomings of active portfolios.
Then there are the quasi-passive funds (or are they quasi-active?), using smart-beta or other guiding principles as the basis for rules-based indexing. The holdings change more often and actively than with a fund based on a traditional, legacy index fund like the Standard & Poor’s 500, but advocates believe they have built a better index product, even though they don’t all behave like the classic benchmark funds.
That brings the discussion back to the new question of investing — discussed here last week — about whether you are an active, passive or rules-based investor.
If you are the latter, then what could possibly better than setting your own rules, using modern technology to sift the markets for the kinds of stocks that meet your personal criteria?
You have to figure the marketers are salivating at the concept.
“Yes,” said Rick Redding, chief executive officer at the Index Industry Association, “you can build an index or some sort of benchmark or measure for just about everything, and they’re not all going to be good ideas or successful indexes. They will only be as good as what you put into them.”
The funny thing is that an individualized or personalized index fund is, effectively, what investors can put together on their own, simply buying-and-holding individual stocks and funds in a mix built to mesh with their values and investment preferences.
It’s the average investor’s version of buy-and-hold investing — find what you like, and keep it for as long as you like it — with the modern twist being the use of screening techniques to find a broader cross-section of names than an investor might find by applying their personal criteria on their own.
The construction of personalized portfolios determines if they are low-cost and tax-efficient; the investor or manager determines if they get the long-term buy-and-hold benefits expected out of indexing.
Dig down, however, and it will look and feel mostly like what average investors always have done, just with a bit of a custom fit to persuade you to stick around.
At that point, investors will still face the same dilemma, deciding if they can live with the fit they get. Otherwise, they will keep thrashing, likely losing ground to the market with each move they think will help them catch up.
“New doesn’t always mean better,” said Tom Lydon, editor at ETFTrends.com. “You can always look at something and say ‘This would have been the perfect index or investment for the last 10 years, but no one can say what is going to be perfect for the next 10 years. That’s why — no matter what approach you take — the important thing isn’t to own the ‘right funds or ETFs,’ it’s to own the right funds and investments for you.”