Mutual Funds
Focused Financial Planning, Inc. is a firm believer in the investment philosophy referred to as passive investments. This does not mean that we are not actively involved in the investment decisions, actually it is quite to the contrary, as investment decisions are made with the clients after much research and analysis of the client’s personal situation. It is referred to as an investment philosophy, which will be further explained below.
Mutual funds basically come in two flavors, actively managed mutual funds and passively managed mutual funds. Following is a summary:
Passive Investment Philosophy: Passive investments are referred to investment vehicles that are mimicking indices without active stock picking. It is also called index investing. The philosophy behind this is that no one can predict the future. Therefore, as an investor, one is better off investing into the whole market or market segment than picking companies based on past performance. Intrinsic costs with passively invested funds are lower than with actively managed funds, which add return to the investor. Research over the years has shown that passive investments beat active managed investment nine out of ten times over a longer period of time.
For my clients, Focused Financial Planning, Inc. uses mainly funds from Dimensional Fund Advisors (DFA). DFA has a scientific approach to investing. They are passive investors as well, but exclude certain companies because of preset criteria such as being in Chapter 11 or recent IPO. Statistics has shown that a company in these categories almost always underperforms and is therefore not a worthwhile investment. They also don’t purchase according to market capitalization as in most index funds. For more information on DFA, please go to www.dfaus.com. In order to invest in DFA funds, you will have to open an account with an approved DFA advisor, which we are. Working with Focused Financial Planning, Inc., you had to have your brokerage account with Ameritrade under the umbrella of our professional service account. A large part of DFA’s business is working with pension funds, the remainder with very wealthy individuals and fee only financial advisors.
In addition, Focused Financial Planning, Inc. also uses Vanguard funds and Exchange Traded Funds (ETF). For all intensive purposes ETF’s are very similar to Mutual Funds, but have several technical differences. I use ETF’s for specific sector diversification as well as being able to invest into commodities among others. They can also be used to short the market as insurance.
Active Investment Philosophy: Actively managed funds comprise of mutual funds that have a fund manager that actively researches companies and then includes them in the fund. Generally they are not as diversified and history has shown that they are often underperforming passive vehicles over a longer period of time. The reason for that is that forecasting the future is a very inexact science. They also are more expensive, and sometimes come with an upfront or backend cost.
Focused Financial Planning, Inc. hardly uses them, but we have found circumstances where they can fit into a portfolio. We will never use funds that have a load.
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