Your Personal Index Portfolio

Indexing 4.0 – Stock Market Exposure that Revolves Around You, Not the Market 

Put simply, we believe custom indexing is the future of stock market investing for high-net-worth families.  First, it builds off of several key advantages developed over the past few decades.  Jack Bogle of Vanguard launched the S & P 500 Index fund in the mid-1970s.  Ever since, low cost index funds have soundly beaten actively managed products.  In the early 1990s, tax-managing an index fund in a separate account brought further advantages of tax loss harvesting to produce reliable “tax alpha”.  Then in the mid-2000s attention shifted to so-called smart beta approaches, such as fundamental weighting, that used different portfolio designs to produce more efficient index exposures.

Around the same time, MIT Finance professor Andrew Lo foresaw the next great advancement*, namely that  investors would have personalized index portfolios purposed for their unique financial picture. While seemingly science fiction, Lo noted the technology existed and “as with the transformation of all great ideas from theory into practice, it is only a matter of time.”  That time is now.  

Today, “Indexing 4.0” brings customization that incorporates risk tolerance, values, human capital, investment beliefs, charitable giving, and taxes.  Each of these attributes is uniquely personal.  Why should the S & P 500 be the perfect stock market exposure for you?  The resulting customized portfolio (i.e., the “Your Household 500”) should have no benchmark.  It’s been designed exclusively for the household’s entire capital base and personal values.  The switching costs of chasing returns from one hot strategy to another – what one of us referred to as the “biggest failure in investment management”– evaporates when the stock market exposure has been built around your unique situation.   This allows your capital to compound efficiently over time.  As Charlie Munger (Warren Buffet’s longtime partner) says, “The big money is not in the buying and the selling, but in the waiting.”  

*Lo, Andrew W. (2001), Personal Indexes, Journal of Indexes, 2nd Quarter, 26–35.