Part of our job here at Hill Investment Group is to keep a relatively close eye on financial industry news, so our clients don’t have to (unless they find it interesting). One technical tidbit caught our eye recently when Vanguard’s advisor news channel reported on how its index funds will be impacted by a change to the way the Center for Research in Security Prices (CRSP) will be reconstituting its indexes.

Wow, that’s a lot of jargon. Let’s translate.

Most investors are familiar with the broad strokes of index investing. An index fund identifies a slice of the market to invest in – such as U.S. small-company value stocks. The fund manager then picks an index that tracks that same swath, and buys up essentially everything that index is holding. For the past several years, Vanguard has been using CRSP indexes to fulfill that role.

Mostly, that’s a relatively sensible way to go about investing. CRSP indexes are at least as robust as any others for tracking particular markets. And index funds are certainly better than active managers, who spend their time and your money trying to dodge in and out of markets, without adding expected extra worth.

If there weren’t an even better – let’s say best – way to go about it, we’d probably be all in on index funds ourselves (and there are times we use them, when we feel they are the ideal tool for the job at hand). But, instead of investing in funds that follow indexes that follow a swath of the market … we typically prefer funds that skip the index “middle man,” and buy into the vast majority of a market swath directly. Dimensional Fund Advisors is one such fund manager, and the longest-tenured among them, having been around since 1981.

Vanguard’s recent announcement speaks to one reason we prefer the more direct approach. One bugaboo index funds face is what to do whenever its underlying index “reconstitutes,” or changes the securities it’s tracking. Every index does this from time to time. For example, say a small company becomes a big company. A small-cap index must then stop tracking its stock and, usually, pick a different one to track instead.

That means any index fund tracking that index must actually sell and buy those same swapped-out securities – and relatively quickly if it wants to keep accurately reflecting its target index. You may already be a step ahead of me if you recognize that this creates some pricing challenges. If several index fund managers are all trying to sell and buy the same securities at around the same time, the trades can end up costing more than if there weren’t an essentially artificial supply-and-demand issue at play.

To help alleviate (although probably not eliminate) that challenge, CRSP has announced it will spread its reconstitution activities across five days instead of just one.

Again, that’s a sensible idea, and it may help some. But remember, fund managers like Dimensional allow us to avoid the reconstitution challenge entirely by more directly tracking the small-cap value market (and many others). This is a topic for another post, but direct tracking also offers other advantages over being tied to an index. Suffice it to say here that not all small-cap value funds are equally as effective at capturing the expected premiums available from this relatively narrow market.

So, with respect to Vanguard’s recent announcement, “better” is nice. But when the choice is, “better or best?” … we still prefer best.

Even though it’s no longer the new year, when “fresh start” resolutions are top of mind, there’s never a bad time to do some good organizing. For that, we are pleased to share this post about Hill Investment Group’s fully mobile client portal.

What’s a portal? I’m glad you asked. Think of it as a cross between a filing cabinet, safety deposit box and personal assistant, rolled together to ensure that everything contributing to your financial life is securely stashed, and readily accessible – whenever you may need it from wherever you may go.

Here’s a short preview to see what we mean.

I know. There are a lot of gadgets out there. It can be hard to imagine how liberating a well-built financial portal can be if you’ve never used one.

Fortunately, we’ve done the due diligence for you, and have selected an innovative tool that combines user-friendly form with powerful function. We’re not just talking about accessing your investment accounts. Think, too: bank accounts and retirement plans, credit cards and collectibles, home interests and insurance policies, payments due and dollars received, financial goals assigned and achieved, emergency paperwork and more … together at last.

The more complicated your financial life becomes, the more critical it is to have a solid portal – your secure, dependable doorway to your financial interests.

PS: It doesn’t hurt to have a wealth manager on board as well, to help you act on the many possibilities that more organized living can reveal. That’s what we’re here for!  Email service@hillinvestmentgroup.com with questions or to get set up.

Here’s another idea to consider as you embark on a fresh start in 2017: In financial jargon, what you own is sometimes referred to as asset allocation. But what about where you own what you own? That’s called asset location. It’s about deciding whether to locate your stocks, bonds and other holdings in your taxable or tax-sheltered accounts, so we can maximize your portfolio’s overall tax efficiency.

Unfortunately, compared to asset allocation, asset location is less familiar to most investors. That’s too bad, because a little bit can go a long way toward minimizing some of the sticker shock you experience when your Form 1099s start rolling in, revealing your annual taxable capital gains and interest earnings.

How far can it take you? In this related Illustration of the Month, Nerd’s Eye View’s Michael Kitces estimates it can bring you up to 0.75% of economic impact to your bottom line.

How Does Asset Location Work?

The general rule of thumb is to:

• Place your least tax-efficient holdings in your tax-sheltered accounts, where you aren’t taxed annually on the capital gains or interest earned. Think bonds, real estate and tax-inefficient equities such as emerging markets.
• Place your most tax-efficient holdings in your taxable accounts – such as the rest of your stock holdings.
• In your taxable accounts, invest in low-cost evidence-based funds that are deliberately managed for additional tax efficiencies. (Start by looking for “tax managed” in their fund names and prospectuses.)

Advisor to Assist

It makes intuitive sense that, by locating your most heavily taxed investments within your tax-sheltered accounts, you can minimize or even eliminate their tax inefficiencies as described. But it’s not as easily implemented as you might think.

First, there is only so much room within your tax-sheltered accounts. After all, if there were unlimited opportunity to tax-shelter your money, we’d simply move everything there and be done with it. In reality, challenging trade-offs must be made to ensure you’re making best use of your tax-sheltered “space.”

Second, it’s not just about tax-sheltering your assets; it’s about doing so within the larger context of how and when you need those assets available for achieving your personal goals. Arriving at – and maintaining – the best formula for you and your unique circumstances involves many moving parts with judgment calls and tradeoffs to consider, and evolving tax codes to remain abreast of.

Ready To Get Located?

It’s common for your assets to wander far and wide over the years, as you accumulate regular accounts, retirement plan accounts and financial service providers galore. Proper asset location often gets lost in the shuffle, and can result in your paying more than you need to on your income taxes. If you’ve not yet built asset location into your investing, consider this tax season to be a great time to take a closer look at how to put asset location to work for you and your wealth.