Passive Portfolio Management
Passive portfolio management utilizes a mix of broad based exchange traded funds (ETFs), tailored to an investor’s risk tolerance and time horizon. Through the use of these ETFs, an investor can develop a proper mix of asset classes and establish a well-diversified investment portfolio.
Some of the many benefits of passive portfolio management over actively managed mutual funds include the following:
- Lower trading costs
- Lower management fees
- Lower taxes for taxable accounts
- Lower portfolio turnover costs
- Reduced risk through the use of broad based indexes versus individual stocks
As you can see, passive portfolio management can reduce overall expenses and enhance the portfolio’s total return year after year. At Mueller Asset Management, we utilize some principles of Modern Portfolio Theory by combining passive asset-class investing with broad diversification of asset classes.
Portfolio Rebalancing
A very important factor that should lead to increased portfolio returns is portfolio rebalancing. The definition of rebalancing is, “The process of restoring a portfolio to its original asset allocations and risk profile.” The dollar amount of each asset class in your portfolio is likely to change in amount over time. As this happens, the amount of risk in your portfolio will also change. Without regular rebalancing (every 6-12 months) some style drift may occur. Certain asset allocations will increase and others will decrease, ultimately deviating away from your original risk profile. This is what we refer to as style drift.
In order to enhance overall portfolio returns, and maintain proper portfolio allocations/risk profile, it is important to rebalance. This can be achieved quite easily. You (the investor) will increase your positions of holdings that have performed poorly (buying low), and in turn reduce your positions of holdings that have performed the best (selling high). Thus achieving the well-known phrase “Buy low, Sell high.” This process has shown to increase overall portfolio performance 1-2% per year.
Every twelve months, Mueller Asset Management will provide clients with the appropriate percentage of asset holdings that require rebalancing. You (the investor) are then responsible for making the appropriate trades in order to maintain your proper asset allocation.
Exchange Traded Funds
An exchange-traded fund (ETF) is a fund that tracks an index, commodity, or basket of assets, and is traded like a stock. An ETF may hold assets such as stocks and bonds, and trades at approximately its net asset value. Net asset value is simply the value of all assets less the value of all liabilities. One advantage ETFs have over mutual funds, is they can be bought and sold throughout the trading day. ETFs are generally attractive as investments because of their low operating and transaction costs, tax efficiency, tradability, and stock-like features.
ETFs have grown in popularity because they give an investor the opportunity to invest in an index without exposure to the risk of buying a single stock.
Presently, there are a wide variety of ETFs available for investors to choose from. There are ETFs that focus on certain sectors such as energy or financials, as well as, ETFs that mirror broad-based indexes such as the S&P 500 Index. There are even ETFs that short the market or specific sectors. At times, this wide selection can become very confusing to an individual investor. Most ETFs used in Mueller Asset Management portfolios reflect broadly based indexes representing several asset classes. We feel this approach helps minimize the risks associated with equity investments, while providing an investor the opportunity to earn a market return.
To learn more about specific ETFs used in Mueller Asset Management portfolios, please see our ETF Descriptions and Fund Summaries page.