Minimalism’s focus on simplicity and ease, so that more of life could be enjoyed, is well-matched to index funds. Other generations, like GenX may relate to different trends. That generation favored belt-tightening and bargain hunting during the Great Recession as more families took to the expanding blogosphere to share their tips on “the messiness of life.” Index funds allow GenX not have to have Instagram-ready retirement plans.
One minute you’re in and, well when it comes to investing theory, the next you are apparently still in. As an advisor, you may feel like you’ve finally crested the rise in demand from new and existing clients for assistance navigating the questions raised by the pandemic. In fact, some advisors may not have found themselves back ashore from the crushing wave of increased communication as layoffs in certain industries like tech and service may continue to roll on in the fourth quarter of 2022. But a surprising number of questions can be resolved with a previously popular answer: Index Funds. Recent reports indicate that actively managed funds aren’t living up to their hype. “’Actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons,’ said Bryan Armour, director of passive strategies research for North America at Morningstar.”[1]
Way back in 2016, an investor asked: “Why would anyone invest in something other than a target date fund?” We had thoughts about that question. In fact, we wrote about rebalancing and robo-funds back in 2017. There we said: “[o]n a strict performance metric, robo-advised funds were beat by Vanguard human managed funds when compared side by side (using Betterment for the robo-advisor).” Apparently, Morningstar’s recent report hasn’t shown much change over the last five years when it comes to performance.[2] That isn’t to say you should robo and forget it. “However, these automatic rebalancing systems may miss key issues. For example, it may be more tax advantageous to rebalance an asset through increased contributions. Rebalancing through increased contributions might not be possible through formula-based funds.”[3]
The mix of using index funds yet leaving the delicate work of planning and careful rebalancing to advisor was the preferred method for Millennials pre-pandemic. “Millennials seem to want the face-to-face interaction of working with an advisor for the financial planning aspect and are happy to leave the rebalancing to the robos. In fact, Millennials are twice as likely to use traditional advisors than robo-advisors.”[4]
Index funds and passive investments may have fallen from investors’ favor over the last few years for a few reasons. One may be that during the pandemic, index funds may have seemed unable to address the volatility of a market that first faced a global health crisis and crippling supply-chain shortages and then faced massive hits to commodities markets due to the Russian aggression towards Ukraine. But index funds, robo or otherwise, and their close cousin target date funds shouldn’t go the way of the baby in the bathwater. And many investors are finding their way back to them. “[A]ccording to S&P Dow Jones Indices … investors saved more than $400 billion in fees by investing in index funds over the past quarter century.”[5] Another reason may be that a cultural trend changed, making active investing seem more relevant.
Advisors who want to get ahead of those questions may find that thinking of how they talk to clients about index funds could help them stay on top of (or even ahead of) client communications. Some advisors may want to talk about index funds in a new way may feel like old wine in a new bottle. However, using a few communication tricks may avoid that.
One way to do so is to relate investing plans with past communication trends. In other words, put old wine in old bottles to increase familiarity and create a new experience of it. To be clear, we aren’t talking about market trends, such as upends, downtrends and sideways trends.[6] Instead, we mean a cultural interest in an object or way of living.
Theoretically, the average trend, whether fashion, communication, or cultural focus, lasts three to five years. After that the topic may seem played out. The point of recognizing trends as a business marketing professional isn’t to follow them. “The point isn’t what the business owner cares about. It’s about their potential audience.”[7]
It may be that robo-investing hit its Zenith in 2017, and then seemed a bit played out as investors moved into focusing on dividend stocks, alternative investments or ESG. The minimalism of 2016, 2017 and 2018 may have given way to a return to a more consumerism-heavy focus. Some nostalgia for late-80s culture of luxury goods may have replaced the minimalism of the post-Great Recession time-period.[8]
Advisors may find that their communications about index funds are more readily accepted when the take the old wine of the index fund and put it into the old bottle of minimalism. Minimalism’s focus on simplicity and ease, so that more of life could be enjoyed, is well-matched to index funds. Other generations, like GenX may relate to different trends. That generation favored belt-tightening and bargain hunting during the Great Recession as more families took to the expanding blogosphere to share their tips on “the messiness of life.”[9] Index funds allow GenX not have to have Instagram-ready retirement plans.
There is one notable exception to this approach to using general trends to help generations understand investing basics like passive investing. The exception is the trend hating GenZ. That generation believes it’s supersaturated in trends. However, it may be more appropriate to say it’s swamped in micro-trends and fads. Semantics aside, that generation will be more sensitive to how information is presented to them and may have an instinctive rejection of anything that references trends at all.[10] The good news is that GenZ has yet to be exposed to index funds. If Index funds hit a zenith of interest in 2017 and peaked a bit, the average GenZ investor was all of 20, at the oldest, then.[11]
[1] https://www.cnn.com/2022/10/25/business/nightcap-yeezy
[2] https://www.bcgbenefits.com/blog/robo-advising
[3] https://www.bcgbenefits.com/blog/balancing-the-need-to-rebalance
[4] https://www.bcgbenefits.com/blog/balancing-the-need-to-rebalance
[5] https://www.cnn.com/2022/10/25/business/nightcap-yeezy
[6] https://www.fidelity.com/learning-center/trading-investing/technical-analysis/basic-concepts-trend
[9] https://www.chicagotribune.com/lifestyles/parenting/ct-mommy-blog-disappear-20180129-story.html
[10] For more on this topic, see https://wearesocial.com/uk/blog/2022/05/trends-arent-deadthey-are-more-powerful-than-ever
[11] Wikipedia’s entry on GenZ’s birth year summarizes nicely the disagreement over the first year for this generation, but 1997 seems to be more favored. https://en.wikipedia.org/wiki/Generation_Z#Date_and_age_range
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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