Page 32 - Investment Advisor - October 2021

COVER STORY

Ellis also emphasizes paying attention to taxes. He says: perspective goes back to [ideas in] his book “Winning the
“Index funds typically turn over at 5% a year, and a well- Loser’s Game.”
managed index fund will match gains and losses so that there I’ll use the financial crisis as an example: A lot of individu-
actually is no tax. als were very highly leveraged in terms of mortgages on their
“Actively managed mutual funds turn over at 40% a homes. The lenders made the assumption that house prices
year, and the gains are taxable at ordinary income rates,” he always go up and that being highly leveraged didn’t matter
points out. Obviously, he feels that index funds have big tax because the price will go up.
advantages; so always consider taxes, correct? But clearly, we know that didn’t end well. Many people at
Yes. He and a number of our luminaries as well stress attention the time were treating their homes as a financial investment,
paid to taxes. If you have high turnover, which will create capi- which they never [really] were.
tal gains, then there could be tax implications versus the typi-
cal index fund, for example, which has a much lower turnover, With all the research that Professor Lo and you conducted for
and could help you from a tax deferral perspective. the book, did you uncover anything surprising?
One of the endowment funds that Bogle oversaw didn’t only
Part of Ellis’ philosophy is: “Don’t think of your house as an have passive index funds. He had a component with an invest-
investment or treat it like a bank from which you can borrow.” ment in gold. That was a surprise!
How does that compare with the philosophy of the others He felt that it was a small hedge against some major catas-
you’ve profiled? trophe — a major risk — and that it might balance things out
It’s a different perspective from Shiller, for example. Ellis’s a bit.

Why Semi-Retirement Is a ‘Phenomenon’

t might very well become a win-win Portfolio Tax Retirement
Itrend: As a result of the pandemic, Construction Planning Planning
some older Americans who were plan- Financial Social Trusts & Estates
ning to retire are opting to remain Planning Security
in the labor force because they can
now conveniently work from home,
employer permitting.
Both the financial gain and scrap-
ping an often arduous commute are
key drawing points, according to
Christine Benz, director of personal
finance at Morningstar. She’s watch-
ing to see if an increasing number of
pre-retirees jump on this now widely
available alternative.
Retirement has undergone big chang-
es over the last two decades. Essentially,
it used to be: Stop working, receive
a company pension, start collecting Social will have very low yields,” Benz argues. They
Security, hightail it to the links. Christine Benz need to recognize that “the point of those safer
Now, semi-retirement has become a popular investment assets isn’t return on capital; it’s
variation. Benz calls it “a phenomenon.” And, as return of capital.”
she notes in the interview, people are choosing to Benz started her career at Morningstar in
define it in a variety of ways. Others are trying “faux retire- Chicago as a copy editor more than 15 years ago, advanc-
ment,” a trial run to see how the life they envision in retire- ing to mutual fund analyst, then to director of the mutual
ment might actually feel. fund analyst team. She spoke recently in an interview about
A disappointing turn of events for most any retiree, how- retirement planning, eventually turning to how to plan
ever, is continuing low interest rates. But people “have to and pay for long-term care. That’s when the co-host of the
make peace with the fact that the safer assets in their portfolio interview podcast “The Long View” brought up what she

30 INVESTMENT ADVISOR OCTOBER 2021 | ThinkAdvisor.com