Tracking Error | Wisdom, Wealth, and Wellness

Jonathan Satovsky
CFP®, ChFC®, CIMA®, CPWA®, CDFA®, DACFP

Wealth management is all about cultivating lasting financial confidence over generations. Drawing insights from Warren Buffett’s long-term investment approach, Jonathan Satovsky takes a look at the concept of direct indexing as a means to minimize tracking error and maintain calm confidence in investment strategies.


 

Building on Financial Literacy Month, I want to talk about reducing financial anxiety.

How do we design someone’s finances to provide calm confidence? Not just for the moment, but for a year, for a decade, for two decades, for a lifetime, for a generation.

In May of every year, for the last number of years, I’ve been fortunate to attend the Berkshire Hathaway Conference and [Warren Buffett] he’s been able to build a community in a culture of three million investors who have benefited by his long-term thinking, and have compounded their wealth well beyond any of their expectations.

In the advisory business, how do we create the same structure and support? So that leads me to direct indexing.

I just had a conversation with someone about the concept of direct indexing. How do you take a portfolio and directly own the securities and get as little tracking error as possible to whatever they want? Let’s say the S&P 500. If that’s your benchmark and barometer, you try to mirror the S&P 500 and then you go about your life and you’re fine. If you are benchmarking and measuring the success relative to the S&P 500 and you just own the blind trust of Berkshire, as a reminder, you’d have underperformed 40% of the time by magnitudes of 20 to 60%. So, if it wasn’t called the Oracle of Omaha and Berkshire, would you sit still?

So, any factor you invest in, whether it’s cheap, small, profitable, international, or small companies, be aware you’re going to live with tracking error. And it’s okay. As long as philosophically you can sit on it to reduce your calm confidence for a lifetime.

Think about that on your path to Wisdom, Wealth, and Wellness.

Have a great day.

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Video Recorded March 28, 2024
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Disclosures

This blog post is not intended to be, nor should it be construed or used as, an offer to sell, or a solicitation or offer to buy any securities or interests in any strategy offered by Satovsky Asset Management, LLC (“SAM”). SAM is a registered investment advisor with the Securities and Exchange Commission – for more information see www.adviserinfo.sec.gov. Please remember that different types of investments involve varying degrees of risk, and that past performance is not indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the strategies recommended or undertaken by SAM) will be profitable. Market index information shown herein is included to show relative market performance for the periods indicated and not as standards of comparison. The market volatility, liquidity and other characteristics of SAM’s portfolio composition are materially different from the securities listed on public market indices. Market index information was compiled from sources that SAM believes to be reliable. No representation of guarantee is made hereby with respect of the accuracy or completeness or such data. Opinions are as of date of video and are subject to change. A copy of SAM’s current written disclosure statement discussing our advisory services and fees continues to remain available for your review upon request. SAM undertakes no duty to update information presented herein.

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