Mutual funds are off-the-rack, SMAs are bespoke tailoring. Which do you prefer?
When sliding into the world of investments, it's crucial to adopt an investment strategy that not only meets your financial goals but also fits your life. When choosing between mutual funds or ETFs and Separately Managed Accounts (SMAs), we like to think of them like formalwear.
Mutual funds and ETFs are like an off-the-rack suit — they work well for a lot of people, are easy to purchase, and are in style (otherwise the retailer wouldn’t offer them). An SMA on the other hand is a tailor-made, bespoke suit, precisely cut to enhance your financial silhouette — whether that's growing wealth, securing income, or even aligning your investments with your personal ethics.
Tailored Just for You
Think of SMAs as the bespoke tailoring of the investment world. Instead of buying off-the-rack through mutual funds or ETFs — where you own a slice of a large, mixed basket of stocks — you get to pick and choose each thread alongside your financial advisor (or for purposes of our analogy, your tailor). This means your portfolio isn't just a collection of investments; it's a reflection of your personal financial strategy, meticulously aligned with your tax considerations and future aspirations.
The Tax Tailor
With SMAs, you can play the role of a tax tailor. Each investment can be tweaked to optimize your tax bill. For instance, if one of your stocks has a bad year, you can sell it off, harvest the loss, and reduce your taxable income—an option not available when you're part of the broader weave of a mutual fund or an ETF.
Direct Ownership: Holding the Reins
Direct ownership in SMAs means you're in the driver's seat. Each stock or bond you or your financial advisor buys on your behalf is yours alone, giving you transparency and control over what you own and how much you pay for it. You get to choose the bolt of fabric, the stitching, the hemlines, the cut and fit, etc.
The Collective Approach: Mutual Funds and ETFs
Mutual funds and ETFs are akin to joining a choir — while you don't get to pick the song, you benefit from the harmony created by the diversity of voices. These investments pool money from many investors to purchase a broad portfolio of stocks or bonds, which helps to spread out and manage risk. Because many mutual funds and ETFs have a wide distribution of holdings, it’s unlikely underperformance of a single stock will torpedo your entire investment. This shared approach offers simplicity and ease of management, particularly appealing to those who prefer a "set it and forget it" investment.
The Takeaway
While mutual funds and ETFs offer simplicity and diversification that can mitigate risk, SMAs offer something different — the ability to influence and react to your investment landscape actively (usually alongside your financial advisor). It’s about having control over your financial destiny and being able to see clearly how each piece fits into your broader financial strategy.
Choosing between SMAs, mutual funds, and ETFs will depend largely on what kind of investor you want to be — a passive participant or an active architect of your financial future. SMAs offer a unique pathway for those who prefer a hands-on approach to growing their wealth and managing their taxes effectively.
IMPORTANT DISCLOSURES
The information contained in this communication has been designed for general informational, illustrative, and educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security. Moreover, the information provided is not intended to provide any investment advice whatsoever. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product, or any non-investment related content, made reference to directly or indirectly in this communication will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. No discussion or information contained herein serves as the provision of, or as a substitute for, personalized investment advice. To the extent that a reader has any questions regarding the applicability above to his/her individual situation of any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing. City Different Investments is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal, tax, or accounting advice.
The presented information and statistics have been obtained from sources we believe to be reliable but cannot be guaranteed. Any projections, market outlooks or forecasts discussed herein are forward-looking statements and are based upon certain assumptions. Other events that were not taken into account may occur and may significantly affect the returns or performance of these investments. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. Please keep in mind that past performance may not be indicative of future results. There are additional differences between separate accounts and mutual funds and ETFs that have not been outlined herein. A mutual fund or ETF prospectus includes investment objectives, risks, fees, expenses, and other information that should be read and considered carefully before investing.