Index Based Investment Management Services

Frequently Asked Questions about Investing and Index Funds

What can Blue Ocean Portfolios do for you?

Design, implement, monitor and rebalance a customized portfolio of low cost index funds based on your situation. The result is a focus on risk management. Is wealth management about chasing outcomes or managing risk?

What is an index fund?

An index fund is a mutual fund security that applies a mathematical model and filters to determine the underlying stocks and weightings that comprise it. Due to the vast number of different index funds to choose from, investors can focus on their allocation instead of manager selection. Several independent academic studies have concluded that portfolio allocation, not manager or stock selection, is the key determinant to portfolio performance.

Index funds are made up of underlying stocks that fit into the mathematical or regional parameters that the index generator specifies. Examples include Large US Value Stock Index, Small US Growth Stock Index, Europe Australia Far East (EAFE) Index, and Emerging Market Index. Large US value stocks like Exxon Mobil, Microsoft, and Procter & Gamble would all be exclusively included in the Large US Value Index Fund – over 300 different issues with value characteristics comprise a US Large Value Index across ten industry sectors. Therefore, you would be buying all 300 stocks when you purchase the index fund – achieving a very efficient and low cost exposure to that set of stocks. Small growth stocks such as Under Armor, Onyx Pharmaceuticals and BE Aerospace would form a different index or group, and those stocks can be just as easily purchased using one index fund.

Investors choosing to use low cost index funds have better odds because they cost less and have eliminated style drift and manager risk. The result is a lower cost, better defined, more broadly diversified portfolio. When it comes to investing, the only thing that can be predicted is the cost. Index funds cost far less than their actively managed counterparts.

What is an Exchange Traded Fund (ETF)?

An Exchange Traded Fund (ETF) is a mutual fund that trades on one of the exchanges throughout the business days. Unlike their open-ended mutual fund cousins, ETFs enable investors to participate in a "basket" of securities and are shielded from the costs created by fellow shareholders buying and selling the same ETF. Open ended funds are less efficient because the accounting nuances require the shareholders to realize long term gains created by the comings and goings of the other shareholders of the fund. The structure of an ETF is far more efficient than open ended funds and, hence, has become a popular choice for investors seeking low cost diversification.

What determines my situation?

Your investment policy should be a function of your spending policy. Blue Ocean Portfolios has developed a simple algorithm to assist investors of all types to determine an optimal allocation policy based on their spending and income outlook. After all, the purpose of money is to exchange it for goods and services; the goal is to not run out!

Does Blue Ocean Portfolios sell securities or index funds?

No. Blue Ocean Portfolios is not a broker/dealer, and therefore does not sell securities. Clients retain Blue Ocean Portfolios to provide fiduciary based investment advisory services. While Blue Ocean Portfolios could use any type of security within your portfolio, it is difficult to conclude that index funds are not the optimal choice for most investors including retirement plans, endowments and foundations.

By not "selling" securities, your odds are most likely better because the conflicts of interest that stem from commission-based compensation to the wealth advisors are eliminated. Many so-called advisors are getting paid from the commission stemming from the securities or investment products that they are selling to their clients. Wouldn't that advice naturally lead to a compensation bias? Conflicts of interest run deep and wide in the wealth management industry.

Where is my portfolio held?

Most of Blue Ocean Portfolios clients opt to have their portfolios held at Scottrade – a leading online brokerage firm. While there is an agreement to share portfolio data and details, there is no revenue sharing between Blue Ocean Portfolios and Scottrade. Clients incur a very low commission of typically $7 per transaction when Blue Ocean Portfolios enters trades for clients at Scottrade. Scottrade provides 24/7 access to all transactions in the client accounts, and Blue Ocean Portfolios only has the limited authority to trade the portfolio consistent with the investment policy developed by and for the client. Additionally, Scottrade provides clients with all of the tax reporting, IRA / IRA Rollover compliance and margin loans if needed. Clients' accounts and securities are always titled in their name and never co-mingled. Clients find comfort that their assets are on deposit with Scottrade while their portfolio management is outsourced to a true fiduciary - Blue Ocean Portfolios.

How does Blue Ocean Portfolios make money from my account?

Blue Ocean Portfolios is a SEC Registered Investment Advisor and makes money by charging a small investment advisory fee based on the size of clients' portfolios. These advisory fees include the portfolio design and ongoing monitoring and re-balancing of the portfolio. Typically the fee will be 0.25% of the portfolio value on the first $500,000 of assets per quarter, 1.00% annually. The fee structure is tiered resulting in a lower fee for larger accounts. Complete details are enclosed in Blue Ocean Portfolios' SEC Form ADV that is periodically filed with the SEC.

What is a Fiduciary?

Fiduciary is a legal term that defines a duty to others. By definition and practice, a fiduciary must place their clients' interests first. A fiduciary duty is never fully satisfied; they must always seek ways to do what is best for the clients. A fiduciary could never recommend to their clients the purchase of an annuity contract from them, or a stock or bond that their firm underwrote, or even a mutual fund that they receive commissions from or 12b-1 fee revenue sharing. Working with a fiduciary does not mean that clients will make any money; it simply means that as a fiduciary Blue Ocean Portfolios must, at all times, put the clients' interests first. Unlike the vast majority of so called advisors, Blue Ocean Portfolios has a fiduciary duty to their clients.

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