If you’re looking to start investing but don’t have the time or desire to follow the market closely, fear not. You don’t have to live and breathe the stock market in order to be a successful investor. In fact, thanks to technological advances at online brokerage firms, you can easily set up a savings and investment program that requires little active maintenance.
Unlike active traders, who can’t imagine a moment away from the screen during market hours, you can check in on a well-built portfolio only occasionally and still succeed as an investor. Here are some tips on how to set up a low-maintenance portfolio for those not inclined to track the market’s every move.
Define Your Investment Objectives or Risk Tolerance
Before you begin any investment program, you’ll have to determine what exactly you want out of your investments and how much risk you’re willing to accept. These factors will help shape what you should invest in. Your investment objectives don’t have to be formal declarations; rather, just decide whether you want your investments to primarily grow over time, or if you prefer income. Contrast this with an honest assessment of how much risk you are comfortable with. For example, would you be perfectly fine emotionally if the markets sold off 25%? Or would you be wringing your hands if you heard the market was down 2%? The more risk you can handle and still sleep at night, the more aggressive your portfolio can afford to be.
Have a Long-Term Perspective
This one is easy because if you don’t follow the market, you’re likely already a long-term investor. Even so, it can be hard to avoid news stories about stocks like GameStop and “all the money people are making.” If you’re not an active trader, then simply don’t listen to all of the noise. For starters, short-term trading is hard, even for professionals; in fact, plenty of people lost money trading GameStop and other hot stocks like it. Most traders didn’t likely hold the stock all the way up, and those who bought the stock in the $400s have lost a ton of money with the stock now sitting at about $200. Focusing on the long term brings about as much certainty to your investment returns as you can expect. Try this on for size: The stock market has never lost money over any 20-year period in its history. A long-term perspective helps smooth out market volatility and enhance long-term returns.
Don’t Compare Your Annual Returns to the Overall Stock Market
Investing is all about risk and reward. If you want to match the stock market’s return, you’ll have to take on the same level of risk. For most investors, except the very young and the very aggressive, a portfolio invested 100% in stocks may not be appropriate. Generally, long-term investors should have more of a balanced portfolio, including some investments that generate income or are based overseas. These types of portfolios smooth out the ups and downs of investments, reducing overall risk, but they also trim potential returns. The bottom line is that for most investors, a portfolio that returns less than the overall market is a bit easier to digest in the risk department. What’s also worth noting is that even aggressive investors that put all of their money into stocks tend to underperform that market, as human nature makes investors pull money out at market lows and invest at market highs.
Consistency is one of the greatest assets that investors have. When you invest at regular intervals, you’re avoiding the common trap of buying at market highs and selling at market lows. Rather, no matter what the market is doing, you are picking up additional shares. Over time, this smooths out the ups and downs of your portfolio and ensures that you’ll be buying even when the market is at its lows. Regular investing also removes a lot of the stress involved in investing. Rather than worrying about if it’s “the right time” to invest, you are always investing. Since most investors are notoriously bad at timing the market anyway, investing at regular intervals can help you avoid that pitfall.
Automate Your Investment Contributions
If you really want to maintain a hands-off portfolio, automate your investments. By setting up regular transfers from your checking or savings account to your investment account, you don’t even have to think about making contributions. No matter what is going on in your life or in the market, you are still investing. Automated contributions also protect you from two common obstacles to investing — emotions and forgetfulness. Some investors let their emotions get the best of them and stop investing when the market sells off, while others simply forget to make regular contributions. When you automate your contributions, both of those problems are eliminated, making it more likely you will succeed over the long run.
Keep It Simple
There seems to be an ongoing myth in the investment world that the more complicated your investment strategy, the more likely you are to generate high returns. Nothing could be further from the truth. In reality, the simplest portfolios can often generate the most consistent long-term returns. For example, buying a simple S&P 500 index mutual fund or ETF allows you to track the returns of the market without any effort at all on your part. Not only are these investments extremely low-cost, but they also generate high returns. In fact, in most years, even professional mutual fund managers can’t outperform the S&P 500 index. Even the “Oracle of Omaha” himself, noted billionaire investor Warren Buffett, suggests that most investors are best off simply owning an S&P 500 index fund.
Consider a Robo-Advisor
Robo-advisors are relatively new entrants into the investment world, but they can be a great option for those who aren’t interested in following the market closely. A robo-advisor uses a computer algorithm to create a portfolio based on an investor’s self-reported investment objectives and risk tolerance. Usually, these portfolios consist of a collection of broad-based ETFs, covering asset classes such as large-cap growth stocks, small-cap value stocks, international stocks and bonds. Robo-advisors often have low minimums of $500 or less and annual fees averaging about 0.25%. Portfolios are regularly rebalanced and you can easily set up automated transfers into your robo-advisory account. All in all, a robo-advisor can offer all the benefits of portfolio construction and management for low costs and little attention needed from an investor.
Choose Only Low-Fee Investments
If you’re not going to be watching the market closely anyway, it’s important to keep costs as low as possible. Although this applies to all investors, if you’re actively trading or using advanced market strategies, sometimes paying a bit more for advice or specialized investment tools can make sense. However, if you’re a “set-it-and-forget-it” type of investor, there’s no reason whatsoever to pay more than you absolutely have to, as you’re not taking advantage of any extra services or benefits. Plus, as with all investors, the lower your fees, the more you get to keep in your pocket. Before you set up your portfolio, shop around to find the best broker for you in terms of cost and services.
Review Your Portfolio Annually, Quarterly or Twice Per Year
Even if you’re not keen on following the market, at a bare minimum you’ll want to review your portfolio once per year. This doesn’t have to be some in-depth analysis, but at the very least, you’ll want to make sure that your investments are positioned the way you want them to be and that nothing is careening off course. You may need to rebalance your portfolio once per year as well, to keep it in line with your investment objectives and risk tolerance. While you can afford to be relatively hands-off when it comes to a well-constructed, long-term portfolio, don’t make the mistake of completely ignoring your investments.
Let Your Portfolio Do the Work
Once you’ve constructed a suitable long-term portfolio, let your investments do the work. The power of compound interest is a remarkable thing, but it works best over long time periods. Imagine you have $20,000 invested in a theoretical portfolio that returns you 10% per year. The first year, you’d earn $2,000, and the second year you’d earn $2,200. However, in the 20th year, this fictitious portfolio would earn $12,231.82, followed by $13,455.00 in year 21. Compound interest can really skyrocket your account values, but you’ll have to let your investments do their thing over time to truly reap the benefits.
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