Hands-Off Investing Often Outperforms Micromanaging
Hands-off investing refers to the “set it and forget it” mode of investing. That is, you put your money into mutual funds and then make only minor changes over the long term. Instead of reacting to fluctuations (or possible fluctuations) in the market, you leave your investments alone. And a new study by the financial firm Morningstar indicates that hands-off investing approach can be the most profitable one.
Hands-Off Investing Study
The Morningstar study reveals that for fund investors who were left their money alone, the average returns for them were significantly higher than for investors who traded based on market trends. In essence, investors who stayed the course won out over those who were frequently buying when the market was high and selling when it was low.
One calculation extrapolated constant buying and selling. over a 30-year period. The result was an investment return some 18 percent lower versus those who followed hands-off investing!
Other Benefits of Leaving Your Investments Alone
Staying hands-off is more time-efficient. You spend minimal effort watching each market move. You have fewer transaction fees than if you trade frequently. And you can get help tax-wise. You avoid the more costly capital gains tax (short-term versus long-term) if you’re not constantly buying and selling.
Types of Hands-Off Investments
In addition to mutual funds, the Morningstar study examined exchange-traded funds, or ETFs. They are similar, but ETFs, as their name implies, are actually traded on exchanges instead of conglomerating several stocks into one mutual fund.
The study looked specifically at index funds, which consist of stocks that make up an index such as the Standard & Poor 500. These index funds offer broad diversification (instead of concentrating risk in one sector of the market) and reduced need to research individual stocks.
There are other types of hands-off investments – with varying degrees of risk. One type is target-date funds, which automatically shift your portfolio toward more conservative assets as you near a target date (typically retirement). These are most often found in 401(k) plans.
Another type is real estate investment trusts, or REITs. REITs are companies that own or finance income-producing real estate. Through an REIT, you can own a share of commercial or residential properties and receive dividends from the income they generate, all without the work of being a landlord.
It Can Be Hard to Leave Well Enough Alone
Even knowing that hands-off investing will give you better results, there are many temptations to abandon that approach. For one thing, the financial services industry is constantly trying to sell you new products and services. That’s how they – but not necessarily you – make money.
For another, it can be hard to sit on the sidelines when the market is streaking higher or plummeting lower. The fact is, though, most of us aren’t smart enough to outmaneuver the market, and buying and holding has historically proved to be the wisest choice.
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