FREE NEWSLETTER
LESS IS MORE when it comes to investing. Less effort. Fewer transactions. Lower costs. Less worry. Lower taxes. Less ego. Less clickbait.
We’re wired to try hard. To do well. Especially if you’ve had some success in your life, and built up some money to invest, you probably got there by working harder than others. Problem is, the same rule doesn’t apply to investing. There is no A for effort. But there is an F for frenetic.
The good news is, there’s a simple way. You can grow wealth by matching the market—with index funds—instead of vainly trying to beat it. Broadly diversified low-cost balanced, asset allocation and target-date funds also can be good choices.
It’s the pursuit of market-beating funds that can do us in, since past outperformance does not predict future outperformance. What will you do when yesterday’s top fund manager lags the market for the ensuing two or three years? Will you agonize, switch to the next hot fund, rinse and repeat?
Just matching the market can be plenty lucrative. While we’re working, most of us will have the opportunity to invest regularly and let our money compound over several decades. Let’s assume you had done just that over the past 30 years. You made an initial $3,000 investment in a tax-deferred account on June 1, 1989, in the Vanguard 500 Index Fund. Then you added $400 a month through May 31, 2019. (In truth, you should try to invest more. This is just an eminently doable example, especially if you have a 401(k) with a company match.)
According to PortfolioVisualizer.com, your money would have compounded at about 9% a year, in line with the historical average for U.S. stocks. Boring you say? What would you say to $717,000? I thought so.
There’s no guarantee that your investments will compound at 9% annually for the next 30 years. But that is close to the long-term average for U.S. stocks.
And what effort does capturing the long-term profit and dividend growth of the overall U.S. market require? Mostly, it requires prodigious patience and faith in the enduring strength of the American economy. Ignoring the naysayers and the doomsayers. Tuning out the siren songs of self-promotional investment gurus.
Finally, it requires the realization that, to get the market’s returns, you have to be in the market. You won’t make money investing when things seem good and getting out when you’re worried.
What is not required for this approach? Daily or up-to-the-minute portfolio monitoring. Expensive financial advisors or newsletter authors who say they can beat the market. Mornings, evenings and even work hours glued to CNBC. Saturdays spent with Barron’s and its lionized fund managers and forecasters. Umpteen magazines, blogs and websites trumpeting the stocks and funds to buy and sell now. (Best ETFs for Brexit! and Top funds for uncertainty! are among my favorites.)
Good advice isn’t clickbait. Fewer clicks can result in higher returns and greater peace of mind.
William Ehart is a journalist in the Washington, D.C., area. Bill’s previous article for HumbleDollar was Father Knew Best. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
Great article. Work hard at your career, then let the markets work.
What a gift Portfolio Visualizer is – for some reason this is the first time I’ve heard of it – thank you! I used to pay a lot of money for annual subscriptions to tools like that back in the 90’s from Morningstar and others. About 25 years ago concepts such as the efficient frontier convinced me that “boring” index type funds would give me the best chance of achieving my retirement investing goals with the least amount of drama. It worked.
When a newbie thinks ‘investing in the stock market’, what usually comes to mind is the frantic buying and selling frenzy you see on movies and television. That was certainly what I had in mind before I knew about index funds and this simple method.
Thanks for the awesome short article!