6 min read
This story originally appeared on MarketBeat
You’re allocated, diversified and saving 10% or more for retirement. You (or your robo-advisor) have the rebalancing thing down pat.
But you’re a little bored. Life isn’t all that exciting. And when Bobby next door makes money in some obscure cryptocurrency, you might feel a little, well, put out. Your returns aren’t 400% like his.
And so, you look into tweaking your portfolio. But is that a mistake?
Probably, and let’s investigate exactly why.
Why Your Investment Strategy Looks Good the Way it Is
When you choose a passive investment strategy, you choose an efficient, inexpensive way to diversify your investments. You spread risk around! You laugh in the face of worrying about the markets daily and aim for the long, slow climb.
On the flip side, when you dump shares of a steady index fund and buy into your neighbor Bobby’s choice of volatile cryptocurrency, hamstercoin (no such coin exists that I know of), you give up the diversification and the peace of mind. You go for emotional consequences instead, all because you couldn’t stand to listen to him brag about his 400% returns.
You know the anxious feeling you get when you think other people have a better idea, a better time, a better lawn tractor. It’s called FOMO, and it can cause major tumult in your life.
Reason 1: You Don’t Want to Go Against the Advice of Investing Greats
Do you think Warren Buffett runs around scooping up hamstercoin?
You know Buffett’s take on value investing — looking for undervalued companies by analyzing a company’s fundamentals. He goes for valuable stocks not recognized as valuable by the majority of other buyers.
You may not want to get into the potentially dangerous trap of trying to buy low and sell high — you could rapidly spend all your time losing sleep over the stock market. Most experts would probably give you a major sigh and ask why you did that.
Why trade a life of feeling plumply diversified to a life of worrying about lower-than-average returns?
Most of the time, you should adopt a passive portfolio for the best outcomes possible for many reasons, including majorly benefiting your sleep schedule!
Reason 2: Your Portfolio is Already Geared Toward Long-Term Stability
Sometimes you need to remember what you’re doing and why you’re in this. It’s kind of like getting in the car and going to work for the six millionth time. You may wonder, “Isn’t there more to life? Remind me why I’m doing this again.”
Remind yourself that you’re saving for long-term financial stability — aka “never running out of money in retirement.” There’s a reason financial advisors recommend the slow and steady turtle route: It offers you the highest chance of doing just that.
When you’re a 40-year-old and you invest in 60% to 70% stocks and 30% to 40% bonds in an index fund, you’re golden. Why mess with it?
It’s boring, I give you that. But chasing returns can end up being much less of a guarantee.
Reason 3: The Media Can Cause Rash Decisions
As much as you might enjoy reading about the next up-and-comer or the last thing Elon Musk tweeted, it’s easy to turn to the media and the hype, particularly when the economy falls into bear market territory.
But you know better. Reacting to the media in extremes can dent you, and if you permanently do that, it can change the trajectory of your nest egg.
The best, most snore-worthy strategy still continues to involve planning for the worst and always remembering that wonderful historical trend: The stock market always points toward growth over time. (Remember to check a chart of stock market returns over time periodically. It reminds you why you’re doing what you’re doing.)
The best companies in the world favor getting better over time. It just might take, well… time.
Reason 3: Passive Income vs. Trading Studies: You Can’t Argue With ‘Em
Trading stocks constantly means you could lose money in the process as you go after the never-ending pursuit of getting a better return.
Many people think they can beat the stock market and achieve better returns than (snore!) sticking money in an index fund that “only” returns the same amount as the market as a whole.
You just can’t argue with multiple studies that have been done: Those who buy, hold and rarely trade end up outperforming those who passively invest.
Reason 4: You Already Know What to Do
When you want to put together a boring portfolio, you might already know exactly what to do. The key to putting together a snoozy portfolio involves paying attention to asset allocation, diversification and rebalancing.
- Asset allocation: You choose your mix of assets based on your time horizon and risk tolerance. You may want a mix of stocks and bonds when you’re in your 40s, a portfolio more heavily weighted in stocks when you’re in your 20s. Aim for an appropriate distribution mixed well among these asset classes: equities, fixed income and cash or cash equivalents. Robo-advisors do a fantastic job of allocating these assets.
- Diversifying: Diversification means you spread your assets across multiple assets and own as much variety within each asset class as possible. This can mean owning stocks and bonds, exchange-traded funds (ETFs) and/or mutual funds.
- Rebalancing: Rebalancing is just like rebalancing tires on a car so everything stays in alignment. It means selling non-performers and allocating money strategically. Maybe one stock becomes overweighted in your portfolio. You invest in other stocks you like until your portfolio balances itself again.
Go Skydiving if You Want to Add Excitement to Your Life
You might find it hard to resist the latest news or your neighbor’s bragging. Turn to skydiving or bungee jumping instead and:
- Remember your goals: Remember to put your overall goals front and center. A passive strategy often makes the most sense for saving for college, saving for retirement and planning for life’s long-term goals.
- Skip the media doldrums: The media loves to get you hyped up. If you had $20 for every time Musk tweets about crypto, you could invest that passively and make a killing!
- Invest based on back-to-basics principles: The right asset allocation, diversification and rebalancing can actually offer some major excitement, albeit later on in life. Plant the tiny tree now, add sunlight and water and check back in 40 years (with careful monitoring, of course).
Really, when it comes to achieving peace of mind with your investments, why wouldn’t you want that?
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