June 26, 2021
6 minutes to read
This story originally appeared on MarketBeat
You are distributed, diversified and save 10% or more for retirement. You (or your robo-advisor) have the rebalancing at your fingertips.
But you are a little bored. Life is not that exciting. And when Bobby next door is making money in some obscure cryptocurrency, you might get a little, well, pissed off. Your returns are not 400% like his.
And so, you plan to polish your portfolio. But is this a mistake?
Probably, and let’s find out exactly why.
Why your investment strategy looks good the way it is
When you choose a passive investment strategy, you are choosing an efficient and inexpensive way to diversify your investments. You spread the risks! You laugh as you worry about the markets on a daily basis and aim for the long, slow rise.
On the other hand, when you empty shares of a stable index fund and buy into your neighbor Bobby’s choice of volatile cryptocurrency, hamstercoin (no such coin exists to my knowledge), you are giving up to diversification and peace of mind. Instead, you opt for emotional consequences, all because you can’t stand listening to him brag about his 400% return.
You know the feeling of anxiety 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 a major uproar in your life.
Reason 1: You don’t want to go against the advice of big investors
Do you think Warren Buffett is running around to pick up hamstercoin?
You know Buffett’s take on value investing – looking for undervalued companies by analyzing a company’s fundamentals. He opts for stocks of value not recognized as valuable by the majority of other buyers.
You might not want to fall into the potentially dangerous trap of trying to buy low and sell high – you could quickly be wasting all of your time losing sleep in the stock market. Most experts would probably give you a big sigh and ask you why you did this.
Why trade a life of feeling plump diversified for a life of worrying about below-average returns?
Most of the time, you should adopt a passive wallet for the best possible results for a number of reasons including mainly benefiting your sleep schedule!
Reason 2: your portfolio is already geared towards long-term stability
Sometimes you have to remember what you are doing and why you are in it. It’s like getting in the car and going to work for the six millionth time. You may be asking yourself, “Isn’t there more life? Remind me why I’m doing it again ”.
Remember, you are saving for long-term financial stability – that is, “never run out of money in retirement”. There’s a reason financial advisers recommend the slow, steady turtle route – it gives you the best chance of doing it.
When you’re 40 and invest in 60-70% stocks and 30-40% bonds in an index fund, you are in gold. Why get involved?
It’s boring, I’ll grant you that. But chasing returns can end up being a lot less guaranteed.
Reason 3: The media can cause rash decisions
As much as you’d love to read about the next newcomer or the last thing Elon Musk tweeted, it’s easy to turn to the media and the hype, especially when the economy is falling into bearish territory.
But you know better. Reacting to the media to the extreme can hurt you, and if you do so permanently, it can change the trajectory of your nest egg.
The best strategy, the one that deserves the most snoring, is always to plan for the worst and always remember this wonderful historical trend: The stock market always points to growth over time. (Remember to periodically check a chart of stock returns over time. It reminds you why you are doing what you are doing.)
The best companies in the world prefer to improve over time. It might just take, well… time.
Reason 3: Passive Income vs Trading Studies: You Can’t Argue With Them
Trading stocks constantly means that you could lose money in the process as you pursue the endless pursuit of better returns.
A lot of people think they can beat the stock market and get better returns than (snore!) Putting money into an index fund that “only” returns the same amount as the market as a whole.
You simply cannot dispute the multiple studies that have been done: those who rarely buy, hold, and 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 building a snoozy portfolio is paying attention to asset allocation, diversification, and rebalancing.
- Asset allocation: You choose your asset mix based on your time horizon and risk tolerance. You might want a mix of stocks and bonds when you are in your 40s, a more heavily weighted portfolio in stocks when you are in your 20s. Aim for an appropriate well-mixed distribution between these asset classes: stocks, fixed income securities and cash or cash equivalents. Robo-advisers do a fantastic job of allocating these assets.
- To diversify : Diversification means that you spread your assets across multiple assets and have as much variety as possible within each asset class. This can mean owning stocks and bonds, exchange traded funds (ETFs) and / or mutual funds.
- Rebalancing: Rebalancing is like rebalancing the tires on a car so that everything stays aligned. It means selling non-performers and allocating money strategically. Perhaps a stock is becoming overweighted in your portfolio. You invest in other stocks that you like until your portfolio balances again.
Go skydiving if you want to add excitement to your life
You may find it hard to resist the latest news or your neighbor’s bragging rights. Instead, turn to skydiving or bungee jumping and:
- Remember your goals: Remember to put your overall goals first. A passive strategy is often the best way to save for college, for retirement, and for planning long-term goals in life.
- Avoid the media slump: The media love to show off you. If you had $ 20 for every Musk tweet on crypto, you could invest that passively and make a murder!
- Invest on the basis of back to basics principles: The right asset allocation, diversification, and rebalancing can actually offer major excitement, albeit later in life. Plant the small tree now, add sunlight and water, and come back in 40 years (with careful supervision, of course).
Really, when it comes to having peace of mind with your investments, why wouldn’t you want it?
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