The most common misconception in the world of finance is that you must be highly intelligent and highly active to produce reasonable investment returns. But the reality is that often the most successful investors over time are the laziest.
Do not get me wrong here, you cannot be so lazy that you neglect your personal finances entirely. You absolutely should take the time to take an inventory of your assets and liabilities. You should also take the time to build a budget and monitor/reduce your expenses when needed. And you absolutely should monitor the asset allocation/ investment line up of your retirement accounts. But there is a balance to this.
People think that if they pay more attention to their investment portfolio or make more changes to their investment portfolio as they react to current events, then they will achieve a higher return. This is simply not the case. “If A, then B” does not work in the stock market.
We can attribute this misconception to the following:
- Media (movies, TV shows, the news)
Whether if it is Hollywood or the newsroom, we see “investors” portrayed as hedge fund gurus. Understandably, as a “buy and hold” / long term approach investor is simply not as entertaining as Gordan Gecko.
- Wall Street Marketing
Many Wall Street firms are in the asset management product manufacturing business. So, naturally their “research” indicates for one reason or another that their people/strategy is smarter than you, and the smarter the strategy, the higher the return. This is not really true.
Even “smarter” people who are “more active” on Wallstreet often do not produce “off the chart” returns.
We see that the vast majority of actively managed mutual funds over a 10-year and 15-year period do not outperform their respective index.
Let me translate:
Based on my financial plan, I need to invest some of my retirement money in Large Cap stocks (companies that are worth over $10 billion dollars). Therefore, I am evaluating Large Cap Mutual Funds to invest in.
I have two choices:
- I can buy an actively managed mutual fund where the managers are buying and selling each day, running fancy analysis to achieve a greater return that the SP500.
- My second choice is I can simply purchase an indexed mutual fund that mirrors the SP500.
Over a 10-year period, research indicates that 88.99% of the time, I would achieve a higher return if I went with option 2 above, as opposed to the fancier option 1.
Note: In my opinion, there can be times when active management can provide value. But this is a topic for another article…
How to Be Lazy
The ultimate “lazy” approach to investing is probably a “buy and hold” / long term approach. But the level of success that you achieve really depends on what exactly it is that you are buying and holding.
Individual stocks can be an investment that you buy and hold. But there is a lot of risk here. Look at the titans like General Electric, and recently, Boeing, where the stock has dropped significantly from the peaks. Buying and holding these stocks long-term could pay off, but there is also a chance that these companies never rebound to where they used to be.
Intel is another good example. Intel’s stock price peaked on August the 31st of 2000 when it closed at $74.88 a share. Currently, the stock is trading in the $56 per share neighborhood.
Arguably, it might be more reliable to buy and hold a basket of stocks through purchasing an Exchange Traded Fund or a Mutual Fund.
When buying a mutual fund that mirrors an index (AKA Indexed Mutual Fund) or an ETF that mirrors an index, you are not making a bet that one company will prevail over other companies. Rather, you are making a bet that American businesses as a whole, or international businesses as a whole, over time will prevail.
There will always be times when stocks are out of favor. But the lazy investor does not attempt to time the market and sell his/her stocks when the market is down, rather, they continue to save into their retirement accounts as they usually would.
Keep in mind the purpose of why you are investing.
If you are not sure why you are investing, stop and think about it.
Are you investing with the goal of becoming the smartest investor out there? Or are you investing to achieve a financial goal? (i.e. funding your retirement, funding your kid’s college education, funding a lifestyle that you would like to have, etc.)
Keep your eyes on the prize and remember, with investing, sometimes less is more.