In keeping with the American culture of productivity, many people think that the more they do, the better their results will be. But with investing, that is not always the case.
"Over the last decade, most people hurt themselves by trading," and would have "been much better off if they had just left their money alone" once it was invested in stock and bond funds, said The New York Times, citing a study by financial services company MorningStar. On average, the "actual returns of fund investors were significantly less than the posted market returns, a discrepancy explained by poor trading decisions," like buying when the market is high and selling when prices are low.
That said, there may also be risks to setting and forgetting your portfolio entirely. Here's how to navigate less-active investing.
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What is hands-off investing?
With hands-off investing, you set an investment portfolio and "make only minor changes for a long period of time," said Investopedia. Common investments for this style of investor include index funds, which aim to track the returns of a market index, and target-date funds, which are designed around a certain timeline for eventual withdrawal.
Because this approach to investing "doesn't require much monitoring," it tends to be "well suited for retail investors who may not be experienced enough or have the time required to routinely research and improve their investments," said SmartAsset, a personal finance blog.
What are the arguments in favor of hands-off investing?
The aforementioned MorningStar study is not the only one that makes the case for enhanced returns with a hands-off approach. An ongoing study that compares investor returns to market returns, Dalbar's Quantitative Analysis of Investor Behavior, also "affirms the benefits of a hands-off approach," said Investopedia. It found that "over the 20 years between 1997 and 2017, the average equity investor earned 5.29% per year while the S&P 500 Index gained 7.20% per year." In other words, an investor who would have simply let their money track index performance may very well have seen better returns than someone who meddled with their money along the way.
Another major upside of a more hands-off approach is that "investors make a plan when they are clear-headed," and as a result, hopefully "avoid emotional trading," said MarketWatch. Getting your feelings wrapped up in your investments is a common investing mistake.
Additionally, the hands-off approach can offer savings on trading fees and taxes from investment sales.
Are there any risks to a hands-off approach?
The set-it-and-forget-it approach has flaws, too. For one, "what you establish for yourself at [age] 23 may not be appropriate as you get older and closer toward retirement," said Laura McHugh, a senior vice president and client adviser at Spinnaker Trust, to MarketWatch.
As such, to make this approach maximally effective, it may require "doing an annual or twice yearly check on investments, asset allocation and goals," all of which "can ensure that savers are on track for retirement," said MarketWatch. To be clear, this is different from checking in after every shift in the market — rather, it means being responsive as your life evolves to make sure your portfolio continues to evolve with you.
