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A Beginner’s Guide to Hassle-Free Investing

a beginner's guide to hassle-free investing

When you think of investing, what are the first things that come to mind? Maybe it’s the image of people running around on the trading floor, or a news segment showing a graph of a company’s stock price shooting up or plummeting. No matter what the exact image you picture is, it’s probably something dramatic and panic-inducing.

While investing may be portrayed as a theatrical, anxiety-inducing boy’s club, that couldn’t be further from the truth. Investing is actually quite simple and easy, and requires almost zero effort on your part. If you’re turned off by the thought of researching stock picks, having to keep up with the markets, or just nervous about investing at all, this hassle-free investing guide is for you.

Trading vs Investing

To understand why investing is so easy, you first need to understand the difference between trading and investing. A lot of people who call themselves investors are really traders. Trading is the frequent buying and selling of financial instruments to try to beat the overall return of the market. To be a successful trader, you need to research companies and markets, and predict when their stock prices are going to rise and fall. Predicting when a stock’s price will rise and fall is called timing the market. Unless you want to seriously dedicate time to studying stocks, you won’t be able to accurately time the market. Honestly, many traders who dedicate serious time to this aren’t even able to do it.

Trading also comes with higher fees. Fees are the enemy to any investor because they eat into your returns. Each time you buy and sell a stock, there is a trading fee associated with that transaction that takes a portion of your money and pays it to your broker for executing the transaction for you. The more you buy and sell stocks, the more money you’re paying in trading fees.

Frequent trading can also affect the amount of taxes you pay on your earnings. If you hold a stock for less than a year, you’ll be charged the short-term capital gains tax rate, which is equal to your income tax rate. Earnings on investments held for longer than a year are taxed at the long-term capital gains tax rate, which is lower than your standard income tax rate. Trading stocks frequently could result in an increased tax bill that, like fees, will eat into your overall returns.

Investing, on the other hand, has the goal of building wealth over a long period of time by buying and holding a diversified portfolio of investments. Unlike trading, you’re seeking to receive the same return as the market, not beat it. When investing, you buy stocks, bonds, and other investment instruments and hold them for years or even DECADES! That means almost no transaction fees, or time spent constantly keeping up with your investments. This is the approach I use and what I recommend to everyone looking to get into investing and grow their wealth.

How to Build Your Hassle-Free Investing Portfolio

Now that you know how easy it is to be an investor, here are some easy investment options you can use to quickly set up your hassle-free investing portfolio, and then sit back and allow your investments to do all of the wealth-building work for you.

Index Funds

The S&P 500 is an index that tracks the performance of the largest companies listed on stock exchanges in the U.S. These companies make up 80% of U.S. equities by market cap. A company’s market cap, or market capitalization, is the total value of all of its shares of stock. Because the companies included in the S&P 500 index make up the majority of the stock market’s value and span all industries, the S&P 500 is widely regarded as the best representation of the overall performance of the U.S. stock market.

While there are short-term peaks and valleys in the market’s performance, over the long-term the stock market rises. This gradual increase in the overall stock market is why investing works. Since the S&P 500 is a great gauge of overall market performance, if you want to invest in something that provides the same return as the market, buying shares of an S&P 500 index fund is one way to do that.

Index funds are a type of mutual fund that tracks and matches the performance of an underlying set of investments. When building an index fund, the fund manager seeks to buy and hold a set of investments that will provide the same return as the market or a segment of it. This buy and hold strategy means index funds are passively managed because unlike actively managed funds, the fund manager isn’t consistently executing trades to try and beat the market’s performance. Index funds are great options for investors because they use a buy and hold strategy and have the goal of achieving the same return as the market, which is in alignment with an investor’s strategy and goals.

Pros to Index Funds

  • Passive management means lower fees for investors
  • Composed of a basket of companies in a market sector, or across many sectors which provides diversification

Exchange-Traded Funds

Exchange-Traded Funds (ETFs) are very similar to index funds. The main difference is that you can buy and sell ETFs throughout the day, while index funds can only be bought or sold at the beginning or end of the trading day. Since you’re not concerned about making trades daily, this shouldn’t matter to you.

One advantage ETFs have over index funds is that they typically require a smaller investment, which can be beneficial for early investors. If you’re just starting out and only have a small sum of money to invest, you may not be able to afford an index fund. In this scenario, ETFs are a great alternative. If you aren’t constrained by your investment amount, there are some differences in the fees associated with index funds vs ETFs, so you’ll want to consider that when deciding which to buy.

Pros to ETFs

  • Lower initial investment required
  • Passive management means lower fees for investors
  • Composed of a basket of companies in a market sector, or across many sectors which provides diversification
  • Can be more easily traded than index funds

Target Date Funds

The holy grail of hassle-free investing is a target-date fund. These funds build you a diversified portfolio AND manage it for you over time. While index funds and ETFs are considered diversified stock holdings, a diversified portfolio also contains foreign investments and other investment instruments like bonds. Target date funds combine all of these instruments to construct an entire diversified portfolio for you.

Building your portfolio is the first step, but you’ll also need to maintain it. To do that, you will need to review your portfolio each year and adjust it as necessary to keep your portfolio’s structure. The structure of your portfolio depends on the percentage of it you allocate to each investment type. If you start the year invested 90% in stocks and 10% in bonds, at the end of the year your portfolio structure may be different depending on how each investment performed. To return it to its structure of 90% stocks and 10% bonds, you will need to sell off some stocks and buy some bonds, or vice versa. Target date funds make these adjustments for you.

In addition to structural adjustments, target-date funds also automatically reduce your risk over time. When using a target-date fund, you select the fund with the date closest to when you want to start using the passive income it generates. For most people, this is their retirement date. As time goes on and you near the target date you selected, your portfolio will automatically be reallocated to reduce your risk. With greater risk comes a greater potential for losses. Reducing your risk is important because as you near your target date, you have less time to recover any losses you experience. This management style allows you to receive a higher return when you can take on more risk, and then maintain those earnings by reducing your risk later. While all investors should use this approach to reducing risk, the great thing about target-date funds is that they do all of this work for you.

Pros of Target-Date Funds

  • Include investment instruments other than stocks to build a fully diversified portfolio
  • Automatically manage your risk over time
  • Automatically maintain your portfolio structure over time
  • Passive management means lower fees for investors
  • Composed of a basket of companies in a market sector, or across many sectors which provides diversification

Starting to invest can be intimidating, but using a passive investing approach and tools that do most of the heavy lifting for you make investing hassle-free. Index funds, ETFs, and target-date funds allow you to become an investor without sacrificing a lot of time or applying serious effort, and still make it possible to build substantial wealth and become a rich bitch.

18 thoughts on “A Beginner’s Guide to Hassle-Free Investing

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