Investing can be hard to understand, but pretty much everyone knows what it’s like to own a pet. Maybe you’re a dog lover, a cat lady, or the oddball that’s really into snakes. No matter what furry or scaly friends you’re into, you know that different pets have different needs. Some take up a lot of your time and need daily attention, while others can be left alone with enough food and water for weeks at a time. Investing strategies are the same way.
The investing strategy you choose determines how much time and effort you need to put in if you want to be successful. To help you understand the different investment strategies out there and find the one that fits your lifestyle best, I’m going to break down each strategy in terms of which pet it’s similar to owning.
Passive investing is a set it and forget it strategy that requires a moderate amount of effort to initially set up and needs very little ongoing maintenance. It’s similar to owning a goldfish, where most of the effort is in configuring the fishbowl and after that, you just need to feed your fish regularly.
This strategy is so effortless is because passive investors buy index funds and ETFs that track the market and hold them for decades. This works because historically, the stock market has always gone up over the long term, and it’s nearly impossible to lose money after you’ve been invested for over 20 years.
To become a passive investor, you need to open an account and build a well-diversified portfolio. There are several ways you can build your portfolio, and the way you choose will determine the amount of effort it’ll take to maintain it.
Hand selecting all of your own investments requires the most effort. When you build your own portfolio, you allocate your money at a certain percentage to each asset based on how risky you want your portfolio to be. Over the year, some of your investments will perform better than others, and this will throw your asset allocation out of whack. To maintain your desired asset allocation, you should rebalance your portfolio about once a year. This method is similar to buying a regular ol’ fishbowl that needs frequent manual cleanings to prevent algae from growing.
If you want to avoid this extra manual clean-up, you can use a robo-advisor or a target-date fund instead. Both of these manage your investment portfolio for you so you can be 100% hands-off. This is similar to buying a fish tank with a filter. You should check up on everything once in a while, but it’s much less work than a regular fishbowl.
Value investing was made popular by the OG investor, Warren Buffett, and is when you find a company whose stock price is lower than what the company is actually worth and buy their stock “on-sale”. To find these companies, value investors pour over financial statements, calculate many ratios, compare the company to others in their industry, and project the company’s future growth. To be an incredible value investor like Warren Buffett, you have to use this information to make correct calculations and assumptions, and that’s not easy. If it were, there would be a lot more Warren Buffetts.
Because of the extreme amount of work value investors undertake to accurately price a stock, value investing is like owning a dog. As a puppy, they’re A LOT of work. You have to housebreak them, spend hours training them to sit, take them on a gazillion walks to wear them out, and replace several pairs of shoes they will inevitably decide to destroy. But if you put in all of that hard work, you’ll end up with a well-trained, amazing dog to call your own. Even better is that as your dog gets older, they get easier and easier. The same is true of value investing.
While a value investor could sell their stock immediately after the price corrects, they usually don’t. Value investors are in it for the long haul, and by long haul, I mean sometimes for decades.
Value investors pick companies they think are on sale, but they also pick companies they think have great long-term growth potential. This way they can cash in on the short-term price correction, and with no extra effort, also cash in on the company’s growth in the long run. Just like with Fido.
Trading is what comes to mind when most people think about investing. GameStop is a great recent example of trading, which is when you try to buy a stock at a low price and sell it at a higher price. You might be thinking that this sounds exactly like value investing, but there’s a huge difference. The length of time the investment is held.
Traders look for short-term price fluctuations and sometimes only hold a stock for mere minutes before selling. This means they are constantly analyzing stocks to find the next deal. If you’re a trader, you can’t just skip a day and leave your portfolio to fend for itself. You constantly have to tend to its needs, be at its beck and call, and continually feed it more money. For those reasons, trading is most like…. having a newborn baby.
If you’re feeling tricked and thinking WTF humans aren’t pets, hear me out. While trading gets lumped in as an investing strategy, it isn’t actually investing. Investing refers to long-term buy and hold strategies, which trading is not. It’s a short-term strategy. So it requires the most effort and time and isn’t even an investing strategy, just like a kid requires constant attention and isn’t a pet.
Even worse is that unlike children, trading often doesn’t even reward you for all of your efforts. In fact, well over half of traders lose money. That’s because it is really hard to predict short-term market fluctuations without insider knowledge. Think back to GameStop. If all traders knew the price was going to rise, they all would have bought the stock, and then sold it before it dropped again. But not all of them did. Once the price fell, traders lost a whopping $27 billion altogether. Just like it’s hard to predict a newborn’s behavior, it’s also hard to predict a stock price’s behavior in the short term.
Overall, the amount of time and effort required to be a successful trader is extraordinarily high compared to what it takes to be a profitable investor. Because of this, trading can’t even be compared to owning a pet, but rather it’s more like having a child.
Which Strategy Should You Adopt?
Unless you want to take on the stress and risk associated with trading, I’d cancel that strategy out because you’ll probably end up losing money.
So now you’re left with value investing or passive investing and while you may be a dog person, I’d still recommend avoiding value investing. If you can find a company that is undervalued, you can make a great return, but these hidden gems are difficult and time-consuming to find. Again, if it were easy, we would all be billionaires like Warren Buffett.
Passive investing is the strategy I use and what I would recommend for most people. It’s extremely low maintenance and provides great returns. If you still want to have a little fun with your money, you can use a passive investing strategy for most of your money and then set up a separate “fun money” account.
To do this, calculate your retirement savings goal, and set up automatic contributions to your retirement accounts to make sure you’ll reach your goal. After that, you can splurge on trendy stocks in a separate fun money account. That way, you aren’t compromising your long-term plan, and you can avoid getting FOMO whenever you hear about the latest hot stock.
Because at the end of the day, your money should be working for you, not making you work for it. Save the hard work for raising your kids and training your pets.