When you think of stock market investing, trading is probably what comes to mind. It’s the strategy that’s been popularized by movies, WallStreetBets, and TikTok. They teach you that to be successful at investing in stocks, you have to investigate the stock market constantly to find hidden deals you can make millions off of. But few people hit it big, and who has a few hours a day to spend watching stock prices? Not me, and probably not you.
While trading is a highly publicized investing strategy, it is the exact opposite of effortless and has an 80%+ failure rate, which actually makes it one of the worst strategies. The good news is that there’s a different way to make money investing in stocks that historically, has worked 100% of the time.
What is Long-term Passive Investing
Long-term passive investing is a buy-and-hold strategy where you build a well-diversified portfolio and take advantage of the almost guaranteed gains the entire stock market will have over time. It’s way less risky than trading and way easier.
It works because it exposes you to hundreds or thousands of different companies across many market sectors, asset classes, and geographic regions. This diversification helps protect you from losing all of your money if one area of your investments is impacted negatively by something. For example, maybe one of the companies you’re invested in goes bankrupt. If you’re only invested in that one company, you’ll lose everything. If you’re invested in hundreds of other companies as well, this one company’s failure will have little impact on your money. That’s the power of diversification.
Time in the Market
The other reason long-term passive investing works is because your risk of losing money when you’re invested in the total stock market declines significantly over time. In fact, after 40 years of investing in the stock market, you have a less than 1% chance of losing money and a 95% chance of earning almost 3 times your initial investment. Those are pretty good odds.
This works because historically, the stock market as a whole has always gone up. There are dips and sometimes huge drops in the short-term, but thanks to diversification and compounded earnings, you’re essentially guaranteed a return if you can ride out the short-term bumps to take advantage of the long-term gains.
But figuring out how to build a diversified portfolio and manage it for 40 years is still a daunting task. Traditionally, people hired a financial advisor and paid them hundreds of thousands of dollars in earnings over several decades to avoid having to do this work themselves. Luckily, with the help of technology, there are new cheap and effortless ways to invest in stocks so you never have to build your portfolio, manage your investments, or learn really anything about the stock market.
Effortless Strategies for Investing in the Stock Market
Use a Target-Date Fund
Target-date funds are the one-stop shop when it comes to effortless investing in retirement accounts. These include your 401k and IRAs. Target-date funds get their name because to find the best one for you, you select the target date for when you’ll want to sell your investments. Typically, these funds are offered in retirement accounts so that date is your retirement date.
Target-date funds are usually offered in 5 or 10-year increments, so choose the date that is nearest to your retirement date. When you do that, your fund will build your portfolio at the appropriate risk level based on the length of time until you retire.
Not only will your target-date fund build your portfolio for you initially, but it will also manage it for you forever. As you age and get closer to your target date, your fund will update your investments to reduce your risk level. Remember, the longer you’re invested, the less likely you are to lose money, so the closer you are to retirement the safer your portfolio should be and vice versa. This will ensure that you maintain your investment earnings to use as income in retirement.
Use a Robo-advisor
Outside of your retirement accounts, the best option for effortless investing is to use a Robo-advisor. Robo-advisors typically ask you a set of questions when you open your account to determine your investing risk tolerance. They then invest your money into one of their diversified portfolios based on your responses. If your risk preferences change, you can update your risk tolerance and your Robo-advisor will move your money into either safer or riskier portfolios.
The Effort You Need to Make
There’s only one bit of effort that you need to make after you invest in a target-date fund or with a Robo-advisor, and that is to make sure you keep investing more money into it. The effortless way to do that is called dollar-cost averaging.
Dollar-cost averaging is a fancy way of saying automating your investments. It’s when you invest a fixed amount of money at regular intervals. 401ks use this strategy by regularly withdrawing a fixed percentage of each of your paychecks to invest for you. Once you set your contribution percentage, all of the investing happens behind the scenes without you having to lift a finger.
You can use this same strategy in your other investment accounts by setting up automatic investments at whatever amount and frequency you’d like. If you want to max out your IRA accounts, for example, you can take the $6,000 annual contribution limit and divide it by your contribution frequency to determine the dollar amount of your automatic contributions. If you’re contributing monthly, you would divide $6,000 by 12 months to get a $500 per month contribution. Automating your contributions will ensure that you’re always investing and making more money with zero effort.
While investing is portrayed as being difficult and time-consuming, it can actually be effortless and stress-free. You just need to choose a method that builds and manages a diversified portfolio for you and automate your contributions. Then you’ll be passively investing and building wealth so you can focus your effort toward other things you love.