What Is a Hands-off Investor?
If you're considering a hands-off approach to investing, understand that it means setting up your portfolio and making only minor tweaks over a long period. I see many investors like you turning to index funds or target-date funds because they adjust slowly and don't demand constant attention.
Key Takeaways
- As a hands-off investor, you're passive, choosing asset allocations and sticking with them, making few changes as time goes on.
- You're more likely to go for index funds, ETFs, or target-date funds rather than picking individual stocks.
- Looking at S&P 500 history, passive funds usually beat active ones over time.
- Still, you'll need to adjust your passive portfolio at key points, like nearing retirement.
Understanding a Hands-off Investor
This strategy suits retail investors like you who don't have hours to monitor investments weekly. Active management demands constant research to chase higher returns, but I know that's not for everyone.
Don't think hands-off means underperforming; many believe in indexing, where a diversified portfolio held long-term builds wealth.
With low expense ratios in index funds, you gain an edge over active traders who face higher commissions, bid-ask spreads, and taxes on short-term gains.
Benefits and Drawbacks of Being a Hands-off Investor
Dalbar's ongoing study on investor behavior shows the advantages: from 1997 to 2017, average equity investors earned 5.29% annually versus the S&P 500's 7.20%.
On a $100,000 investment, that's about $120,000 less for the average investor compared to a hands-off one tracking the S&P. Fixed-income investors fared worse, trailing their index by 4.54 points and losing around $155,000 over 20 years.
Special Considerations
Underperformance often stems from market timing and biases like loss aversion; indexes stay fully invested, while you might sit out waiting for the perfect entry.
You can benefit from price returns and dividend reinvestment, buying more shares in mutual funds with those proceeds.
If you're not in a target-date fund, watch for added risk near retirement—without rebalancing, your portfolio might get too heavy in equities, risking big losses in a bear market five to 10 years before retiring.
In retirement, shift to a conservative mix with cash and quality bonds, which might require more trading to preserve capital.
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