Whether you want to get fit, learn a new language or lose a few pounds, hard work pays off. But when it comes to taking care of your financial health, doing less can really pay off more.
A lazy approach to investing can make you richer and happier. So says Rob Smith, head of behavioral finance at Barclays. “The more you do with an investment portfolio, the more you can hurt investment performance,” he says.
“When you try to time the stock market to increase your returns, your emotions often get the better of you and you end up making bad decisions. Being more hands-off, or even lazy, is definitely a good thing when it comes to investing.’
In the slow lane: a lazy approach to investing can make you richer and happier
In addition to the costs associated with buying and selling mutual funds or stocks, human nature makes it difficult to get through the bumps in the stock market if you are an active investor.
When stock prices fall, it hurts, especially if you picked that investment yourself. Selling – turning a price drop into an actual loss – may be the only way to stop the pain.
Likewise, when an investment performs well, it’s a great feeling. You’ve got it right and it’s the absolute darling of your wallet, so how could you ever sell it?
Since it’s impossible to know when the right time is right, many investors hold onto these treasures in the portfolio until the price drops, taking their profits with them.
Even something as simple as living by the “buy low, sell high” investment principle feels incredibly unnatural. No one wants to invest in a company that is out of favor and has a low share price to prove it. But it is some of these shunned companies that can change their fortunes and that of their brave investors.
How much these poor investment decisions can hurt performance can be seen in the stock market turmoil amid the pandemic. When news broke that Covid-19 had reached mainland Europe last year, global equities went into freefall on February 20, with many investors cutting losses and selling.
These investors were probably pleased with themselves a month later when world stock markets – as measured by the MSCI World Index – had fallen by more than a third. But their complacency was short-lived.
News of a $2.2 trillion (£1.6 trillion) stimulus package in the US on March 23 caused markets to recover and while it took a full six months to return to pre-pandemic levels, a significant part of that recovery takes place between 24 and 26 March .
Rick Eling is investment director of the Quilter Financial Planning advisory group. He says, “If an investor had sold out when the market started to fall, but missed those three days in March, he would have missed nearly half of the total recovery. Someone who did nothing and left his investments undisturbed would have been much better off as a result.’
While there’s plenty of evidence of being a lazy investor, it’s worth investing some time and energy to get the basics right when you start out. This may sound daunting, but James Norton, senior investment planner at asset manager Vanguard in the UK, says it doesn’t require any special understanding of investments or how the stock market works.
He says, “Think of your goals. Are you saving for a mortgage in five years, or are you putting money aside for your pension in 40 years? Knowing when you need the money can help you determine how much investment risk you want to take at your leisure.
“The longer you have to reach your goal, the more risk you can take.”
ASSESSING YOUR ATTITUDE TO INVESTMENT RISK
Your willingness for investment risk determines the assets in which you may want to invest. As a rule of thumb, stocks carry a higher risk than bonds, so if you only have a short investment horizon, look for a mutual fund with a higher proportion of bonds, as they will protect you from the short-term fluctuations of the stock market.
Conversely, with more time on your side, you can afford to be more adventurous.
Investments in higher risk areas, such as emerging markets and technology stocks, have the potential to deliver very high returns if you can afford to let them do their thing. But whether your goals mean being comfortable with risk or going for something more conservative, the key to choosing the perfect investment is diversification.
Barclays’ Rob Smith says: “No one knows where the next big idea will come from, so it makes sense to invest in as many different companies as possible, preferably through an investment fund or mutual fund. This helps manage risk as some stocks will appreciate and others will fall.’
He adds: “On our investment platform, clients who invest in diversified mutual funds outperform those who pick a handful of stocks. It is extremely difficult to choose scholarship winners.’
For the ultimate in diversification, you can’t beat a global fund that invests in a range of different markets (see below). But if an adventure into the unknown feels too nerve-wracking, there’s nothing wrong with a narrower range fund – say Europe or even the UK – provided there’s enough variety in its portfolio.
TAKE A PASSIVE POSITION TO INVESTING
There is a lot of choice when it comes to selecting a well-diversified fund that fits your needs. In addition to actively managed funds – and multi-manager funds in which you invest in different funds selected by a general manager – passive funds can be a useful option for lazy investors.
These are managed by computer programs designed to track an index, so you don’t have to worry about a manager picking a duff investment or having an off day.
The other advantage of passive funds is the cost. Without an administrator to pay, these can have annual charges of less than 0.1 percent.
Norton says it’s essential to make sure you’re not paying more than necessary when choosing a fund. He explains, “There may not seem much difference between a fund asking 0.5 percent per year and another 2%, but over time this difference can significantly affect how much you build.”
To illustrate this, he points to £10,000 invested in 50 years. If this produced an average annual investment growth of 7 percent, it would be worth almost £300,000.
But if the annual burden falls by 2 percent, it would shrink to around £115,000. “You can’t control markets, but you can control the investment costs,” Norton adds.
“Choosing a low-fee fund is an easy way for someone to make a significant difference in their investment return.”
Picking for one well-diversified fund rather than a hodgepodge of different investments has another benefit for lazy investors. Saddle up with a range of funds or stocks and you’ll have to master the art of rebalancing.
This wonderful bit of investment jargon basically means cutting back your top performers and stocking up on the laggards to return to your original portfolio.
Experts recommend doing it every six to 12 months and while it helps reduce risk, it takes time and all the buying and selling costs can increase costs. Hold one fund and you can forget about rebalancing altogether, as the fund manager does it all for you.
Without the need to rebalance your investments, it’s possible to sit back and let your money do its thing. Daniel Bland, head of sustainable investment management at EQ Investors, recommends this hands-off strategy.
He says: ‘Check your investment regularly and you run the risk of becoming obsessed. Its value will rise and fall with each market move, making you more and more uncomfortable.
“If someone takes care of everything for you, only check once or twice a year to see if it does what you expected it to do. Relax and let your investments do all the hard work.”
A FINAL THOUGHT…
Setting up a direct debit to add to your investments every month can be a great strategy for lazy investors.
Most wealth platforms – run by companies like AJ Bell, Hargreaves Lansdown and Interactive Investor – allow you to invest small monthly amounts.
EQ Investors’ Bland is a fan of this approach – even recommending it if you have a large lump sum to invest. “Put it in,” he says. ‘That way you don’t have to worry about whether you have invested at the right time.’
HOWEVER A TRUST CAN HELP YOU RELAX
Some of the best funds for “lazy” investors are global mutual funds.
These vehicles are listed on the London Stock Exchange and have a number of attractive features.
First, they are generally broadly invested in the world’s major equity markets, offering shareholders reassuring geographic diversification.
They also have many corporate interests, meaning that their overall investment performance is not compromised if a stake in an individual company goes awry. While the annual fees may not be as low as some passive funds, most global investment trusts have competitive fees.
For example, Monks and Scottish Mortgage, both managed by Baillie Gifford, have a total annual charge of 0.43 percent and 0.34 percent, respectively.
Other global trusts with annual fees of 0.6 percent or less include Bankers (0.5 percent), F&C (0.52 percent) and Scottish (0.52 percent).
Two other attractive features of global investment trusts are their longevity — some trusts like F&C go back more than 150 years — and their ability to achieve steady growth in dividend payments.
Trusts such as Bankers (managed by Janus Henderson), Alliance and F&C have annual dividend growth records going back at least 50 years.
More details on these lazy investor trusts can be found on the website theaic.co.uk.
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