Here at Investor Junkie I’ve talked a lot about early retirement topics, like the crazy but fun perks of retiring early, and how to travel the world during retirement. When I mention to others that I retired early, some instantly assume that I made millions by being an expert stock picker.
They expect that I bought Apple before the iPhone and the iPad and made millions over the span of a few years as the stock doubled and split and doubled again and again.
That sounds really exciting, but the real truth is actually pretty boring. I started out trying to pick winning stocks and after suffering losses repeatedly, I gave up the habit. I found out about low-cost index fund investing as I started my career as an engineer, and over the years I piled all my money into a passive index fund portfolio.
Though the portfolio was never very interesting to discuss at parties, it did its job and produced excellent long-term returns without excessive fees over time. It also never stressed me out.
Who has time to worry about day trading and stock picking when there’s so much other craziness in life?
Keep It Simple
Your investment strategy should be easy to set up initially and easy to maintain over the long term. Whether it’s a single target retirement fund for your entire portfolio or a small handful of index funds or ETF’s, always keep it simple. Develop an asset allocation and stick with it over the long term even when everything looks ugly.
If you can’t stand to lose a lot of money in a down market, don’t try to time the market by selling when you think it’s bad, then buying back in before the next bull. Instead of timing the market, increase your allocation to lower risk assets like short-to-medium-term bonds or cash. Dialing back the risk of your portfolio will help you weather the next bear market while simultaneously leaving you partially invested in the stock market so you can profit from the next roaring bull market.
Too many folks got left behind when they sold out of the scary markets in 2008 and 2009 and never got back in before the market doubled (and then some) over the next five years.
Don’t blow your entire retirement portfolio by making an impulsive knee-jerk decision to go to 100% cash because of scary headlines, or what your cubemate at work says might happen in the market according to the talking heads on CNBC. Stick with your investment plan and asset allocation and you’ll be doing good in the future.
Over the short-term, the markets go up and down, sometimes wildly. Over the long-term, the trend is a slow upward climb.
Put Your Investments on Auto-Pilot
Long-term investment returns happen over a long period of time. It’s a fairly obvious statement but is worth mentioning in the context of low stress investing.
Take advantage of that this trend by putting your investments on auto-pilot. Set your 401k contributions to automatically invest according to your asset allocation. Set up recurring purchases at your brokerage firm for your IRA and taxable accounts too.
Don’t get scared and stop investing in stocks just because you think something might happen in the market. Leave your investments on auto-pilot and let each month’s investments happen. Sometimes you’ll buy at the peak of the market, but you’ll also be buying at the bottom of the market when everyone else is too afraid to invest at all.
Don’t try to pick winners. It’s tempting to try and figure out the next trend before everyone else does, and then buy accordingly. Just remember that there are thousands of paid professionals on Wall Street and other financial capitals of the world getting paid six figures to outsmart you.
Let your investments run on auto-pilot instead. You’ll ride out the ups-and-downs of the market and achieve the long-term returns required to get you to retirement.
If you have to satiate your adrenaline need with stock-picking and active trading, keep it to a very small proportion of your portfolio — a few percent at a maximum. I’ll occasionally get a wild hair and try to outsmart the market but never put any significant sums of money at risk. And that’s a good thing because I haven’t been very successful at picking winners (but maybe my poorly timed bank ETF purchase from 2008 will prove me right eventually).
Why Low Stress Investing Wins
Low stress investing is a winning strategy because it takes the emotions out of investing. By picking a simple asset allocation and automatically investing each month, you’ll snap up the long-term gains and won’t have to constantly worry about the zigs and zags of the market.
Too many investors fall into the emotional investment traps of fear and greed at exactly the wrong times. Instead, do as Warren Buffett suggests:
“Be fearful when others are greedy, and be greedy when others are fearful.”
When Mr. Buffett talks about being greedy when others are fearful, he’s talking about continuing to buy stocks in the face of a mountain of worry. Automatic investments that happen without any intervention from you are the best way to get greedy when others are fearful.
Disclosure: I own AAPL stock through my index fund investments.
Readers: how do you set up your investments to ensure low stress with good returns?