Okay, so you’ve read Part 1 and now you are pumped up and ready to invest eh? What if I told you to slow down a bit and just be lazy? I can see the look of confusion on your face. You mean to tell me you got me all riled up only to say we are going to just chill? Correct.
I backspaced out so many other potential posts for Part 2. I was going to talk about how to pick a broker, investments to avoid, how to pick a stock with a guaranteed 1038723% return. Okay one of those is not true. I have no idea how to pick a broker. *rimshot* On the cool, I will get around to all of that, but I decided to skip a bit for Part 2. Today, we are being lazy. Grab a cool, cool beverage and vibe with me for a second.
When have you ever heard “lazy” be used in a positive way? I’m certain you were not beaming with pride with your moms called you lazy for not taking that chicken out of the freezer. I can’t see you cheesing when your pops called you lazy for not waking up at 5:57 am on a Saturday. Okay, I may be triggering you. Let me get to the content.
Lazy investing also known as passive investing is an investment method that can be summed up as “out-thinking the market is hard, yo”. Passive investing is a buy and hold strategy. This means investments are bought with the intentions of keeping them for the long haul. Holding investments shields you from the short-term fluctuations that the market experiences. Holding investments long term also shields you from the biggest saboteur of your success….YOU. We are emotional creatures. We panic. We worry. We wring our hands. This kind of emotion also leads us to hit the eject button too early.
Passive investing is genius because it doesn’t try to beat the market, all it wants to do is match the market. Beating the market is a tall order. The majority of actively managed funds fail to beat the market. If you wanna put a stat on it: around 90% of active fund managers don’t beat their benchmark. Why chance that? With the average stock market return hovering around 8% (10% before inflation), I’d say a “guaranteed” 8% return beats a “fingers crossed” 19% any day. Just like tasty and delicious Southern BBQ, slow and low is the way to go.
You’re probably saying by now “I’m hungry” but I still want to know more about this passive investing. How do I go about doing it? Grab a snack and listen closely. Come closer. Okay a little closer. One more step. Too far…back up off of me!!! Ahh, much better. The investment vehicle key to passive investing is index funds. Yup. That’s it. That’s the post.
An index fund is a collection of stocks/bonds that are supposed to imitate a certain index. For example, ever hear of the Standard & Poor’s (S & P) 500? It is an index of 500 of the largest companies in the United States. What if I told you that you could buy a fund that owns every one of these stocks? All you would need to do is buy shares of this fund and sit back and let it mimic the gains and losses of the S&P 500. Pretty sweet no?
Since you are not dipping and dabbling in all 500 of these stocks, you don’t have to pay a Fund Manager and their staff. Index funds are known for their low expense ratios because there isn’t a team of folks throwing darts at a board trying to figure out the “next big stock” or needing to go on Investment Zen retreats in Fiji. If you want to see this in numbers: active managers charge about 1% of your total portfolio to manage your account. That may seem like small potatoes if you have a small portfolio, but the gag is most active investors have 5 figure minimums. Index fund fees clock in around 0.05 – 0.25%. Much better!
Let’s go back to the example. Index fund Super Duper S&P 500 has you invested in 500 stocks. That is what we like to call diversification my friends. Your ducats are spread all around and that means your risk is spread around as well. Check it: folks decide they are fed up with the blue bubbles and Apple stock tanks. Lucky for you, there are 499 other companies that are doing splendid. S&P 500 index continues to rise and your ducats continue to grow. It’s beautiful ain’t it?
Passive investing works because it’s simple and easy to understand. You don’t have to be an investment guru. No complex strategies to learn (unless you want to). Index funds are trained to follow their respective index. Just like Toucan Sam following his nose to the Froot Loops, let index funds take you right to the ducats.
So what say you? Does passive investing seem too hands off? Too good to be true? Hit that comment box and let’s chat.
P.S: Fret not, while this is the end of Part 2, the fun is just starting. In Part 3, we will construct our “Lazy Portfolios”. Stay tuned!!