When many of us think about investing, we think about a fast-paced trading floor. We’ve seen movies like Wall Street that make investing seem like it has to be a high-rolling, fast-paced game. And, while this can be true in some cases, there is no reason that investing has to be complex. Or exciting. In fact, I’m a big fan of boring investments. It’s not glamorous, and you probably won’t see huge annual returns, but over time a boring approach to investing can help you come out ahead.
One of the great things about boring investments is that many of them have long-term staying power. When you invest for the long-term, you consider the big picture, and what is likely to do well over time.
These investments are rarely “exciting.” They are rarely the “hot” investment. Instead, these investments are more likely to be boring old standbys. Dividend aristocrats often do well over time, even though you probably won’t see huge short-term gains. Index funds and index ETFs can also be very boring, offering rather modest annualized returns, but performing consistently over time.
One of the great things about boring investments like these is that you don’t have to worry about some of the volatility in the markets. Yes, these investments will lose value during times when the market is down. However, these investments often recover because they are fundamentally sound.
More exciting investments might show bigger shifts, but their fundamentals might not be as solid. Just as there is the potential for a big gain with the more exciting investments, there is also the potential for big losses. Boring investing allows you to more accurately find investments that are likely to do well over time, providing consistent returns.
Among the best ways to be boring is to consider index funds. Index funds (and index ETFs) offer you the chance to taking boring investing to the next level. Instead of picking stocks, you just have to pick a collection of investments following an index.
Choose an all-market index fund, and your performance will reflect the overall performance of the entire market. You essentially own everything — no need to pick and choose at all. Over time, the market has historically gone up, so that means that there is a good chance that an all-market index fund will stand you in good stead over the course of 20 or 30 years.
You don’t have to go with all-market funds only. It’s possible to choose index funds that follow specific indexes, such as foreign indexes, business indexes, or even indexes that follow dividend stocks (a boring way to build a dividend income portfolio).
Finally, the boring investor pays fewer fees than someone who has a more exciting investment life. If you decide that you need to pay a fund manager to help you invest in high growth investments, you could pay fund fees in excess of 2% a year. Compare that with a boring index fund that only charges 0.40% in fees. The savings can be dramatic — especially over time as your portfolio grows.
Additionally, when you trade frequently, you rack up the transaction fees. Someone who employs dollar cost averaging only pays transaction fees once or twice a month. An active trader might pay these fees multiple times a week. Those transaction fees can add up quickly.
Another problem is what comes with lost opportunity. If you are always buying and selling, you can miss out on opportunities. It’s hard to know exactly when to buy low and sell high. And, in fact, if you are too interested in following the market, there is a good chance that you end up feeling the pressure to follow the crowd. You might actually be buying high and selling low as you make panic-driven decisions.
Boring investing also leads to more reasonable rebalancing. Yes you need to rebalance your portfolio. However, if you are constantly changing things around and trying out new things, there is a good chance that the fees will add up.
A boring investor takes a measured approach to investing, using dollar cost averaging, and judiciously rebalancing in accordance with long-term investing goals. Consider how you might benefit — financially and in terms of peace of mind — by taking a more boring investment path.
Photo from Wikimedia Commons.
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I'm just an average mom, trying to live a frugal life and get out of debt. I write about things that have (and haven't) worked to improve my family's financial situation. What works for me may or may not work for you, and you should always consult a financial advisor before making important financial decisions.
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