Passive Investing: A How-To Guide
Passive investing, or buy-and-hold investing, is one of the simplest and most effective strategies for growing wealth over time. This passive approach relies on choosing investments, sticking with them, and letting the power of compounding do its magic. Whether you prefer the hands-off convenience of a target-date fund or the DIY charm of a Lazy Portfolio, the key is consistency and a long-term mindset.
In this guide, I’ll break down how these two approaches work, their pros and cons, and what to consider before making your choice. From understanding the nuances of fees to finding the right investments for your goals, this resource will equip you with the knowledge to make informed decisions about your financial future. Let’s dive into the world of buy-and-hold investing and discover how it can work for you.
FAQs
What is a robo advisor?
A robo advisor is an online financial advisor that automates its services to keep costs low. These digital advisors rely on automation to efficiently and inexpensively manage portfolios aligned to investors’ risk tolerances. They can be a great tool for people who want to get started investing, but if you want one-on-one help from a human, a robo advisor may not be the answer.
Quick take: Robo advisors typically appeal to passive investors who want to “set and forget” their portfolios. Stashing cash in a diversified portfolio of stocks and bonds is a really good way to grow your money over time, and robo advisors harness this fact for people who aren’t sure how to get started investing on their own. For a small fee, you let the robo advisor build your investment portfolio for you. Hey presto, you have commenced wealth-building.
Tell me more: The thinking behind robo advisors is that if you want to invest for a future goal, then you, like most of us, will be well-served by a passive, indexed, buy-and-hold investment portfolio aligned with your risk tolerance. When opening an account at a robo advisor, you answer some questions about your goals and appetite for risk, and the robo advisor selects the best investment portfolio for your situation.
Here’s what to look for when searching for a robo advisor:
- Fees. Another appealing feature of robo advisors is that they typically cost less than half of what a human advisor would charge. A management fee of about 0.25% is common, but there is variation, so shop around. Keep in mind that you’ll pay mutual fund or ETF expenses in addition to the management fee.
- Services offered. Some robos promise tax-loss harvesting; others might have really nice personal finance tools. Not sure where to start? Consider some of the big-name brokers like Fidelity, Charles Schwab and Vanguard — they all offer a robo advisor option. Or consider a robo that’s aligned with your needs or values. For example, Ellevest focuses on women’s unique financial challenges.
- Access to a human. Some robos let you meet with a human financial advisor or planner. If that’s important to you, be sure to compare robos based on what’s on offer and how much that extra service costs. Pro tip: If the robo gives you access to a Certified Financial Planner (CFP), that generally means you’ll be able to get answers to a wide range of money questions, plus financial planning strategies that take your overall life goals into account.
One more thing: One challenge investors face when using a robo advisor is transparency. Robo advisors’ descriptions of their investment processes are often on the vague side. The best human wealth advisors explain their investment philosophies and ensure you are a good fit for their services.
Bottom line: Robo advisors make passive investing super easy and are a great, low-cost option for people seeking help building an investment portfolio, especially for a long-term goal like retirement.
What is the best investment for retirement?
The best investment for retirement will depend on your situation, but we outlined two great ideas for you to consider in the article above: a target-date fund or a handful of mutual funds in the form of a Lazy Portfolio. Dive deeper: What is the best investment for retirement?
What is the 4% rule?
The 4% rule is a widely referenced guideline in retirement planning, offering a simple formula for how much you can safely withdraw from your savings each year without running out of money. It suggests withdrawing 4% of your portfolio annually, adjusting for inflation, to sustain your savings for approximately 30 years. This rule assumes a diversified portfolio with at least 50% invested in stocks and the rest in bonds, providing a balance of growth and stability. Originating from research that included historical market downturns like the Great Depression, the 4% rule aims to offer a conservative, reliable approach to retirement income.
Beyond withdrawals, the rule also helps estimate how much you need to save before retiring. By multiplying your desired annual retirement income (after accounting for Social Security and other income) by 25, you can determine your target savings goal. For instance, if you need $45,000 annually from your portfolio, saving $1,125,000 would align with the 4% guideline. While the rule is a helpful starting point, it’s not one-size-fits-all. Experts debate its precision, with some suggesting adjustments based on market conditions or personal circumstances. Consulting a financial advisor can help tailor this approach to your unique needs.
References
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