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A boring investment strategy doesn't necessarily mean low risk, but it can help you construct an efficient portfolio and avoid costly pitfalls as you build wealth for the future.
If you're looking for a way to invest your money for important financial goals, here's why a boring approach may be best.
What Is a Boring Investment Strategy?
Professional investment managers and day traders are constantly watching the financial markets, looking for opportunities to buy and sell stocks and other financial securities and outperform the market. Timing the market can result in outsized gains, but for most investors, the risks are high.
A boring investment strategy, on the other hand, sticks to the basics to ensure that your portfolio is diversified, you have the right asset allocation and your investment contributions are consistent. Over the long run, this approach can reduce your exposure to risk and help you avoid emotional mistakes.
That doesn't mean every aspect of your investment strategy needs to be boring. If you still have some money you can afford to invest after all of your other financial goals are taken care of, you can choose to take more risks with more active investing.
How to Construct a Boring Portfolio
There are several different investments and strategies you can consider when building an investment portfolio that focuses on long-term stability over a riskier approach. Here are some to help you get started.
As you consider how to approach your investments, here are some strategies to keep in mind:
- Asset allocation: Some investment options are riskier than others, so it's important to invest in different assets to maintain a balance of risk and return. For example, stocks are riskier than bonds but can also provide higher long-term returns. As a result, young professionals saving for retirement may opt to lean toward investing in stocks, while seasoned professionals nearing retirement may focus more on bonds. Finding the right asset allocation mix can help you create a balanced investment portfolio.
- Diversification: Once you have a strategy for your asset allocation, diversify within each asset class. With stocks, for instance, you may want a mix of blue-chip stocks, growth stocks and value stocks. If you can handle a little more risk, you may also consider international stocks. With bonds, you might want a mix of government and corporate bonds.
- Dollar cost averaging: Instead of trying to time the market, make regular contributions to your investment portfolio in both good and bad times. Dollar cost averaging involves investing the same amount—whether it's $5 or $500—at regular intervals. This approach can help you manage the risk of price fluctuations over time.
- Buy and hold: While it may be tempting to try to time the market, the buy-and-hold strategy is particularly crucial for long-term investing. While you may need to make adjustments to your portfolio over time, setting it and checking your balance only occasionally can help you avoid emotional decisions that could result in big losses.
To maintain a boring and effective investment approach, it's best to stick to exchange-traded funds and mutual funds. However, you may also decide to employ a robo-advisor to help you build your portfolio:
- Exchange-traded funds: When you buy exchange-traded funds (ETFs), you're effectively investing in dozens or even hundreds of stocks, bonds and other financial securities. Some ETFs will track major indexes, such as the S&P 500, making it easier for you to stay diversified. ETFs are sold on major stock exchanges.
- Mutual funds: Mutual funds act similarly to ETFs, allowing you to invest in a basket of individual stocks, bonds and other financial securities. The biggest difference is that mutual funds aren't traded on major stock exchanges. Additionally, you may need more money to invest in a mutual fund than an ETF.
- Robo-advisor: If you don't want to build your portfolio on your own, a robo-advisor can manage your investments for you, often at a low cost. Utilizing a computer algorithm, it will construct your portfolio, typically made up of ETFs and mutual funds, based on your risk tolerance and desired asset allocation. A robo-advisor may also regularly rebalance your portfolio to ensure that the asset allocation remains true to your needs and goals.
Pros and Cons of a Boring Investment Strategy
As you consider your approach to investing, here are some advantages and disadvantages of a boring approach to keep in mind.
- Lower costs: ETFs often have low costs, and if you're not paying someone to actively manage your portfolio—not including robo-advisors—you can avoid expensive management fees.
- Lower risk: Focusing on asset allocation, diversification and dollar cost averaging, you can eliminate a lot of the risks associated with day trading individual stocks. At the same time, you can likely still generate a high enough return over the long term to achieve your goals.
- Less stress: Trying to time the market can be a stressful experience, and if you're not an experienced investor, it can be easy to make costly mistakes based on emotional impulses. With a boring investment strategy, you can essentially set it and forget it, making your money work for you.
- Can miss out on some opportunities: There may be opportunities that come up with a better potential for a high return, and if you're only investing in ETFs and mutual funds, you might miss out. As you build a sizable portfolio, a boring approach also excludes alternative investments that might be available to you.
- Less control: While you can decide which ETFs and mutual funds to buy, you can't control what the fund invests in. And if you opt to work with a robo-advisor, you won't even be able to decide which funds make up your portfolio.
- It doesn't eliminate all stress: Even with a boring investment approach, you may still experience stress and make emotional decisions during market downturns.
Consider Consulting With a Financial Advisor to Determine Your Approach
Even if you're not planning to hire a financial advisor to manage your money, it can still be a good idea to consult with one to determine how to approach your investment goals. An advisor can help you develop a strategy based on your needs and objectives and even provide some recommendations on how and where to get started. This option can help you save the time it would take to research on your own.