There’s a lot to be said for doing nothing when it comes to investing.
The investment industry is set up to encourage activity. Who else can stock brokers and financial advisors make money?
If a broker makes a lot of trades on your account without your knowledge, that’s known as “churning” an account. It’s wrong and brokers can get into trouble for doing it.
But if the broker or advisor gets you to agree to lots of trades, then they’re in the clear. The salesperson gets his or commissions but isn’t at risk of getting into trouble with regulators.
Until, of course, you open your account at retirement and you’ve made almost no money! Lots of trading without purpose can drain an account of gains over time.
So what’s the alternative? Well, a lot of research suggests using index funds instead of holding individual stocks and bonds.
By owning a low-cost fund you get diversification and you can avoid the plaque of account-churning. You advisor might tell you it’s a bad idea, but ask yourself: What’s his motivation here? Commissions?
You will, of course, eventually need to buy or sell something. That’s why rebalancing matters so much.
For instance, if stocks run high for a year, then it’s a good idea to sell off some of those gains and reinvest in, say, bonds or real estate.
Likewise, if fixed income or property outpaces stocks (it can happen, especially if stocks decline sharply) then you sell some those gains and buy stocks while they’re cheap.
The distribution of your investments, be it 60% stocks and 40% bonds or some other combination, is less important than keeping that ratio firmly in mind when you rebalance.
You might do that once a year, or maybe twice. More and you run the risk of increasing your investment cost to a point where you lose money in the effort.
A financial advisor does have a job to do. Namely, that’s to suggest low-cost investments and to help you to develop a diversified portfolio that fits your goals.
Ideally, the advisor is a fiduciary. That means that his or her suggestions must be in your interest first, ahead of their own and ahead of the company for which they work.
Working with advisor, come up with a portfolio, pick your underlying investments and forget it for a while. You might be surprised at how well this approach works over longer periods of time, and how relaxed you can be about your own retirement ahead.
MarketRiders, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.