{"id":7167,"date":"2013-11-18T10:24:56","date_gmt":"2013-11-18T18:24:56","guid":{"rendered":"http:\/\/www.marketriders.com\/investing\/?p=7167"},"modified":"2016-12-21T07:28:18","modified_gmt":"2016-12-21T15:28:18","slug":"how-to-invest-passively-retirement-success","status":"publish","type":"post","link":"https:\/\/www.marketriders.com\/investing\/how-to-invest-passively-retirement-success\/","title":{"rendered":"How To Invest Passively For Retirement Success"},"content":{"rendered":"

To invest, you have to be wily trader, up to date on market news and a lightning-fast decision maker, right?<\/p>\n

Yes, but that’s not the only way to invest. If you learn how to\u00a0invest passively for\u00a0retirement<\/a>, you can ride along on the coattails of all those speed demons and, in time, even outperform them.<\/p>\n

The reason why this works is that passive investing gives you all of the advantages of being mostly right most of the time while greatly\u00a0minimizing investment risk<\/a>: Being very wrong even once at exactly the wrong time.<\/p>\n

\"how<\/p>\n

Young investors tend not to understand the second part as risk. If you are in your 20s and only have a few thousand bucks in the markets, a big dip in stocks doesn’t seem like a problem.<\/p>\n

And it isn’t a problem. If you have decades of recovery time ahead of you, lower stock prices are an opportunity to buy more at better prices. As\u00a0Warren Buffett<\/a>\u00a0says, nobody complains when hamburger goes on sale, so why worry about a decline in stock prices?<\/p>\n

If you’re older, though, that kind of “sale” can feel pretty bad. Your\u00a0retirement\u00a0plans go from “good enough” to “missing by a mile” in a few days or weeks. Ask the near-retirees of 2009 how they felt about the Dow falling in half.<\/p>\n

The trick is to learn how to invest passively in an age-appropriate manner. Here are the steps:<\/p>\n

1. Keep costs low<\/strong><\/p>\n

This is not an afterthought. It’s crucial. Use\u00a0index ETFs<\/a>\u00a0instead of trying to pick and choose individual stocks. Most broad ETFs trade commission-free and their fees are a tiny fraction of those charged by actively managed mutual funds.<\/p>\n

2. Buy asset classes, not stocks<\/strong><\/p>\n

Diversification<\/a>\u00a0is the key to sanity. If you put all of your\u00a0retirement\u00a0savings into five or even 10 stocks, one bad pick can seriously undermine your long-term return. Index\u00a0ETFs\u00a0give you reasonably priced exposure to whole indexes instead.<\/p>\n

3. Rebalance regularly<\/strong><\/p>\n

The markets will move, sometimes chaotically. But nothing last forever. Every stock seller is meeting a stock buyer to make the transaction. If you own a\u00a0balanced portfolio of asset classes<\/a>, you can sell as they rise in value and buy the ones that fall, programmatically.<\/p>\n

4. Keep risk in check<\/strong><\/p>\n

As you get older, move your mix of investments steadily toward\u00a0less-volatile asset classes<\/a>. That way, another big decline won’t matter as much to you personally.<\/p>\n

5. \u00a0Compound<\/strong><\/p>\n

Compound interest<\/a>\u00a0is how you get to\u00a0retirement. Earning a market return of 7%, every dollar you save now is worth $2 in a decade, then that same $2 turns into $4 a decade later, then it doubles again to $8.<\/p>\n

These five steps, taken together, are how\u00a0pension funds and university endowments<\/a>\u00a0manage their wealth. You can use the same tools cheaply to achieve the same effect, with minimal trading and minimal stress.<\/p>\n","protected":false},"excerpt":{"rendered":"

To invest, you have to be wily trader, up to date on market news and a lightning-fast decision maker, right? Yes, but that’s not the only way to invest. 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