If investing makes you want to pull your hair out, it's time to take a step back and simplify. Photo: Flickr user Helga Weber.
Investing on your own can seem complicated and scary, but it doesn't have to be. There are steps you can take to automate the process, as well as to find investments that will allow you to sleep soundly no matter what the market is doing. With that in mind, we asked five of our top contributors to share their advice on how investors can simplify their approach, and here's what they had to say.
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Selena Maranjian: Investing is complicated if you spend lots of time and energy studying investing strategies and individual stocks, deciding which ones to buy and when to buy (and, later, sell) them. You have to keep looking for bargains, and you need to keep up with your holdings to make sure they're still on track. Many people don't have the time, skills, or interest to do all that.
A great way to avoid this process while still enjoying solid investing results is to be an index investor. Instead of trying to cherry-pick the best stocks out of thousands, you can buy shares of an inexpensive, broad-market index fund and instantly be invested in hundreds or thousands of stocks. A good index fund gives you most or all of the market, for a pittance. The Vanguard S&P 500 Index Fund, for example, charges an annual fee of just 0.17%, or $17 for every $10,000 you invest, and parks you in 500 of America's biggest and best companies, making up about 80% of the overall stock market's value. The Vanguard Total Stock Market Index Fundwill invest you in just about every U.S. stock, while the Vanguard Total World Stock Index Fundwill give you the world stock market.
And best off all; you're not sacrificing a lot of performance by indexing. Index funds tend to outperform professional mutual fund managers over long periods of time.
One way to simply your investing is to forget about moving in and out of the hottest stocks and focusing on companies that have a high chance of survival over the long run.
To identify these stocks, I like to apply three tests:
- Is the company in a business that will be around in 100 years? For example, people will always need food, safe places to keep their money, and homes to live in. On the other hand, will there still be a market for tablet PCs in 100 years? Maybe, but maybe not.
- Does the company have a wide economic moat? In other words, does the company have some sort of sustainable competitive advantage over the competition? To name a couple of examples, Costco's wide moat is its ability to charge lower prices than its competitors while remaining profitable, and Coca-Cola's wide moat is its tremendous brand recognition, which gives it pricing power and strong marketability for new products.
- Does the company have a history of responsible, shareholder-friendly management? Take a look at whether the dividend has been increased regularly, profits have steadily grown, and the company has made it through bad economic times unscathed.
If you concentrate on finding stocks that stand the test of time, you can simply buy your shares and let them create wealth for you over the years, instead of constantly obsessing about the ups and downs in the market.
Brian Stoffel: There are lots of reasons humans aren't natural investors. We are chock-full of biases that significantly skew our perceptions -- namely, loss aversion, confirmation bias, and our own selective memories. While we suffer from the same maladies in our lives outside investing, the consequences for our bias-blindness are more concrete and easier to measure.
I've found that the best way to simplify investing (and help me improve as an investor) is to keep a journal. Before I ever buy a stock, I write down:
- Exactly why I'm buying it.
- What I expect to see from the company over the next three to five years.
- Most importantly, what it would take to get me to sell the stock.
The lessons you can glean by going back over your journal are priceless. I've stopped from panic-selling a number of times when I glance back at my "what it would take to sell the stock" passages. This has saved me thousands in returns I eventually realized by not selling. I've also learned that I, too, often avoid stocks that have already gone up, and this realization has helped me get more comfortable with buying more of a stock I already own -- even if the price tag is heftier than it once was.
Your own lessons will be different, but you'll never discover them if you don't start a journal today.
Jason Hall: One of the hardest parts of investing is knowing what to invest in. It takes a commitment and time to research individual stocks. You need to understand the company, industry, and competitors.
And based on piles of research that shows how few people manage to beat the market, it's exactly why so many people just don't do it. One great way to simplify this matter is to invest in exchange-traded funds, or ETFs.
ETFs are basically mutual funds that are traded on a stock market exchange, while mutual funds are bought and sold directly by the mutual fund manager, or sometimes through a broker.
One of the major benefits of an ETF versus a mutual fund is that most mutual funds require minimum investments, making it cost-prohibitive for someone just getting started. But with an index fund, you just buy shares as you would a regular stock, so it's simpler.
The downside? Brokerage fees, just like with buying stocks.
In other words, ETFs give you the benefits of mutual funds, but without some of the limitations. And since they're traded like stocks, it can be much easier to get started.
Check this out: The Vanguard index funds Selena wrote about? They're all available as ETFs, too.
Dan Caplinger: As several of my peers have noted, choosing the right stocks and ETFs to maximize your long-term growth prospects can be a challenge in itself. Yet even after you identify the high-quality companies and funds that are the best place for your investing dollars, the question of when to invest is also important. Pick the right companies at the wrong time, and you'll reduce your total returns compared to someone who times the market perfectly.
Rather than taking out your crystal ball, though, there's an easy way to benefit from changing conditions in the stock market without resorting to guesswork. Dollar-cost averaging lets you gradually build positions in your favorite investments, putting fixed amounts of money toward your stocks and funds on a regular basis. Because a fixed dollar amount will buy more shares when prices are low and fewer shares when prices are high, it automatically imposes the investing discipline that many people need to prevent themselves from making costly mistakes. Moreover, with many brokers and fund companies letting you set up automatic investment plans, the dollar-cost averaging strategy is easier than ever to implement. To simplify your investing, dollar-cost averaging can take away the need to decide when the absolute right time is to invest, and it can lead to better investment performance over the long run.
The article 5 Ways to Simplify Your Approach to Investing originally appeared on Fool.com.
Brian Stoffel has no position in any stocks mentioned. Dan Caplinger has no position in any stocks mentioned. Jason Hall owns shares of Coca-Cola and Costco Wholesale. Matthew Frankel has no position in any stocks mentioned. Selena Maranjian owns shares of Coca-Cola and Costco Wholesale. The Motley Fool owns shares of and recommends Costco Wholesale. The Motley Fool has the following options: long January 2016 $37 calls on Coca-Cola, short January 2016 $43 calls on Coca-Cola, and short January 2016 $37 puts on Coca-Cola. The Motley Fool recommends Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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