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Money Girl

221 MG How Being a Lazy Investor Can Pay Off

Learn about two broad investing philosophies and which one researchers say will put more money in your pocket in the long run.

Broadcast on:
25 May 2011
Audio Format:
other

Learn about two broad investing philosophies and which one researchers say will put more money in your pocket in the long run.

Curious how equity compensation can help build employee financial confidence and move your business forward? Tune in to the latest episode of Morgan Stanley at Work's "Invested at Work" podcast, where we explore the power of financial benefits and how they can help your employees in the workplace and beyond. Listen now by visiting morganstandley.com/investedatwork or stream on Apple or Spotify. Because we believe that when employees thrive, your company thrives too. Again, visit morganstandley.com/investedatwork to listen today. Hi friends, thanks for joining me on the Money Girl podcast. I'm Laura Adams. When it comes to investing, there are two broad strategies or philosophies. Active investing, impassive or lazy investing. In this podcast, I'll give you the major pros and cons for each of the strategies, tell you what the researchers say, and give you an important tip to boost your investment returns. First off, let me explain active investing. An active investor likes to buy and sell various kinds of investments, like stocks, mutual funds, exchange traded funds, and commodities on an ongoing basis. They keep a close eye on the markets and make decisions like buying a stock when the price dips and selling it when the price goes up so they can make an immediate profit. The goal of an active investor is to time the market in order to take advantage of short-term price movements. As you can imagine, if you're really good at active investing, the upside could be massive. But if you're not, an investment that turns sour could leave you with massive losses. Not only can timing the market be risky, but it can be expensive, because you generally have to pay a trading fee every time you make a transaction, which can really take a bite out of your earnings. Additionally, it takes a certain level of expertise to understand how to read performance charts, use professional trading software, and understand how changes in different types of industries and interest rates relate to the future price of your investments. On the other hand, passive investing is just what it sounds like. It means you really don't do much, hence the lazy factor. Passive investors take a long-term view of investing, which is also known as a buy-and-hold strategy. The idea is that they make consistent, but limited purchases of investments that should appreciate over long periods of time. They don't consider owning stocks that are exploding in growth so rapidly that they might self-destruct. Those types of volatile investments are the ones that active investors will gladly snap up. A passive investor typically buys fundamentally strong companies, or funds that own those companies, that are likely to continue making profits for decades to come. But the question you're probably asking yourself is whether lazy investing pays off? Who's more likely to make more money over time, an active investor, or a passive one? There's been lots of research about this topic, but I want to highlight an article by Mark Holbert who writes for the American Association of Individual Investors. He's been tracking advisor portfolios for over three decades and says that about two-thirds of them would have made more money if they had been much less active. Holbert says that for 2010 alone, 500 different portfolios he examined gained an average of 14.6%. That's a pretty great return, but get this. If those same portfolios had not engaged in active trading, if they had just held on to the same investments from January 1 through the end of the year, they would have made 18%. Even in 2009, when the market plunged on March 9 and then made a run-up, the average portfolio would have come out ahead by almost a percent if absolutely no trades had been made. Holbert also cites an academic study that scrutinized the trades made in 10,000 random brokerage accounts of individual investors from 1987 to 1993. The study focuses on cases when active investing occurred where the account owner bought and sold a stock in fewer than 30 days. The researchers found that in the 12 months after the stocks were sold, they performed better than the stocks that were purchased to replace them. In other words, the data reveals that investors are prone to selling out too early. If the investors had been lazy and kept their investments, they would have earned a return that was 3.2% higher than what they got. The point of Holbert's article is to demonstrate that making more transactions lowers portfolio returns. A well-known economist named Jean Fama Jr. is credited for saying, "Your money is like soap. The more you handle it, the less you'll have." AI might be the most important new computer technology ever. It's storming every industry, and literally billions of dollars are being invested. So buckle up. The problem is that AI needs lots of speed and processing power. So how do you compete without cost spiraling out of control? It's time to upgrade to the next generation of the cloud, Oracle Cloud Infrastructure, or OCI. OCI is a single platform for your infrastructure, database, application development, and AI needs. OCI has 4 to 8 times the bandwidth of other clouds, offers one consistent price instead of variable regional pricing, and of course, nobody does data better than Oracle. So now you can train your AI models at twice the speed and less than half the cost of other clouds. If you want to do more and spend less like Uber, 8x8, and Databricks Mosaic, take a free test drive of OCI at oracle.com/advanced. That's oracle.com/advanced, oracle.com/advanced. Curious how equity compensation can help build employee financial confidence and move your business forward? Tune in to the latest episode of Morgan Stanley at Work's Invested at Work podcast, where we explore the power of financial benefits and how they can help your employees in the workplace and beyond. Listen now by visiting morganstandley.com/investedatwork or stream on Apple or Spotify, because we believe that when employees thrive, your company thrives too. Again, visit morganstandley.com/investedatwork to listen today. Many companies and researchers who study investor behavior find consistently that the average investor earns below average returns. The reason we do so poorly on our own when compared to historical market returns is due to our human nature. When the market drops, we panic and sell at the very worst time when prices are low, and when the market shoots up, we get greedy or finally get the confidence to buy. Again, at the very worst time when prices are high, we chase trends and overreact to news, which can lead to very irrational and bad investing decisions. My quick and dirty tip is to boost your investment returns by becoming a lazy investor. Now, I'm not saying that you should never make a trade, but I do believe that becoming an active investor shouldn't be taken lightly. If you do have a passion for trading, be prepared to spend at least as much time doing your homework as you would working a part-time job. For most people, sticking to a passive strategy where you contribute money to a retirement or a non-retirement brokerage account like Betterment in a systematic way will give you plenty of investment returns for much less effort. There aren't too many areas of life where being a couch potato can pay off, but isn't it nice to know that investing is one of them? If you like the tips you get in the Money Girl podcast and want to take more control of your money, I think you'll like my book Money Girl Smart Moves to Grow Rich. The book tells you what you need to know about money without bogging you down with what you don't. It's available at your favorite bookstore in print or as an e-book for your Kindle, Nook, iPad, PC, Mac, or smartphone. You can download two free chapters from the book at smartmoves2growrich.com. As always, you'll find links to everything I've mentioned in the podcast and more resources on the Money Girl section at quickanddirtytips.com. While you're there, be sure to get more money tips by signing up for the free newsletter. Following me on Twitter, my username on Twitter is Laura Adams with No Space and joining the Money Girl Facebook page. You can email your money questions to money@quickanddirtytips.com or leave it on my voicemail line at 206-333-1610. I'm glad you're listening. Cha-ching. That's all for now. Courtesy of Money Girl. You're a guide to a richer life. Curious how equity compensation can help build employee financial confidence and move your business forward? Tune in to the latest episode of Morgan Stanley at Work's Invested at Work podcast, where we explore the power of financial benefits and how they can help your employees in the workplace and beyond. Listen now by visiting morganstandley.com/investedatwork or stream on Apple or Spotify, because we believe that when employees thrive, your company thrives too. Again, visit morganstandley.com/investedatwork to listen today. [BLANK_AUDIO]