The Scottish Mail on Sunday
Relax to get rich! A lazy investor’s guide to wealth
Don’t keep tinkering with a portfolio. Just sit back – and let it do the work...
WHETHER you’re looking to get fit, learn a new language or drop a few pounds, hard work pays off. But, when it comes to looking after your financial health, doing less really can deliver more. Taking a lazy approach to investing can leave you richer and happier. So says Rob Smith, head of behavioural finance at Barclays. ‘The more you do to an investment portfolio, the more you can hurt investment performance,’ he says.
‘If you try to time the stock market to increase your returns, your emotions will often get the better of you and you’ll end up making bad decisions. Being more hands-off, or even lazy, is definitely a good thing when it comes to investing.’
As well as being hit with the costs associated with buying and selling investment funds or shares, human nature makes it difficult to ride out the bumps in the stock market if you’re an active investor.
If share prices fall, it hurts, especially if you picked that investment yourself. Selling – turning a price drop into an actual loss – can feel like the only way to stop the pain.
Similarly, when an investment performs well, it’s a great feeling. You got it right and it’s the absolute darling of your portfolio, so how could you possibly sell it?
As it’s impossible to know when the right time is, many investors hang on to these portfolio darlings until the price falls, taking their profit with it.
Even something as simple as living by the investment maxim of ‘buy low, sell high’ feels incredibly unnatural.
Nobody wants to invest in a company that’s out of favour and has a low share price to prove it. But it’s some of these shunned companies that can turn around their fortunes and those of their brave investors.
Just how much these poor investment decisions can hurt performance can be seen in the stock market turmoil during the pandemic. When news broke that Covid-19 had reached mainland Europe last year, global equities went into freefall on February 20 with many investors cutting their losses and selling up.
These investors were probably feeling pleased with themselves a month later when world stock markets – as measured by the MSCI World Index – had fallen by more than a third. But their smugness was short-lived.
NEWS of a $2.2trillion (£1.6 trillion) US stimulus package on March 23 caused markets to rebound and, although it took a full six months to get back to prepandemic levels, a significant part of that recovery happened between March 24 and 26.
Rick Eling is investment director of advice group Quilter Financial Planning. He says: ‘If an investor had sold out when the market started to fall but missed those three days in March, they would have missed almost half of the total recovery. Someone who did nothing and left their investments untouched would have been much better off as a result.’
While there’s plenty of evidence in favour of being a lazy investor, it is worth investing a little time and energy into getting the basics right when you start out. This may sound daunting, but James Norton, senior investment planner at asset manager Vanguard in the UK, says it doesn’t require any special insight into investments or how the stock market works.
He says: ‘Think about your goals. Are you saving for a mortgage deposit in five years, or putting money aside for your retirement in 40 years? Knowing when you need the money will help to determine how much investment risk you’re comfortable taking.
‘The longer you have to achieve your goal, the more risk you can afford to take.’
ASSESSING YOUR ATTITUDE TO INVESTMENT RISK
YOUR appetite for investment risk will determine the assets you might want to invest in. As a rule of thumb, shares are higher risk than bonds, so if you only have a short investment horizon, look for an investment fund that has a higher proportion of bonds as these will protect you from the short-term wobbles of the stock market.
Conversely, with more time on your side, you can afford to be more adventurous.
Investments in higher risk areas such as emerging markets and technology stocks have the potential to deliver peachy returns if you can afford to let them do their thing. But whether your goals mean you’re comfortable with risk or you need to go for something a little more conservative, the key to picking the perfect investment is diversification.
Barclays’ Rob Smith says: ‘Nobody knows where the next big idea will come from so it makes sense to invest in as many different companies as possible – preferably via an investment fund or investment trust. This helps to manage risk as some shares will go up in value while others go down.’
He adds: ‘On our investment platform, customers who invest in diversified investment funds outperform those who pick a handful of shares. It’s extremely difficult to pick stock market winners.’
For the ultimate in diversification, you can’t beat a global fund investing across a range of different markets (see below). But, if venturing into the unknown feels too nerve-racking, there’s nothing wrong with a fund with a smaller reach – for instance, Europe or even the UK – provided there’s plenty of variety in its portfolio.
ADOPTING A PASSIVE STANCE TO INVESTING
THERE’S lots of choice when it comes to selecting a well-diversified fund that suits your needs. As well as actively managed funds – and multi-manager funds where you’re invested across a variety of different funds selected by an overall manager – passive funds can provide a useful option for lazy investors.
These are run by computer programmes designed to track an index, so you don’t need to worry about a manager picking a duff investment or having an off day.
The other benefit of passive funds is cost. Without a manager to pay, these can have annual charges of less than 0.1 per cent.
Norton says it’s essential to check you’re not paying more than you need when you pick a fund. He explains: ‘There might not seem to
be much between a fund charging 0.5 per cent a year and another charging 2 per cent, but over time this difference can significantly affect how much you accumulate.’
To illustrate this, he points to £10,000 invested over 50 years. If this achieved average annual investment growth of 7 per cent, it would be worth nearly £300,000.
But take off annual charges of 2 per cent and it would shrink to around £115,000. ‘You can’t control markets, but you can control investment costs,’ Norton adds.
‘Picking a fund with a low charge is a simple way for someone to make a significant difference to their investment returns.’
Plumping for one well-diversified fund rather than a hotchpotch of different investments has another benefit for lazy investors. Saddle yourself with a range of funds or shares and you’ll need to master the art of rebalancing.
This wonderful piece of investment jargon basically means trimming back your star performers and stocking up on the laggards to get back to your original portfolio.
Experts recommend doing it every six to 12 months and, while it helps reduce risk, it takes time and all the buying and selling can add to costs. Hold one fund and you can forget about rebalancing altogether as the fund’s manager will do it all for you.
Without a need to rebalance your investments, it’s possible to sit back and leave your money to do its thing. Daniel Bland, head of sustainable investment management at EQ Investors, recommends this hands-off strategy.
He says: ‘Check your investment regularly and you risk becoming obsessed. Its value will go up and down with every market movement making you feel increasingly uncomfortable.
‘If someone’s managing everything for you, only look once or twice a year to make sure it’s doing what you expected. Relax and let your investments do all the hard work.’
A FINAL THOUGHT...
SETTING up a direct debit to add to your investments every month can be a great strategy for lazy investors.
Most wealth platforms – run by the likes of AJ Bell, Hargreaves Lansdown and Interactive Investor – allow you to invest small monthly amounts.
EQ Investors’ Bland is a fan of this approach – and even recommends it when you have a large lump sum to invest. ‘Phase it in,’ he says. ‘It means you won’t have to worry about whether you invested at the right time.’