I want to invest passively. How can I create a “set it and forget it” portfolio?

Investing can be difficult and stressful. The idea of ​​constantly monitoring, rebalancing, and selecting stocks can be overwhelming (not to mention, it can be costly if done wrong), especially for those new to investing. But what if there was a way to simplify the process and still achieve great results? Enter the world of passively managed portfolios. Think of it as a “set it and forget it” approach.

Morningstar research has shown that a hands-off approach to investing can lead to better results, especially when it comes to lowering costs and minimizing the impact of time to market and individual stock selection.

Consider talking to a financial advisor if you are trying to decide how to take a more proactive approach to managing your investments. Here are four steps to building a passively managed portfolio.

Discover the guiding principle of your investment portfolio

The first step in creating a passively managed portfolio is to define your investment philosophy and goals. This will be the guiding principle for your portfolio and will guide your asset allocation, diversification strategy, and risk tolerance. Some common investment philosophies include value investing, growth investing, and income investing. There are also some common methods for structuring your portfolio, such as the 60/40 method.

Investors who value capital preservation, for example, may have lower risk tolerance and prefer a portfolio dominated by bonds and other fixed income investments. On the other hand, investors who prioritize growth may be more risk tolerant and prefer a portfolio dominated by equities and other equity investments. The bottom line is to determine what is most important to you and then build a portfolio that aligns with those priorities.

Optimize your accounts by removing duplicates

Once you have a clear investment philosophy and goal, it’s time to evaluate and adjust your current portfolio. This may include account consolidation, closing excess accounts, and optimizing your investment. By removing duplicates and reducing complexity, you can streamline your portfolio and make it easier to manage. In addition, reducing the number of accounts can also minimize fees and save time.

Investors who have multiple investment accounts may find it difficult to keep track of all their holdings and may pay multiple fees and charges. Combining these accounts into one or more primary accounts can simplify the process and reduce costs. It’s also a smart game to balance your portfolio and review your investments regularly. This is when you will remove all duplicates, as having multiple identical investments can lead to concentration risk and redistribute your assets in line with your investment strategy.

Discover affordable and diverse investment opportunities

One of the benefits of a passively managed portfolio is the ability to access inexpensive, well-diversified building blocks such as exchange-traded funds (ETFs) and index funds. These types of investments provide access to a wide range of assets and sectors, reducing concentration risk and increasing diversification.

These investment options also tend to have lower fees compared to actively managed funds, which can have a significant impact on returns over time, due in part to capital gains taxes levied on the frequent buying and selling of investments.

Keep in mind that when creating a passively managed portfolio, both the asset class and specific investments need to be considered. For example, investors may want to consider a mix of stocks as well as bonds and real estate. By focusing on low-cost, passively managed options, investors can build a well-diversified portfolio without paying high fees for active management.

Keep track of your portfolio management strategy

Finally, keep track of your portfolio management strategy, including your investment philosophy, asset allocation, and the investments you own. This documentation will help you stay on track and ensure that your portfolio continues to meet your goals. In addition, it can also save you in the event of a tax audit or other financial audit.

Investors who take a hands-off approach to portfolio management may be tempted to ignore their investments and just leave them alone. However, you should never leave your investments unattended. You still need to review your portfolio regularly to make sure it continues to meet your goals and make any necessary adjustments. This way, by keeping a record of your portfolio management strategy, it will be easier for you to track your progress and make the necessary adjustments.

bottom line

Building a passively managed, auto-managed portfolio can be an easy and effective way to invest in the long run. By focusing on finding the true north of your portfolio, optimizing accounts, uncovering diverse and affordable investment opportunities, and keeping track of your management strategy, you can potentially increase your return on investment while reducing the stress and effort associated with active management.

Investment Tips

  • Many financial advisors use passive investing as their primary investment strategy. Finding the right financial advisor that suits your needs is easy. The free SmartAsset tool will match you with up to three vetted financial advisors that serve your area, and you can interview their advisors for free to decide which one is right for you. If you’re ready to find a consultant to help you reach your financial goals, start now.

  • For those with less money to invest, robotic advisors are a great alternative to more expensive financial advisors. In fact, many robo-advisers already include many index funds, ETFs, and mutual funds in their portfolios. As a result, passive investing is central to the robo-advisor community.

Photo: ©iStock.com/courtneyk,tumsasedgars

The post “How to create a set-and-forget portfolio” first appeared on the SmartAsset blog.

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