By: Bob Haegele
November 20, 2020
Investing is an important part of building wealth. The problem? It can also be a lot of work.
That’s why this post is going to focus on passive investing.
In particular, we’ll talk about investing in stocks. While there are many ways to invest, stocks are one of the easiest ways, and something most professionals should consider.
However, you may not know how to get started. This post will go over some of the basic ways to invest passively in stocks.
1. Invest in Your Retirement Plan
It may seem overly obvious, but investing in your retirement plan is a great first step. Not only do these investments generally lower your taxable income, but many employers offer matching, too.
That said, just how good of an option this is varies by organization. Because employers have jurisdiction over which investment options you have, some are better than others.
Some employers don’t offer the best funds. They may have high fees or not be well-diversified.
Generally, though, investing as much as you can in your employer’s retirement plan is a good idea. But there are basic things you can look for to ensure your employer-sponsored plan is a good investment.
First, check the management fees. These are often known as “expense ratios.” If those fees are below 0.5%, you’re in pretty good shape. However, if they are 1% or above, that is a bit high.
Another good thing to look for, especially when it comes to passive investing, is a target-date fund.
These funds will usually have several options according to your planned retirement year, such as “target date 2050” or “target date 2060.”
2. Invest in Index Funds
The next option for passive stock investors is index funds. These funds are funds that attempt to mimic the performance of a given index. For example, an S&P 500 fund tracks the performance of the S&P 500.
There are many ways to invest in index funds, but if passive is your goal, two or three funds can produce great results.
There are also different types of accounts where you can invest in index funds, but some examples are an IRA or brokerage account.
You can simply open an account at the brokerage of your choice, such as Fidelity, Schwab, or Vanguard, and then open the type of account you want.
If you really want to keep things simple, you can invest in a total-stock market index fund and a total-bond market index fund. If you want international exposure, you can add a total-international stock index.
If you were to do this at Vanguard, the relevant funds would be VTSAX, VBTLX, and VTIAX. I would recommend a portfolio of 80% VTSAX and VBTLX if you are early in your career.
If you add VTIAX, make it 70% VTSAX, 20% VBTLX, 10% VTIAX.
Keep in mind that this is just an example. It’s not a must to invest in these particular funds. Other brokers have equivalent funds which you can find by searching “VTSAX equivalent Fidelity” for example.
However, now that you see the general strategy, you can see that it’s pretty simple. Just invest in two or three index funds and watch your portfolio grow.
3. Use a Robo-Advisor
Investing in index funds is certainly a low-cost way to invest, but it doesn’t always produce the best results. They are also diverse by design, but they can still be volatile at times.
You may have heard of a “bear market” which refers to a stock market where most investors are not very confident. This can lead to large parts of the market seeing a drop, and index funds go right with it.
Robo-advisors can help with this by deploying a dynamic investment strategy that can be adjusted based on market conditions. All of this is done without any input from you.
In addition, some robo-advisors such as Betterment come with advanced investing features like tax-loss harvesting. Tax-loss harvesting helps you minimize capital gains taxes by selling securities at a loss. Thanks to Betterment promotions, you can get up to one year managed free.
Robo-advisors also give you more guidance than DIY-investing solutions. For example, they help you determine your risk tolerance and help you set goals for retirement savings.
Plus, they’ll help you track savings for major purchases, such as a new home.
All of this is done while maintaining low costs, so you get a ton of value out of a robo-advisor.
See more robo-advisors with our robo-advisors comparison.
4. Work with a Financial Advisor
I don’t often recommend working with a financial advisor simply because their fees are always going to be higher than index funds or a robo-advisor.
But if you’re wondering if you need a financial advisor, there are some scenarios where they can still be beneficial.
The main reason you may still need a financial planner is if your finances are particularly complex. Robo-advisors can help with basic goal setting, but they aren’t always adequate for complex financial decisions.
For instance, estate planning, retirement planning, and complex tax strategy may require more than just a robo-advisor. A certified financial advisor (CFA) who is experienced in one of these areas may be more helpful in that case.
If you decide to seek the help of a CFA, you can look for a fiduciary. Fiduciaries are legally required to act in your best interest. That means they can’t steer you toward assets with a higher commission, for example.
You can also look for a fee-only financial advisor. If a financial advisor charges a fee as a percentage of your assets, anything higher than 1.5% may not be worth your time.
On the plus side, you may not have a need to meet with a financial advisor on an ongoing basis. The scenarios mentioned above often don’t last forever (though complex tax strategy may).
But if you only need a few meetings to formulate a plan, the fee may be an easier pill to swallow.
5. Invest in Dividend Stocks
Technically, index funds can contain dividend stocks. However, not all stocks within index funds pay dividends so it’s worth mentioning them separately.
Dividends are a distribution of some of a company’s earnings to shareholders. That is different from other stocks, which don’t regularly pay out a dividend.
Stocks that don’t pay out a dividend rely on growth of the stock to generate income. While growth can be substantial in the long run, there is no benefit to shareholders in the meantime.
Note that the average dividend yield is not all that high - slightly above 3% for both the S&P 500 and Dow Jones. Compare that to the overall growth rate of the S&P, which is about 10.5%.
Still, the share price of dividend stocks does increase, allowing for some long-term growth as well. And, of course, it’s nice to have some payout while you are waiting for the stock to grow.
Some investors do wonder if dividends can hurt a company’s growth since dividends are money that can’t be put toward research & development.
Nevertheless, dividend stocks - especially when they are a complement to a larger portfolio of stocks - can be a nice benefit.
Should You Invest in Stocks?
Short answer: definitely. Unfortunately, not everyone owns stocks, but they are a powerful wealth-building tool of which everyone should take advantage.
Retirement accounts, index funds, robo-advisors, financial planners, and dividend stocks are just a few ways to get started.
If you still feel overwhelmed, be sure you are investing in your retirement plan. That is easily the most important first step.
And if you need help with your retirement plan, tools like Blooom can help make your life a whole lot easier. Whatever you do, don’t put off investing in stocks. Doing so is key to long-term financial success.
