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- When the markets are volatile, it’s easy to find stories of people who made it rich with day trading, but you usually don’t read about the many failures.
- Volatile markets may lead you to want to sell all of your investments and sit on the sidelines, but historically, that’s a big mistake.
- Keeping a long-term, boring investment strategy is often the best plan regardless of recent investment market trends.
- Try commission-free trading with TD Ameritrade »
When it became clear that the coronavirus would have a major impact on the United States economy in March, the stock market quickly plummeted, wiping out assets for millions of investors. Markets have moved in a mostly positive direction since, but there have been enough upward and downward swings in the markets over the last few months to give any investor financial whiplash.
Some investors respond to volatility by trying to capture it and turn it into a profit. However, this usually isn’t the right strategy for most people. Keep reading to learn why a boring investment strategy is best even during turbulent markets.
Options trading Exciting investments mean high risk
To earn big profits from volatile markets, active traders may use stocks as a way to invest. But they could also look to leveraged funds, options, futures, and other exotic financial instruments to maximize their profits.
The problem with these types of investments is that they can carry very high levels of risk, particularly for investors who are newer to the markets and don’t have experience with them. Buying one options contract, for example, could give you the same market exposure as buying 100 shares of the underlying asset. That’s more risk than you may want to carry.
Exciting is good in the movies and video games, but exciting doesn’t belong in your portfolio. One bad trade could wipe you out completely, or worse.
Options trading A boring investment plan is best for most people
Instead of buying a bunch of complex and confusing investments that can skyrocket or plummet in value in a few minutes, most investors should stick with a portfolio of low-risk, low-cost, diverse mutual funds and ETFs.
In the 2013 annual letter to Berkshire Hathaway shareholders, investment guru Warren Buffett shared how he would want his wife’s inheritance invested if he were to die. He said he would put 90% into a low-fee stock index fund and 10% into a short-term government bond fund. That might sound simplistic, but it’s actually a very sound strategy.
A diverse index fund may give you ownership of hundreds of stocks or bonds with one purchase. For example, an S&P 500 fund would hold the 500 stocks in the S&P 500 index. There are funds for many indices including the equity (stock) funds by company size, sector, geography, asset type, and specific market strategies.
An early 2020 SPIVA report from Standard & Poor’s found that 88% of actively managed funds underperformed compared to their benchmark index over the last 15 years. If professional fund managers can’t be the markets, we probably can’t either. That’s why boring index funds are a good choice for most investors.
Options trading Choosing the best boring investments for your needs
There are more than 10,000 investment funds to choose from in the United States, so picking boring investments may be easier said than done. If you are looking to start a portfolio or want to make updates, consider these criteria:
- Underlying index: The index tells you what stocks, bonds, or other assets will be held by a fund. There is no “best” index for all investors. The S&P 500 is very popular, but there are many others as well including the Dow Jones Industrial Average, Russell 3000, and Wilshire 5000.
- Expense ratio: The expense ratio tells you how much the fund’s managers charge per year to manage your assets. Lower costs are better.
- Fund performance: Just because multiple funds follow the same index doesn’t mean they will have identical performance. Look at the fund’s performance history to compare with similar funds.
- Fund family: While most ETF trades are now free, you still have to pay to buy and sell mutual funds in many cases. Some brokerages offer free trades of their own mutual funds or offer a specific list of no-transaction-fee funds. Don’t pay for something you can get for free!
Options trading Slow and steady wins the race when it comes to investments
If you’re looking for an exciting way to potentially make money, you might as well head to a Las Vegas blackjack table. According to Benjamin Graham, author of “The Intelligent Investor,” short-term trades to make a profit is speculating, not investing. Most people should try to manage their portfolio risk and focus on a well-balanced, long-term investment plan.
Just like the tortoise that beat the hare, sometimes slow and steady does win the race. When it comes to your investments, that’s almost certainly the case.
Disclosure: TD Ameritrade is a partner of Insider, Inc.’s business development team, which is separate from its editorial department. We may receive a commission if you open an account.
Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.
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