Most people recognize that it's important to invest their money in order to meet future financial goals, rather than keeping it under the mattress or putting it in a savings account that earns nearly zero interest.
However, the investment world can be an intimidating place for novices, and doing it yourself can be extremely time consuming. On the flip side, professional financial advisors can be prohibitively expensive. That's why so many people are looking for alternative ways to invest that don't involve spending a lot of time or money.
With that in mind, here are three sensible ways to invest money without paying for a pricey financial advisor or spending all of your free time managing your investments.
Go simple: A U.S. index fund
If you read the financial press, it seems like risk is everywhere and stock market returns are totally unpredictable. In the short run, that's true.
But historically, over long periods of time -- think decades -- the stock market has earned surprisingly consistent returns of about 10% annually. As a result, one of the best ways to invest money if you have a long time horizon is to buy a broad stock market index fund. (If you're saving for retirement and you're in your 20s, 30s, or even 40s, this could apply to you.)
Funds such as the SPDR S&P 500 ETF buy up and hold every one of a large group of stocks. As an exchange-traded fund, or ETF, shares can be bought and sold like regular stocks (all you need is a discount brokerage account). Buying shares in the fund allows you to essentially copy the stock market's returns.
One of the top advantages of this strategy is that it minimizes transaction costs. The SPDR S&P 500 ETF's annual expense ratio is 0.09%. Essentially, that means that if you invest $10,000, you're paying just $9 per year for the fund to match the S&P 500 index.
The value of this strategy can be seen from its long-term results. Even if you had the worst possible timing and bought shares when the market peaked in September 2007, you're now sitting on a 60% total return, including the value of dividends. (If you invested in this ETF exactly 20 years ago, you've earned a 450% gain, including dividends.)
SPY Total Return Price, data by YCharts.
Another advantage of ETFs is that you don't owe capital gains tax on any profit until you sell your shares of the fund. All of these reasons make investing in an ETF index one of the best ways to invest money you know you won't need for 10-20 years or more.
A little more complex: A target-date fund
If you have shorter-term goals -- perhaps you're close to retirement, or you're saving to make a down payment on your first house -- buying a broad stock market index fund is probably too risky. Remember that while long-term stock returns are consistently positive, big losses are possible in the short run.
As a result, target-date funds have become a popular way to invest money while keeping an appropriate level of risk based on the investor's time horizon. All you have to do is pick the date that you intend to take the money out, and the fund will rotate the mix of stocks, bonds, and cash in the portfolio to reduce your risk as the target date approaches.
Target-date funds allow investors to sit back and relax over the course of their investing lives, knowing the decisions are being made for them. However, the fees can be high -- roughly 1% a year for a $10,000 investment -- and both fees and performance can vary greatly between firms for funds with the same target date.
Automated investing services
One of the most intriguing ways to invest money without spending a lot of time or money is a relatively new option: automated investing services.
Services such as Betterment are much like target-date funds in that they try to match your holdings with your financial goals and time horizon. However, they tend to have two advantages.
First, automated investing services usually collect a variety of information about you before allocating your money. By contrast, the only information a target-date fund collects is the date on which you want to withdraw the money.
Second, automated investing services often have lower fees than target-date funds. For example, Betterment charges just 0.25% annually if you invest $10,000-$100,000, and 0.15% if you invest more than that. (If you invest less than $10,000, the most you'll pay is $36 per year.) That said, like all ETFs and index funds, the funds that Betterment invests in charge their own -- usually modest -- fees on top of what Betterment charges.
Nothing's perfect
There are still no foolproof ways to invest money and guarantee a good result without spending a large amount of time, money, or effort. But there are more ways than ever to give yourself a shot at investing success with just a little time and a little money.
If you have a very long time horizon, then time truly is on your side. By investing in a broad ETF index fund like the SPDR S&P 500 ETF, you can match the stock market's return with very low transaction costs. Meanwhile, if you need a little more help with managing risk (particularly when you have a shorter time horizon) target-date funds and automated investing services are two great ways to invest money.
