You don't have to subscribe to 23 investing newsletters or The Wall Street Journal to make money in the stock market. In truth, you don't really need any special subscriptions at all. If you know a few tricks of the investing trade, you can generate wealth without annoying market alerts on your phone or a single piece of financial news hitting your inbox. Start with these six investing tips that are ideal for people who don't follow the market.
1. Only invest money you don't need for five years
Long-term, the stock market grows to the tune of about 7% annually after inflation. But that growth comes in fits and spurts. One year, share prices might be up 20%, and the next year, they'll be down 8%. Because the long-term trend is up, those short-term fluctuations are most disruptive when you need to sell your stocks in the midst of a down cycle. That's when selling would create realized losses and prevent you from participating in the recovery that will follow.
You can avoid that trap by only investing money you won't need for five years or more. With that approach, it's appropriate -- and often even beneficial -- to overlook the immediate-term market fluctuations that can drive other investors crazy.
2. Check your expectations
Investors love to talk about beating the market. I mean, why settle for market-level returns of 7% annual growth when you could achieve 10% or 12% growth, right? Here's a reality check: Even professional mutual fund managers fail to outperform the market most of the time. Over the past 10 years through mid-2020, the S&P 500 outperformed 82% of large-cap stock funds. The S&P 500 is an index that includes 500 of the largest public companies ("large caps") in the U.S.
Professional fund managers follow the market as their job, and they still have trouble achieving market-beating returns. If you choose not to follow the market at all, check your growth expectations. You can ride with the market as described in tip No. 3 below, but you should accept that you're probably not going to beat it.
3. Buy index funds
When you hear someone say, "The market was up 6% today," that's a reference to a market index, probably the S&P 500. An index is a basket of companies that, in aggregate, represent broader financial market trends. The financial community considers the S&P 500 a benchmark for the entire stock market.
You can invest in this benchmark by buying an S&P 500 index fund. This is a mutual fund that mimics the index, by holding either the same stocks or a representative sample of stocks. Vanguard 500 ETF (VOO 0.96%) and SPDR S&P 500 ETF Trust (SPY 0.94%) are two popular index funds. When the S&P 500 rises 6%, the value of these funds rises just a shade less than 6% -- with the difference being mostly related to the fund's expense ratio.
4. Choose low expense ratios
The expense ratio is a standardized percentage that covers the fund's operating expenses and how they're absorbed by shareholders. A 0.50% expense ratio, for example, means you pay $0.50 in fees for every $100 you have invested in the fund. It also means that the fund's returns will be 0.50% lower than the aggregate performance of the fund's investments.
By choosing funds with low expense ratios, you are setting yourself up to receive a bigger share of the fund's actual investment returns.
5. Follow the Rule of 110
The Rule of 110 is an easy way to manage risk within your investment account. It's based on two fundamental concepts. One, stocks and bonds behave differently. And two, your investment style should gradually become more conservative as you grow older.
Stocks grow in value over time, but they can also lose value in the short term. Bonds are more stable than stocks, which is both good and bad. It's good, because your bond holdings won't be as volatile as your stock holdings. And it's bad, because you won't make as much with bonds as you would with stocks. Holding both stocks and bonds together in your portfolio gives you a mix of growth opportunity plus stability.
The rule of 110 tells you how to balance growth and stability in your portfolio. All you have to do is subtract your age from 110. The answer is the percentage of stocks you should hold, given your age. At 40, for example, you'd have 70% stocks and 30% bonds. As you get older, you'd lower your stock percentage and increase your bond percentage.
5. Automate your investing
If you're investing in a 401(k), that system should be fairly automated. You set up your contribution amount and your investment selections, and the plan does the work for you. If you are investing outside a 401(k), ask your brokerage what automation options you have. At a minimum, you should set up recurring transfers of funds into the account. If your brokerage allows it, have those funds automatically invested too.
Automated investing reduces your risk of loss from timing mistakes, such as buying the day before the market crashes. You might still do that, but the effect on your overall portfolio will be lower when you are making smaller, periodic buys versus larger, less frequent buys.
6. Check in twice a year
Every six months or so, log into your investment account to check in on your portfolio. You'll want to do two things. First, make sure your composition of stocks versus bonds is still appropriate. If the market's up, for example, you might need to sell off some of your stock funds and use the money to buy more bond funds. And second, review the performance of your individual positions. Specifically, make sure your S&P 500 index fund is actually tracking along with the S&P 500 index.
If your fund is not tracking close to its index, switch to a similar fund with lower expenses. That should provide an easy boost to your returns.
Let time and consistency do the work
Here's what it comes down to: The time you have to build wealth and the consistency of your investing activities are far more influential to your portfolio's growth than the number of financial articles you read weekly. If you don't want to follow the market, then don't. But you should follow investing best practices. These include investing weekly or monthly in low-cost index funds, managing your risk by holding bond positions alongside those index funds, and reviewing and adjusting your portfolio every six months.