Investing doesn't have to be hard. In fact, it shouldn't be hard -- it should be rewarding.
Luckily, there are things you can do to become a smarter investor that don't require you to work harder. Here are three methods you can use to invest smarter, not harder.
1. Set up automatic transfers
One of the best ways to make investing easier is to make it automatic. Having money sent directly to your brokerage or retirement account when you get paid can take some of the legwork out of investing. The only thing you have to do is go to the account you're investing in and purchase whatever assets you're interested in; you don't have to worry about making a transfer anytime you want to invest.
Having an automatic transfer set up for the same time you get paid can also make it easier on you because you get used to not "seeing" the money first, and you can adjust accordingly. For example, if you get paid $3,000 biweekly and plan to invest 10% of your paycheck, having that automatic transfer can quickly get you used to living off the $2,700 without missing the $300 you invest.
2. Utilize index funds
Researching and investing in individual companies can be challenging and time-consuming. That's what makes index funds ideal for many investors. An index fund is a type of mutual fund or exchange-traded fund (ETF) put together to mirror a specific market index. For example, the S&P 500 consists of the 500 largest U.S. companies by market cap. An S&P 500 index fund consists of and tracks those 500 companies.
Since index funds follow a set index -- whether it's company size, industry, social mission, etc. -- they are passively managed and have low expense ratios. The difference in seemingly small percentages may seem minimal, but it can easily add up to thousands in the long run.
One of the keys to long-term investing success is diversification; you don't want your portfolio's success (or downfall) to depend on the success of too few companies. The right index funds can provide instant diversification because you simultaneously invest in multiple companies with one purchase. Utilizing index funds can ensure you're invested in companies in different sectors, sizes, and even growth potential.
3. Invest in tax-advantaged accounts
One of the primary reasons for investing is making sure you're financially comfortable in retirement. To help and encourage investing for retirement, the IRS provides opportunities for tax-advantaged accounts, such as a 401(k), Roth IRA, and traditional IRA. A lot of people utilize a 401(k) plan because it's offered through their employer, and they don't have to go out of their way to open an account. IRAs, however, are not tied to an employer and must be opened on your own.
Although the maximum contribution to both a Roth and traditional IRA is $6,000 combined ($7,000 if you're 50 or older), taking advantage of them can pay off big time. You contribute after-tax money into a Roth IRA, and in return, your money gets to grow and compound tax-free. If you were to make a $6,000 investment in an S&P 500 index fund in your Roth IRA, which historically returns 10% annually, and never made another contribution, you would have accumulated over $104,000 after 30 years -- with no taxes owed on it.
So just imagine the impact if you contribute for years. There is an income limit for eligibility to contribute to a Roth IRA, so if you're still eligible, it's in your best interest.
You also contribute after-tax money into a traditional IRA, but your contributions are potentially deductible from your taxable income. Lowering your taxable income will save you money on the front end (although you will have to pay taxes when you take withdrawals in retirement).
Both Roth and traditional IRAs operate like regular brokerage accounts in that you can purchase any single company stock or ETF you want. Instead of making investments in a brokerage account, take advantage of tax-advantaged accounts first and then go back to a brokerage account.