You'll often hear "there's no free lunch" in investing. This simply means that with every investment there's a degree of risk.
But there are some financial moves investors can make that are virtual no-brainers. These are simple ways to generate a high probability of returns with limited downside. And in the recent bear market, all investors should be looking for ways to control the amount of risk to which they are exposing themselves.
Here are three ways you can do that.
Take advantage of employer 401(k) matches
The words "free money" sound too good to be true, but that is essentially what you get when you invest in a 401(k) with an employer match. If you're lucky enough to have an employer that does this, it would be (lowercase f) foolish not to take advantage of it.
An employer match is a benefit through which the company you work for matches your 401(k) contributions up to a certain percentage of your compensation. For example, many employers will match your contributions dollar for dollar up to 6% of your salary. This means if you have a salary of $60,000 and you contribute at least $3,600 annually, your employer will add an additional $3,600 to your savings.
This is as close as it gets to a free lunch. While most financial advisors would recommend saving much more than 6% in your 401(k), you should at the very least contribute up to the match limit to take advantage of this free money. By doing so, you're getting an immediate 100% return on your investment.
It should be noted that many companies have vesting periods during which the money does not technically belong to you until you've worked at the company for a minimum amount of time. If you're in the market for a job change, it would be prudent to look into any potential vesting requirements before leaving your current job, as you could be losing retirement savings.
According to FINRA, Americans leave nearly $24 billion in 401(k) matches on the table each year. This equates to about 1 in 4 employees who are passing up free money.
Invest in a Roth IRA account
The Roth IRA is one of the greatest wealth-building opportunities because it allows you to grow your money tax-free. While the cash you contribute has already been taxed, any capital gains you incur on your investments are shielded from future taxation.
This means if you invested $1,000 in say, Amazon 20 years ago, you'd be sitting on $151,697 in tax-free gains.
You can also use your Roth IRA as your emergency fund since you can pull your contributions (not gains) out at any time without facing an early withdrawal penalty.
Because of how advantageous this investment vehicle is, the Internal Revenue Service has put limitations in place. The maximum you can contribute on an annual basis is $6,000 ($7,000 if you're 50 or older), and if you earn more than $129,000 as an individual filer or $214,000 as a married couple, you're ineligible (although there is a workaround).
While not a free lunch per se, growing your money tax-free is a no-brainer when it comes to boosting your investment returns.
Investing in the S&P 500
While the market can certainly be wildly unpredictable in the short term (see recent headlines for proof), over the long term, it goes up.
For patient investors, buying low-cost S&P 500 index funds such as the SPDR S&P 500 ETF Trust or the Vanguard S&P 500 ETF is a low-risk strategy that is almost certain to make you money if you give it enough time.
Going back to 1957 when the S&P 500 index was first created to track the 500 largest companies in the U.S., it's produced a total return of over 50,000% (with dividends reinvested). That's an annualized return of 10% without having to spend countless hours researching and tracking individual stocks.
Oh, and the index did this while enduring numerous economic recessions:
While investing in individual companies can certainly generate higher annualized returns if done well, the luxury of being able to set it and forget it makes an allocation to low-cost S&P 500 index funds worthy of every investor's portfolio.
Investing is as simple as you make it
While deploying complex investing strategies can be intellectually stimulating, investors should also focus on the layups the market provides.
The free money of 401(k) matches, the tax-free gains of Roth IRAs, and the steady, long-term performance of the S&P 500 are three no-brainer strategies all investors should be taking advantage of.