What Is a Hands-off Investor?

A hands-off investor prefers to set an investment portfolio and make only minor changes for a long period of time. Many hands-off investors use index funds or target-date funds,ꦆ which make only small and slow changes to the♓ir holdings and therefore do not require much monitoring.

Understanding a Hands-off Investor

A hands-off investment strategy is well-suited to many retail investors who may not have the time needed to routinely monitor and research their investments. Hands-on, 澳洲幸运5开奖号码历史查询:active management requires investors to continuously keep up-to-date on the positions that they hold. This often requires several hours of research per week. Active managers belieꦫve that by doing this work, they can earn higher-than-average returns on their investments.

A hands-off strategy is not necessarily underperforming. Many investors believe in an indexing approꦬach, which posits that sticking with a well-diversified portfolio over the long term is the key to wealth.

Since index funds often have very low expense ratios, hands-off investors often enjoy a built-in advantage over active traders who pay more in trading commissions, lose out to the 澳洲幸运5开奖号码历史查询:bid-ask spread and incur the higher tax rates on short-term capital gains and non🌳qualif♔ied dividends.

Benefits and Drawbaℱcks of Being a Hands-off Investor

An ongoing study that compares investor returns to market returnꦿs, Dalbar’s , affirms the benefits of a hands-off approach. Over the 20 years between 1997 and 2017, the average equity investor earned 5.29% per year while the S&P 500 Index gained 7.20% per year.

On a hypothetical $100,000 investment, the average investor would have earned approximately $120,000 less than a hands-off investor holding the S&P 500. The average 🌺fixed-income investor has done even worse, trailing the Bloomberg U.S. Aggregate Index by 4.54 percentage points per year, and making approximately $155,000 less over 20 years.

Special Considerations

The reasons for investor underperformance are myriad but attempting to time the market and behavioral biases like 澳洲幸运5开奖号码历史查询:loss aversion are primary contributors. Dalbar correctly points out that an index is always in the market and alw💫𝔍ays fully invested while investors may be on the sidelines waiting for the right moment to return to the market.

Hands-off investors can benefit from the price return of their investment but also from the 澳洲幸运5开奖号码历史查询:reinvestment of dividends. For mutual fund investors, this approach enables investors to purchase more fund shares with thei♊r dividend proceeds.

Hands-off investors that are not in a target-date fund that adjusts its allocation over time could be taking on additional risk as they approach retirement. Without periodic 澳洲幸运5开奖号码历史查询:rebalancing, a portfolio could become oveꦗrweight in riskier equity investments, which could destroy wealth should a bear market occur in the last five to 10 years prior to retirement.

The handꦫs-off investor will need a much more conservative portfolio in retirement that conserves capital with assets like cash and high-quality bonds and will likely need to engage in significant trading to achieve this.