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, which make only small and slow changes to their holdings and therefore do not require much moniꦺtoring.

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官方开奖结果体彩网:active management requires investors to continuously keep up-to-date on the positions that they ho♒ld. This often requires sev𝐆eral hours of research per week. Active managers believe 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 approach, which posit🎃s that sticking with a well-diversified portfolio over the long term isღ 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官方开奖结果体彩网:bid-ask spread and incur the higher tax⛦ rates on short-term capital gains and nonqualified dividends.

Benefits and D💖rawb😼acks of Being a Hands-off Investor

An ongoing study that compares investor returns to market returns, Dalbar’s , affirms the benefits of a hands-off approach. Over the 20 years between 1997 and 2017, the a༒verage 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 Bloomb⭕erg U.S. Aggregate Index by 4.54 percentage points peꦡr 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官方开奖结果体彩网:loss aversion are primary contributors. Dalbar correctly points out that an index is always in the market and always fully invested while investors may be on the sidelines waiting for the right moment to return to the꧙ market.

Hands-off investors can benefit from the price return of their investment but also from the 澳洲幸运5官方开奖结果体彩网:reinvestment of dividends. For mutual fund investors, this approach enables invest🅷ors to purch🎶ase more fund shares with their 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官方开奖结果体彩网:rebalancing, a portfolio coꦿuld become overweight in riskier equity investments, which could destroy wealth should a bear market occur in the last five to 10 years prior to retirement.

The hands-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.