Hands off investing has become increasingly popular in recent years. With a hands off approach, investors take a more passive role and avoid constant monitoring or frequent trading of their portfolios. The goal is to build a portfolio that can run on autopilot and require little ongoing maintenance. This allows investors to spend less time managing investments and focus on other priorities. To build a successful hands off portfolio, the key is to choose the right mix of assets and automate processes. Core holdings should be low-cost, diversified index funds and ETFs that track broad markets like the S&P 500. These provide instant diversification and minimize the need for stock picking. Automated rebalancing can be set up to maintain target allocations over time. Limiting portfolio turnover also leads to lower taxes and fees. Hands off investors accept modest returns in exchange for simplicity and convenience. Though passive in approach, careful design is still required upfront to create a durable, hands off portfolio.
Choose broad index funds and ETFs as core holdings
The foundation of a hands off portfolio should be low-cost index funds and ETFs that track major stock and bond indices. Broad stock funds like VTI and VOO provide instant diversification across hundreds or thousands of stocks, avoiding the need to pick individual winners. Aggregate bond funds like BND or AGG offer a simple way to add stability and income. Blend these stock and bond funds to create a balanced allocation appropriate for your risk tolerance. With index funds, you benefit from broad diversification and market returns minus minimal fees. Since they track entire asset classes, there is no need for constant monitoring or trading. Reducing turnover will minimize taxes and costs over time.
Automate processes like rebalancing
Once your target asset allocation is set, you can automate processes to maintain it over time. As markets fluctuate, portfolio drift occurs where your stock/bond mix shifts away from original targets. Hands off investors can schedule automatic rebalancing to periodically return to desired allocations, typically annually or quarterly. Robo-advisors offer automated rebalancing and tax-loss harvesting, or you can set up rebalancing within a brokerage account. Dollar-cost averaging through automatic periodic investments is another way to automate buying and smoothing volatility. The less trading required, the more hands off your portfolio.
Focus on minimizing fees and taxes
To maximize returns in a hands off portfolio, keep costs and taxes low. Index funds and ETFs have expense ratios under 0.10%, far less than actively managed funds. As Warren Buffett says, “Costs matter.” Use a low-cost brokerage and avoid funds with high fees or sales loads. Also minimize taxes through long holding periods, limiting turnover, and strategic tax-loss harvesting. Taxes and fees compound over time, so keeping them down will boost your total returns.
Accept modest returns for simplicity
The tradeoff for a hands off approach is giving up potential upside from active trading or stock picking. But research shows most active managers underperform basic index funds over time, after fees. Hands off investors are content earning market returns in exchange for simplicity, lower stress, and time savings. Though passive in approach, you can still thoughtfully construct and periodically rebalance your portfolio. Hands off investing suits those seeking convenience who value their time and peace of mind over stock trading thrills.
In summary, hands off investing provides a simplified approach to grow your wealth steadily over time. By building a diversified, low-cost portfolio based on index funds and ETFs, automating processes, minimizing fees and taxes, and taking a patient, long-term view, you can create an investment portfolio that runs on autopilot with minimal maintenance required. This frees up time for the things that matter most outside of investing. Though hands off investing means giving up active trading and potential upside, most investors end up better off avoiding the pitfalls of stock picking and market timing.