Two Ways to Invest (But Only One Works Well)

The thing about investing is that markets are volatile.

When it comes to that reality, there are two broad approaches.

One is to try to outguess the volatility, getting out when markets feel too high and getting back in when they’ve fallen. This tends to become a frantic, all-consuming process, and most people who follow it end up with less than they would have by simply staying invested.

The second approach is the opposite. Buy and hold a diversified set of businesses for a long time, and treat volatility as noise.

The first approach has an almost limitless number of steps. It’s reactive, constantly changing, and difficult to sustain.

The second approach has just three.

One, understand what you own. If you own something like the S&P 500, you own shares in 500 of the largest, profitable, publicly traded businesses in the United States. These are real companies, made up of people producing goods and services, adapting to change, and working to grow over time.

Two, choose an allocation you can live with. Your mix of stocks and safer assets should reflect both your goals and your ability to tolerate volatility. More volatility generally comes with higher long-term returns, but only if you can stick with it.

Three, automate and step away. Set up contributions through your workplace plan or investment accounts. Let them run. Over time, those steady contributions and compounding returns do most of the work.

Investing doesn’t need to take up much of your time. For most people, it shouldn’t.

Your career, your relationships, and how you spend your time will have a far greater impact on your life. Investing works best when it runs quietly in the background.