A set and forget investing strategy may sound boring or even lazy, but for the majority of amateur investors, this strategy will result in substantially higher rewards and far less stress than typical trading investment strategies would.
A set and forget investing strategy involves investing in the stock market and leaving your investment to grow and compound over time without regular buying and selling. Not only is this strategy remarkably simple, it will also produce superior returns to most other strategies over time.
Trying to time the market and trying to pick winning stocks are two of the most common and avoidable mistakes investors make. The data is clear, very few investing professionals can reliably beat the market over time or consistently pick winning stocks, so there is even less chance for us amateur investors.
The best solution seems to be investing consistently over time in well-diversified funds and leaving them to grow.
What is a set and forget investing strategy?
As alluded to above, a set and forget investing strategy is about as simple as it gets when it comes to investing. All you need to do is make an investment in the stock market and leave it to grow over time whilst avoiding the temptation to tinker.
Whilst in theory a set and forget strategy could involve buying any investment, it is most commonly associated with buying low-cost, passive index funds. These funds simply track an index like the S&P500 which is the largest 500 stocks in the US. These types of investments lend themselves perfectly to long-term strategies as no rebalancing or buying and selling should be necessary.
For more on where to get started with investing in passive index funds, check out my post on The top 5 best UK investing platforms for passive index fund investing.
A set and forget investing strategy is closely related to automated investing. By this, I mean that investing shouldn’t be a time-consuming manual process that can easily be forgotten about.
To automate investing, you need to do two simple things. Step 1 is to create a monthly investing instruction in your investment account to purchase units in your fund of choice for whatever amount you can afford to invest.
Secondly, link up your bank account to your investing platform (this should be easy to do within the platform’s settings) so that these monthly purchases are automatically funded by your bank account without any effort on your part.
Whilst set and forget investing is simple, it’s not always easy. Human nature makes it difficult for us to just leave things alone, we think by watching our investments like a hawk and intervening when an opportunity or threat arises, we will earn greater returns over time.
This is a classic example of trying to “time the market”. Almost nobody can successfully do this over a long enough period. The solution – don’t even try.
What is a buy and hold investing strategy?
A buy and hold investing strategy is similar to a set and forget strategy. This involves buying an investment and holding it over the long term to compound and provide dividend income over time. This contrasts to a trading style of investing which involves frequent buying and selling.
In practice, there is no difference between a ‘buy and hold’ and a ‘set and forget’ investing strategy. You may see this investing style referred to by either of these names.
How much time should I spend investing?
Most investors should spend less than 30 minutes per month investing once they have set up their automated investing systems properly. This time should be spent checking the value of your investments and confirming your monthly investment has been processed correctly.
Once investors are in the position where they have their automated investing system (described above) set up and are investing monthly into their desired funds, it is not really necessary to spend any time at all checking on your investment portfolio.
I prefer to spend 30 minutes a month reviewing my portfolio. I use this time to confirm my monthly transaction into my account was processed without issue and to update my monthly net-worth spreadsheet.
Spending any longer than this is more likely to have negative implications. By checking your portfolio too often, you are more likely to want to intervene which goes against the principles of buy and hold investing.
As Nassim Nicholas Taleb highlights in his excellent book Fooled by Randomness, as we are naturally loss-averse (losses feel worse than gains feel good) regular checking of our portfolios may also have a difficult mental impact.
Let’s say we check our portfolio daily and half the time it’s gone up and half the time it’s gone down. Due to loss aversion, each time it goes up it may give us +2 positive feelings whilst every time it goes down may give -3 negative feelings.
Based on this, the logic follows that the more often we check our portfolio, the worse we will feel as each day of losses is felt more strongly than each day of gains.
Advantages of set and forget investing
The key advantages of a set and forget investing strategy are that it’s easy to implement, reduces investing related stress and will likely result in superior investment returns over time. For those who aren’t interested in the market but want to build their wealth, this strategy is perfect.
A large proportion of people are in the position where they appreciate the power of the stock market as a wealth-building tool and want to invest their money but who don’t really care about the stock market and take no pleasure in understanding it on an intellectual level.
For these people, automated, set and forget style investing is perfect. They can reliably benefit from the stock market without the hassle of researching something they are simply not interested in.
In my view, this investment strategy is suitable even for those who are interested in the stock market (such as myself) simply because this strategy will perform better than other strategies on average and I invest to build wealth, not to enjoy myself or learn.
Disadvantages of set and forget investing
The key disadvantage of the set and forget investing strategy is for those with a genuine, intellectual interest in the stock market who prefer to see how the market operates on a daily basis. This strategy is also inflexible to market opportunities to make a quick profit.
I can appreciate why this strategy may not appeal to everyone. This strategy is boring. There is no fun, drama or community associated with investing in this buy and hold way.
For me, I’m happy to accept that whilst comfortable in the knowledge this strategy is very likely to be profitable over time.
For others, investing (or trading) is a hobby and whilst not common, it is possible to earn outstanding returns that are far better than the market.
A common critique of a set and forget investment strategy is that by the time it results in any true wealth, you’ll be too old to enjoy it and it’s better to take risks on individual stocks now to hit the jackpot and get rich whilst still young.
Whilst this proposition is alluring, it’s also fanciful. In percentage terms, very few investors will be able to beat the market in this way and if they do, chances are one of these investments (or bets, depending on how you look at it) will fail spectacularly and lose a lot of money.
The bottom line is this – if you’re a stock market savant or have a winning trading system, by all means, go for it and I hope it’s successful. For the majority of us though, the “fun” of investing shouldn’t outweigh the real goal, to build wealth over time.
How often should I check my investment portfolio?
Investors should only check their investment portfolios once per month to confirm the monthly investing instruction has been processed correctly and to keep an eye on the impact of their investments on their net worth. Any more often than this will likely have net negative implications.
How long does it take to learn about investing and the stock market?
New investors can learn the fundamentals of investing in less than a day. Whilst there is always more you can learn about investing, it is easy to learn enough to confidently invest on a monthly basis. Numerous blogs and books are out there that teach investing fundamentals in a very accessible way.
Investing professionals can go throughout their entires lives learning about investing and the stock market and still have plenty they don’t know. But this shouldn’t intimidate you, it’s perfectly reasonable to begin investing whilst only knowing the fundamentals.
When you have a headache, you take paracetamol despite not knowing the chemical make-up and formulation of the tablet. Investing is no different. Understand the basics, that it’s a tool to help you grow wealth by investing in Company’s around the globe and get started.
Whilst I would recommend starting to invest as soon as you feel comfortable, it’s rationale to want to understand what you’re getting into. My advice is to read the relevant posts on this website and purchase the following books from Amazon for a great initial understanding:
As always, please remember I am an Accountant, but not your Accountant. In this post (and all of my others) I share information and oftentimes give anecdotes about what has worked well for me. However, I do not know your personal financial situation and so do not offer individual financial advice. If you are unsure of a particular financial subject, please hire a qualified financial advisor to guide you.
This article has been written by Luke Girling, ACA – a qualified Accountant and personal finance enthusiast in the UK. Please visit my ‘About‘ page for more information. To verify my ACA credentials – please search for my name at the ICAEW member finder. Please comment below or contact me here to get in touch with questions or ideas for future posts.