If you’re not one of these people that pore over quarterly financial reports while watching every move the stock market makes, you’re not alone — in fact, you’re among the majority of investors. And that’s not necessarily a bad thing. From the standpoint that people should take a long-term view of their investments, the less you get caught up in watching the daily market swings, the better off you are in the long run as you’ll be less prone to overreact to volatility and make an unwise buy or sell decision.
You don’t need to be an avid market watcher to have success as an investor, but there are a few keys to success for people who don’t follow the market.
Invest in index funds or ETFs for diversification
One of the most important principles of investing is diversification, which refers to the need to have different types of investments in your portfolio as a way to reduce risk. For example, a diversified portfolio might have growth and value stocks; stocks from different industries and sectors; stocks from small companies, mid-sized companies, and large companies; etc.
Building a diversified portfolio takes a lot of time and research, but you can achieve that same type of diversification in an index mutual fund or ETF. These are investments that simply track the performance of an index — be it the S&P 500, which includes 500 of the largest publicly-traded companies in the U.S., a technology-oriented index like the NASDAQ, or an index that tracks the entire market or different portions of it.
There are literally thousands of ETFs and index funds in the U.S., and they offer curated exposure to every section of the market with options to slice and dice them in many different ways. Investing in just a few ETFs or funds will give you access to hundreds, if not thousands of stocks, and that type of diversification will greatly reduce your risk.
Do some initial research and think long term
While you don’t have to closely follow the market to be a successful investor, you should do some initial research to make sure you are investing in the right stocks and/or funds. If you are investing in funds, determine the mix of investments that fits your goals and time horizon. If the goal, say retirement, is 20 or more years off, you may want to invest in some more aggressive growth funds, which can be more volatile but offer the potential for higher returns over the long term.
Consider the Invesco S&P 500 Equal Weight Technology ETF, which tracks the 75 largest information technology companies on the S&P 500. This ETF is equal weighted, meaning all 75 stocks are about the same percentage in the portfolio. Over the last 10 years, this ETF has returned 18.5% per year through April 30. That’s higher than the S&P 500, which returned about 14% per year over the last 10 years. This past decade has been particularly good for the stock market as it was one of the longest bull markets ever. But over time, the S&P 500 has posted about a 10% annual return going back to 1926.
So if you’re investing for the long term, you might want to invest in an aggressive growth fund, but balance that out with something more stable like a value fund or a broad market fund that tracks a wider swath of the market. How you allocate those investments should be determined in your initial research and preparation, but once you have a plan of action, let the market and your money work for you.
Ultimately, not watching the daily fluctuations of the market could be a blessing in disguise as your focus will be where it should be — on long-term results.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.