Burnt by the market? Try these 3 passive investments instead


One of the main ways to reduce the returns on your investments over time, especially when working with a volatile market, is trading in and out of the market. With day trading, things can change in a matter of moments and randomly, which is why you are better off extending your time horizon and working with investments designed to follow the entire market. You will also benefit from tax breaks by simply holding your investments for longer periods of time.

Here, we’ll take a look at three passive investments that can form the heart of any portfolio.

1. Vanguard Total Stock Market Index Fund

Advertised as the ultimate passive investment, Vanguard Total Market Index Fund (NASDAQMUTFUND: VTSAX) can be the heart of most wallets – and in some cases, it can be your all wallet. When you invest in a total equity fund, you are investing in all companies in the broad market, which includes large, mid and small cap companies.

The advantage here is that you will no longer need to follow the market or try to time your entries and exits. All you need to do is invest regularly on a predetermined schedule, like every week or every two weeks. The investing thesis is simple: while you can expect a bumpy ride along the way, your investment balances are likely to increase, given the uptrend in large markets over time.

Plus, adding more at regular intervals will unleash the magic of compound interest. The longer you hold your shares, the more likely you are to benefit from favorable long-term capital gains tax rates, which only apply at the time of sale.

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2. Fidelity ZERO Total Market Index Fund

Similar to Vanguard’s total stock market but geared towards Fidelity clients, the Fidelity ZERO Total Market Fund (NASDAQMUTFUND: FZROX) offers a very similar set of investments. Yet Fidelity goes even further than Vanguard Total Stock Market with its 0.04% annual expense ratio, offering the ZERO fund at zero cost.

One of the best ways to ensure that your long-term returns on investment are what they need to be is to reduce your investment costs to their lowest possible level. High fees and other administrative expenses can force you to work longer to meet your financial goals. To be clear, 0.04% is pretty low compared to many mutual funds, but it’s still quite refreshing to see a fund that has managed to avoid charging fund investors anything.

A passive fund like this also doesn’t incur any trading fees if you hold it on Fidelity’s brokerage platform, so it’s especially appealing to those with accounts with Fidelity.

3. Vanguard FTSE All-World Index Fund outside the United States

Vanguard FTSE All-World ex-US Index Fund (NASDAQMUTFUND: VFWAX) provides exposure to all companies based outside in the United States and allows investors to take advantage of economic growth beyond what happens within national borders.

Based on Vanguard’s empirical research, the growth outlook and defined opportunities for international investment tend to be a little more attractive for the 2020s than for domestic investment. International stocks represent 44% of the global stock market, and the expected return on international stocks is expected to exceed that of domestic stocks over the next decade.

While the outperformance of international equities over the next decade is far from guaranteed, it is good to have at least some exposure to international equities in case they outperform.

The passive is effective

Remember, when you invest in passive funds, you just need to make the investment. There is no time or research requirement to stay in the fund, and you won’t need to obsessively follow the market every day, week or month. You just need to make a commitment to yourself to stay invested and keep investing over time.

It will be much harder to get burnt by the market if you adhere to proven investment principles like buying all of the world’s stocks, going through tough times, and keeping costs as low as possible.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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