{"id":46701,"date":"2021-08-22T05:20:00","date_gmt":"2021-08-22T09:20:00","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=46701"},"modified":"2021-09-02T18:30:28","modified_gmt":"2021-09-02T22:30:28","slug":"autopilot-investing","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/autopilot-investing\/","title":{"rendered":"Autopilot Investing: The Right Way to Invest"},"content":{"rendered":"\n

What is autopilot investing? Why is it the best investment method, according to Burton Malkiel?<\/p>\n\n\n\n

Autopilot investing involves buying broad index mutual funds or exchange-traded funds, rather than buying active individual stocks. This is Burton Malkiel’s preferred method of investing, as he advises building a portfolio around index funds. <\/p>\n\n\n\n

Learn about autopilot investing below.<\/p>\n\n\n\n\n\n\n\n

Autopilot Investing, Explained<\/h2>\n\n\n\n

Ideal for the prospective investor who wants to take advantage of stock-market returns but isn\u2019t interested in specifics, autopilot investing consists of purchasing broad index mutual funds or exchange-traded funds (ETFs) <\/strong>rather than individual stocks or industries.<\/p>\n\n\n\n

(Some of the tax differences between traditional mutual funds and ETFs are described below, but the general rule of thumb is: If you have a large lump sum <\/strong>that you want to invest in index funds<\/a>, ETFs are generally the most advantageous choice<\/strong>. If you\u2019re going to be purchasing index fund shares in smaller amounts over a longer period of time<\/strong>, traditional mutual funds<\/strong> are your best bet.) <\/p>\n\n\n\n

Autopilot investing is Malkiel\u2019s preferred method of investing. No matter how knowledgeable or engaged the investor, Malkiel advises building the core of a portfolio around index funds<\/strong> and only making active bets with excess cash<\/strong>.<\/p>\n\n\n\n

The rationale behind autopilot investing is simple: Long-run returns of the S&P 500 Stock Index, which represents almost three-quarters of the value of the entire stock market, typically beat returns on portfolios<\/strong> designed by the most seasoned investment professionals. In short, if you were to invest in a mutual fund that holds a weighted representation of the stocks in the S&P 500, you would do better on average<\/strong> than trying to pick winners yourself or entrusting your money to an investment advisor.<\/p>\n\n\n\n

Not only are returns better with broad market index funds, fees and expenses tend to be, too<\/strong>. Because index funds are passively managed\u2014that is, they adjust their holdings more or less automatically on the basis of market values\u2014they tend to have extremely low expense ratios (.0005% or less for some). And because index funds only trade to rebalance their weights, they incur low trading costs as well<\/strong>.<\/p>\n\n\n\n

While the S&P 500 index funds are generally the most popular type of index fund\u2014and they will outperform actively managed funds on average\u2014Malkiel actually recommends that investors choose a total market index fund<\/strong> over an S&P 500 fund. This is because the S&P 500 index excludes smaller stocks<\/strong> that, historically and on average, have outperformed larger ones<\/strong>. Try to find a fund indexed to the Russell 3000, the Wilshire Total Market Index, the CRSP Index, or the MSCI US Broad Market Index. <\/p>\n\n\n\n

Of course, as Modern Portfolio Theory<\/a> teaches (see Chapter 8), diversification is the key to a successful portfolio. But one need not abandon index funds to diversify: There are funds that track REIT, corporate bonds, international capital, and emerging market indices<\/strong>.<\/p>\n\n\n\n

A Sample Index-Fund Portfolio<\/strong><\/h3>\n\n\n\n

If you’re interested in<\/a> autopilot investing, here are some specific index funds you might consider in each of the primary asset classes (cash, bonds and bond substitutes, REITs, and stocks). <\/p>\n\n\n\n