What is a 'Hands-Off Investor'

A hands-off investor prefers to set an investment portfolio and make only minor changes for a long period of time. Many hands-off investors use index funds or target date funds which make only small and slow changes to their holdings, and therefore do not require much monitoring.

BREAKING DOWN 'Hands-Off Investor'

A hands-off investment strategy is well-suited to many retail investors who may not have the time needed to routinely monitor and research their investments. Hands-on, active management requires investors to continuously keep up-to-date on the positions that they hold. This often requires several hours of research per week. Active managers believe that by doing this work, they can earn higher-than-average returns on their investments. 

A hands-off strategy is not necessarily underperforming. Many investors believe in an indexing approach, which posits that sticking with a well-diversified portfolio over the long term is the key to wealth. Since index funds often have very low expense ratios, hands-off investors often enjoy a built-in advantage over active traders who pay more in trading commissions, lose out to the bid-ask spread and incur the higher tax rates on short-term capital gains and nonqualified dividends. 

Benefits and Drawbacks of Being a Hands-Off Investor

An ongoing study that compares investor returns to market returns, Dalbar’s Quantitative Analysis of Investor Behavior, affirms the benefits of a hands-off approach. Over the last 20 years through 2017, the average equity investor has earned 5.29% per year while the S&P 500 Index has gained 7.20% per year. On a hypothetical $100,000 investment, the average investor would have earned approximately $120,000 than a hands-off investor holding the S&P 500. The average fixed-income investor has done even worse, trailing the Bloomberg Barclays U.S. Aggregate Index by 4.54 percentage points per year, and making approximately $155,000 less over 20 years.

The reasons for investor underperformance are myriad but attempting to time the market and behavioral biases like loss aversion are primary contributors. Dalbar correctly points out that an index is always in the market and always fully invested while investors may be on the sidelines waiting for the right moment to return to the market.

Hands-off investors can benefit from the price return of their investment but also from reinvestment of dividends. For mutual fund investors, this approach enables investors to purchase more fund shares with their dividend proceeds.

Hands-off investors that are not in a target date fund that adjusts its allocation over time could be taking on additional risk as they approach retirement. Without periodic rebalancing, a portfolio could become overweight in riskier equity investments, which could destroy wealth should a bear market occur in the last five to 10 years prior to retirement. The hands-off investor will need a much more conservative portfolio in retirement that conserves capital with assets like cash and high-quality bonds and will likely need to engage in significant trading to achieve this.

  1. Portfolio Investment

    A portfolio investment is a passive investment of assets in a ...
  2. Index Fund

    An index fund is a portfolio of stocks or bonds that is designed ...
  3. Advisory Management

    Advisory management refers to the provision of professional, ...
  4. Total Return Index

    Total return indexes include any dividends in the calculation ...
  5. Active Investing

    Active investing refers to an investment strategy that involves ...
  6. Active Index Fund

    Active index funds track an index fund with an additional layer ...
Related Articles
  1. Investing

    Top Income Investing Strategies for 2016

    Dividend paying stocks and equity income funds are two ways to get yield out of your investments this year.
  2. Investing

    4 Best Passive Income Investments

    Generating income from passive investments begins with knowing which ones are the best fit for your portfolio.
  3. Investing

    The lowdown on index funds

    If you can't beat the market, why not join it? Read on to see what your options are.
  4. Investing

    Target Date Funds: More Popular, Cheaper Than Ever

    How target date funds can help investors weather volatility when it comes to saving for retirement.
  5. Financial Advisor

    Why Investors Can Be Their Own Worst Enemy

    Here are a few examples of investor behavior that contributes to portfolio underperformance.
  6. Investing

    3 Index Funds with the Lowest Expense Ratios

    Read detailed information about index mutual funds with some of the lowest expense ratios in their categories, and learn about their pros and cons.
  7. Investing

    The Pros And Cons Of Target-Date Funds

    Take charge of your retirement savings, by learning the pros and cons target-date funds.
  8. Retirement

    Is a Target-Date Fund the Best Choice?

    Target-date funds are increasingly becoming the default choice, but can you do better on your own?
  9. Investing

    Long-Term Investing: Hot Or Not?

    Forget the latest craze - you're more likely to succeed with a buy-and-hold strategy.
  10. Retirement

    Are You Ready for a Low-Interest-Rates Retirement?

    A new survey from BlackRock suggests that investors may be relying too heavily on high returns to guarantee their retirement security.
  1. How Do I Find Mutual Funds That Track Indexes?

    Two good sources for finding index funds are Fidelity Investments and Vanguard. Read Answer >>
Trading Center