Minimalist investing is an approach that emphasizes simplicity and efficiency in investment decisions. Rather than getting caught up in the latest trends and having to spend countless hours researching individual stocks, minimalist investing focuses on investment options that require less time to manage. It’s important to understand how to minimize complexity when living minimally and by pursuing these minimalist investing options you can earn solid returns while reducing stress and anxiety. Even though this approach emphasizes simplicity and efficiency, you can still gain exposure to a wide range of investment types, key to a strong portfolio. Minimalist investing options include:
1. Mutual Funds
Mutual funds are pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. They are typically managed by a professional fund manager who invests the pooled money into varying securities dependent on the fund’s overall investment objective. Before investing in a mutual fund, it’s advisable to research various funds to find one that aligns with your investment goals and risk tolerance. From there, it’s often as simple as opening an account with the mutual fund and choosing an investment amount and fund type.
The advantages of investing in a mutual fund include:
- Diversification – Mutual funds offer exposure to a diversified portfolio of securities that can help reduce investment risk.
- Convenience – Once an account is established, additional investments or withdrawals can usually be made within the mutual fund’s platform whenever you choose to.
- Lower costs – Mutual funds normally have lower investment costs than individual investors would experience by purchasing and managing the same portfolio of investments on their own.
For a minimalist, mutual funds are an accessible investment vehicle that requires a low effort before, during, and after investing.
2. Real Estate Investment Trusts (REITs)
Real estate investment trusts, shortened to REITs, are investment vehicles that own, operate, or finance income-producing real estate properties. They allow individuals to invest in real estate assets without having to buy and manage the properties themselves.
There are several ways to invest in REITs:
- Purchasing REIT stocks directly on a stock exchange
- Investing in an aforementioned mutual fund or exchange-traded fund (ETF) that holds REIT stocks
- Investing in a private REIT offered by a real estate investment company
- Investing in a real estate crowdfunding platform that focuses on REITs (more on crowdfunding later)
- Investing in a REIT index fund (that tracks the performance of a broad market index of multiple REITs.
REITS provide a variety of advantages such as diversification, passive income, and liquidity. Publicly traded REITs can be bought and sold on stock exchanges, making them a relatively liquid investment. REITs also come with tax benefits because they are required to distribute at least 90% of their taxable income to shareholders as dividends, which makes them attractive for income-seeking investors. Investing in REITs can provide a diversified and potentially profitable addition to an investment portfolio, especially for those investors seeking in come and exposure to real estate assets. Given the low effort required to invest in REITs, they are a smart option for minimalist investors.
3. 401k and IRAs
401ks and IRAs are savings plans that offer tax advantages to help individuals save for retirement. 401ks are employer-sponsored retirement savings plans that allow employees to contribute a portion of their pre-tax income into a retirement account. Some businesses and organizations offer matching contributions of varying degrees to encourage employees to save for retirement. An IRA (Individual Retirement Account) is a retirement savings account that individuals open and fund on their own. Traditional IRAs allow individuals to contribute pre-tax dollars which grow until they are withdrawn in retirement at which point they are taxed. In comparison, Roth IRAs allow individuals to contribute post-tax dollars which grow and can be withdrawn free of tax throughout retirement.
Similarities of 401ks and IRAs include:
- Both account types offer tax advantages for contributions made to the accounts.
- Once money is contributed, both allow investors to select different asset classes (stocks, bonds, mutual funds, and others) although there are often pre-determined selections available to reduce the amount of time and research needed.
- Annual contribution limits exist for both types that are set by the IRS dependent on age and income level.
- There are penalties for early withdrawals with the exception of certain qualifying events.
- Roth options exist for both 401ks and IRAs that impact how the accounts are taxed.
Differences between 401ks and IRAs include:
- IRAs are available to anyone with an income while 401ks are usually offered as a workplace benefit.
- The contribution limits vary substantially. The contribution limit for 401ks is set at $22,500 (as of 2023) with an additional $7,500 limit increase for those over 50 years of age as a catch-up. Meanwhile, IRAs have a limit of $6,500 for those under 50 years of age and $7,500 for those over 50.
- Employers can add additional dollars to employees 401ks but they cannot contribute to IRAs.
- Investing options within a 401k may be more limited than within IRAs as employers may only have certain options available for employees to select.
- IRAs generally offer more flexible early withdrawal options.
How can a minimalist take advantage of 401ks and IRAs?
The best approach for a minimalist is to “set it and forget it”. 401ks are oftentimes the first investing option individuals will select as employers matching any contribution amount (even a small percentage) is additional money that can be put into savings beyond what is earned in salary. Contributions are normally automatically set within each pay period and reduce the amount of taxable income on each paycheck. Once an individual has hit the employer match limit, then it becomes a choice of continuing to contribute additional dollars to the 401k or selecting an IRA/Roth IRA. As IRAs typically have more investing choices, most individuals will set up one of these accounts and set up direct deposits at regular intervals to automate their investing process. After all automatic contributions are in place, there is little to no time or effort commitment needed for these investing options.
4. Real Estate Crowdfunding & Syndication
Real estate crowdfunding is a method of pooling capital from multiple investors to fund the development or management of a real estate project. A lead sponsor identifies a property or portfolio of properties, develops a business plan, and then solicits investments from individuals and investors who receive debt or equity ownership in the project. Investors later receive a portion of the proceeds from the project either through the sale of the real estate investment or passive income if the project has an ongoing nature, like a multi-family rental investment.
Real estate syndication is a specific form of real estate crowdfunding. In real estate syndication, all investors are considered to be members of an LLC that is formed for each specific project. Additionally, syndications are more likely to require accredited investors who have to meet certain financial prerequisites.
With these investment types, there is typically a minimum amount of capital needed to invest, which would vary on the project. Like the other minimalist investing opportunities, it is important to monitor the investment to stay informed about the project and any changes that could occur.
Real estate crowdfunding and syndication is quite simple as many companies offer flexible schedules, low minimum investments, and provide user-focused platforms that can make investing as easy as a few clicks. For those minimalists looking to invest in real estate, crowdfunding and syndication are easily accessible options.
Minimalist Investing Is Easier than You Think
These four investing options can be a smart approach for those who want to build wealth while minimizing the time and effort required to manage their investments. By focusing on low-maintenance options like mutual funds, REITs, 401k and IRAs, and real estate crowdfunding, investors can benefit from solid returns without spending the time and energy many think would be necessary. Mutual fund’s offer diversification, professional management, and ease of use, while REITs provide exposure to real estate and the potential for rewarding returns. 401ks and IRAs bring in many tax advantages and flexibility while real estate crowdfunding offers more direct access to real estate projects. It is still important understand the risks involved and consult with your financial advisor to ensure each investment aligns with your financial goals and risk tolerance. With the right approach and commitment to a long-term investment strategy, minimalist investing can be a successful path to building wealth and achieving financial independence.