This Finance Guru Says Investing 'Should Be Boring.' Here’s Why

If investing is like a rollercoaster ride, you're doing it wrong.

Few financial habits are more important than investing, but you need to invest well to get the best results. Finance guru Ramit Sethi, author of I Will Teach You To Be Rich, was recently on an episode of the White Coat Investor podcast. In it, he talked about how he invests and a common mistake investors make.

That mistake is choosing investments for excitement and emotional satisfaction. As Sethi puts it, "If you're lonely, get a dog. Don't use your investment portfolio to fill a hole in your heart." He says that investing should be boring, and that's his philosophy with his own investments.

It's great to hear a big name in finance bring this up, because it's 100% correct, and it's a topic that doesn't get talked about enough. Chasing excitement with your portfolio can lead to disaster. When it comes to investing, boring is a good thing.

Why Ramit Sethi believes investing should be boring

Sethi mentioned a few valid reasons for why you shouldn't expect entertainment with your investment portfolio. Here's the big one -- the most entertaining investments are rarely the best investments.

An example Sethi used was alternative investments, such as venture capital and hedge funds. Cryptocurrency also fits into this category. These are certainly much more exciting than putting your money in index funds. They also tend to be significantly more volatile and have much more expensive fees. That means investors are far more likely to get suboptimal returns with these types of investments.

Another good example is day trading, where you buy and sell stocks on a daily basis. It's an exciting way to invest, since you're making moves all the time. It's a whole lot more mentally stimulating than auto-investing 10% of your income in an index fund every month. But analysis has found that fewer than 1% of day traders are consistently profitable each year.

Sethi is also a proponent of making your finances as simple as possible. He says, "The more advanced you get with your money, the more you have to fight for simplicity." A simple, boring investment portfolio doesn't take much time to manage. An entertaining portfolio, on the other hand, can be a full-time job.

How to build a boring (and successful) investment portfolio

The nice thing about Sethi's investing philosophy is how easy it is. In his interview with White Coat Investor, he provided two simple tips on how to invest well:

• Choose long-term, low-cost investments
• Maximize your tax-advantaged accounts

Let's take a closer look at exactly how you can do this.

Choose long-term, low-cost investments

There are a few ways to go about building your investment portfolio. The fastest, easiest option is to choose one or more quality investment funds. These funds pool investor money and invest it in a large number of stocks. Some also include other types of assets, such as bonds.

Sethi specifically mentions Vanguard funds for their low costs. Those are a great option, but all the best stock brokers have low-fee investment funds available. If you already have an account with one, see which funds it offers. Index funds, in particular, are known for having low fees. There are also target-date funds that are set up for a specific retirement year.

Maximize your tax-advantaged accounts

When investing your money, it's usually best to invest through retirement accounts first, because these help you save on taxes. Popular types of retirement accounts include:

• 401(k)s
• Roth 401(k)s
• Individual retirement accounts (IRAs)
• Roth IRAs

Standard retirement accounts, including 401(k)s and IRAs, let you deduct contributions from your income taxes. You then pay taxes on plan withdrawals in retirement.

Roth accounts don't offer tax-deductible contributions. Their advantage is that your withdrawals in retirement are tax-free.

Retirement accounts have annual contribution limits, and you need to wait until you're 59 1/2 to withdraw money without penalty. To save the most on taxes, it makes sense to contribute as much as possible to retirement accounts, up to the maximum if you can. If you have money left over afterwards, you can invest it through an individual brokerage account.

Sethi makes a good point about not chasing excitement with your investments. There's nothing wrong with enjoying investing and learning about how to invest well. But if it's entertainment you're after, there are better hobbies for that. Investors who want a rush often end up losing money on risky alternative investments, day trading, and other poor strategies.