28/07/2022
Develop an investment strategy focused on your goals
After decades of relative stability, the economic landscape is now shifting. Inflation has hit a 40-year high and we're seeing interest rate hikes as a result. Finding inflation-resistant investment opportunities has become increasingly important. Rising prices can erode your portfolio, since the same $100 dollars will buy less than it did the day before. But some types of assets are more impacted by inflation than others. This is a moment to explore assets that will help insulate your portfolio, including some retirement accounts, real estate and Treasury Inflation-Protected Securities, a type of government bond that counterbalances against inflation.
Today, "investing" is often associated with actively trading stocks on Robinhood or some other brokerage. That implies frequent buying and selling, based on an analysis of the market. But making a reliable return through active investing is extremely difficult -- even for professionals -- and, for most people, it's not the most practical or effective way to manage money.
Passive modes of investing, such as using index funds and ETFs, are the better choice for most people. In contrast to active investing -- where you (or your portfolio manager or broker) regularly buy and sell individual investments -- passive investing usually means buying and holding assets for the long term.
As markets ebb and flow, index funds are designed to deliver the average return of the market overall, tracking the performance of a set market benchmark such as the Standard & Poor's 500 or Nasdaq Composite. The rationale is that in the long run, the market usually outperforms any single investment. Research shows that index funds routinely do better than actively managed funds. Passive investing through mutual funds has been particularly productive for generations of young people, who have decades to build wealth early in their careers.
Even Warren Buffet, one of the wealthiest people in the world and chairman and CEO of Berkshire Hathaway, is a fan of index funds. Cited in The Little Book of Common Sense Investing, Buffet said in an interview: "A low-cost index fund is the most sensible equity investment for the great majority of investors. By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals."
Better yet, index funds are less risky and typically cost less than other types of investments -- unchecked fees can erode your portfolio over time. Though it's not particularly complicated to buy into an index fund on your own, a robo-advisor can help identify which makes the most sense for you and manage your portfolio.
