In a previous article, we took a look at the business cycle to understand how the natural ebb and flow of our economy impacts things like asset prices, wages and interest rates. In this article, we'll dive deeper into what exactly causes those dreaded periods we call recessions.
Article Category: Investment Insights
In the quest to become a savvy investor, one of the most important concepts you must understand is that of the business cycle. This periodic ebb and flow of our economy exerts tremendous influence not just on asset prices, but on everything from interest rates to the availability of jobs. Since nearly every aspect of your financial life will be influenced in some way by the business cycle, it pays to have a basic conceptual understanding.
Whether we like it or not, the value of our portfolios depends heavily on the behavior of financial markets, which, in turn, are intertwined with the economy. Therefore, how and where we invest are dictated in large part by our expectations of future economic growth. As the U.S. and other G7 economies slow, it's going to permanently change the investment landscape.
In last month's article, we addressed the topic of active vs. passive management. Specifically, we provided clear and comprehensive evidence that active management is never a prudent decision. Today, we'd like to elaborate on this topic by relaying the story of a famous bet made by the greatest investor of all time - Warren Buffett. Mr. Buffett shares our perspective on this issue, and in typical fashion, made a large wager to prove his point.
Mutual funds have long been a staple for investors, offering instant diversification and the prospect of having a professional money manager in charge of your portfolio. But changes to the structure of investment vehicles, specifically the introduction of exchanged-traded funds (ETFs), have rendered the old-school mutual fund obsolete.