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.
Article Category: Stocks
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.
We all have a natural inclination to want the stock market to move higher. But counterintuitively, for the vast majority of investors, lower market prices will actually lead to higher account balances down the road. There are of course some exceptions, but more than likely you're about to find out why you've been spending your whole life hoping for the wrong outcome in the stock market.
With each and every investment that you make, you're going to be giving up one benefit in exchange for another. Most of the time, this trade-off is between risk and potential return. Understanding this trade-off at a conceptual level will go a long way in helping you to select the right investments (or strategies) on your path to retirement.