The Biggest Challenge Is Inflation

Investing advice is hard to come by, or at least the kind of advice that you really think could be quite valuable. Warren Buffett is the kind of person, when it comes to investing, that few would count what comes out of his mouth as that which might be wrong, or even worse, short-sighted. He is the founder of the venerated Berkshire Hathaway. The preponderance of people in this country likely have a total portfolio value that might warrant them being able to buy perhaps 2 shares of this amazing investment vehicle.

Recently Mr. Buffett said he would donate $1 million to charity if he were to obtain better investment results by simply investing in an S&P passive index fund than those garnered by a team of fund managers. His feeling is there are many, many funds that are loaded with fees and mediocrity, and that the S&P passive index will likely outperform all of those funds.

Tim Armour of Capital Group weighed-in on Mr. Buffett’s challenge on CNBC recently. Mr. Armour points out that equity funds, in the fullness of time, will likely outperform most everything else. Mr. Armour is likely concerned that too many Americans might latch on to what Mr. Buffet is proposing as a smart way to invest, in perpetuity. A passive index fund will almost never outperform an equity-based fund over time. The S&P is an indice, and mutual funds are baskets of stocks-the 2 really cannot be compared.

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It seems Mr. Buffet is throwing down the gauntlet on a one-year challenge, largely so he can donate money to a charity, but it is doubtful he is intimating that is a solid investment strategy forever. Tim Armour is concerned that investors need not be too conservative, and way too early in their investment lives, with what they think might be a safe bet.

Inflation is historically 3%, so if you earn 5%, after taxes you are barely breaking even on your money. The bottom line is the value of $1 today is going to be 30% less in 10 years, so if you are not earning at least 5% interest on your money, you are falling behind without even realizing it because you are not keeping pace with inflation. This is where Tim Armour thinks the biggest risk is in not taking some risks as retirement looms large for everyone.

Learn more about Timothy Armour:

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