In this unprecedented environment of raging inflation, war in Europe, and the ongoing pandemic, there are 3 main lessons to be learned about value investing, index funds, and inflation from legendary investor and billionaire Warren Buffett, according to an article in MarketWatch.
Investors can’t control inflation. As inflation rises, the U.S. dollar isn’t going to go as far, tightening the budgets of households across the country. So investors should focus on what they can control: staying on track with their investing strategies. Buffett has always held the philosophy that to beat inflation, it’s best to invest in the long term.
Index funds can offer an easy and powerful way to diversify. Index funds are investment bundles that reflect a specific market index. Actively managed index funds can charge high fees, and carry more risk, which doesn’t always pay off. But lower-cost index funds have lower fees, giving investors the chance to buy into a diversified cross-section of that market. That will reduce risk by spreading it out—something that investors should be looking to do in this volatile environment. MarketWatch recommends starting by selecting a fund by the percentage amount your annual fee takes out of your investment, then using a brokerage account or IRA—or 401(k) if your plan offers access to index funds—when you’re ready to buy.
Value investing can provide a stable approach to investing. “Buy into a company because you want to own it, not because you want the stock to go up,” Buffett said in an interview with Forbes magazine in 1974, and the advice still holds up—especially since this strategy has worked extremely well for Buffett. While value investing generally refers to assessing a company’s worth then buying that stock at a discount price and holding it for a long time, it can also refer to using your own social, environmental, and moral beliefs when choosing stocks to buy. Buffett has held to both methods, prioritizing the insurance, tech (in the form of a large stake in Apple), railroads and energy sectors in Berkshire Hathaway’s holdings.
And indeed, basing your investments on your personal values should be a vital part of your investing strategy, MarketWatch posits. Investors can set their financial goals, then determine the best way to reach them in a way that’s impactful or philanthropic, and a good many brokers allow their clients to filter their investments—including index funds—based on their ESG practices. As for finding the best values, researching undervalued and under-the-radar companies is actually easier right now, when the market is down.
