A basic understanding of investing is crucial for financial planning. Nurtured with patience and discipline our investments grow steadily over time, thereby strengthening our pillars. In contrast, poor investing decisions undermine our pillars and imperil our financial priorities.
If you find the topic confusing or intimidating, rest assured—it needn’t be. You can achieve all your household objectives by self-identifying as a passive investor (discussed below) and following simple mechanical processes.
All forms of investment: in stocks, bonds, real estate, etc., are undertaken with the objective of obtaining some positive gain or return. In seeking these rewards we must accept some risk. Thus, no conversation about investing is complete unless it considers both risk and return, and that’s where we begin this chapter. We’ll then move on to discuss the concept of risk tolerance, followed by passive versus active investing strategies, and traditional versus alternative asset classes. The latter part of this chapter covers the aforementioned mechanical portfolio construction process in detail, along with examples.