You have your budget in place. You're spending less than you earn. You've started to save money on a regular basis and you're starting to accumulate a handy little pile of cash. So what's next? It's time to start thinking about another very important part of personal finance - investing.
Investing is the mechanism by which you will make your money grow. It is the act of buying assets which will grow in value and/or produce income over the years to come. Investing your current and future savings at a reasonable rate of return will help build wealth in order to reach your future financial goals.
But how do you get started with investing? Today I'd like to discuss a broad group of investment strategies which advocate a relatively simple and hands off approach to investing.
While most us us have heard of legendary investors like Warren Buffett, there is a theory floating around which says that the average investor wont do anywhere near as well as Warren Buffett. In fact they will struggle to beat the average because the average itself is made up of a bunch of average investors. Even more importantly, just to earn a return equal to the average should be considered a success.
This is where approaches put forward by The Coffee House Investor and others come to the fore. In a nutshell, they advocate the use of asset allocation and low cost Index Funds or Exchange Traded Funds (ETF's) to build your investment portfolio. Asset allocation is used to diversify across asset classes thereby spreading risk and reducing volatility. Index Funds and ETF's are used as a low cost way of ensuring an investor captures all of the return of a particular asset class - this is the very idea behind index funds.
You can see some of these types of portfolios in action at the Lazy Portfolios section of the Market Watch website.
Or for a more in depth discussion of the Ultimate Buy & Hold Portfolio from the Lazy Portfolios mentioned above, read The Ultimate Buy-and-Hold Strategy by Paul Merriman at FundAdvice.com.