Passive vs. Active Management
- Passive Investing:
- ETFs (Exchange-Traded Funds): Track indices (e.g., SPDR S&P 500 ETF) with low fees (~0.03% expense ratios). Example: Vanguard Total Stock Market ETF (VTI) holds 4,000+ U.S. equities.
- Index Funds: Mutual funds mirroring benchmarks (e.g., Fidelity 500 Index Fund). Studies show passive funds outperform 85–90% of active managers over 10+ years.
- Active Management:
- Mutual Funds: Professionally managed portfolios (e.g., Fidelity Contrafund). Higher fees (~1% expense ratios) with mixed results.
- Hedge Funds: High-risk strategies (leverage, short-selling). Example: Renaissance Technologies’ Medallion Fund (66% annualized returns, 1988–2018).
Tax-Advantaged Accounts
- Retirement Accounts:
- 401(k): Employer-sponsored plans with tax-deferred growth. Contribution limit: $22,500 (2023).
- IRAs (Traditional vs. Roth): Traditional IRAs offer tax deductions; Roth IRAS provide tax-free withdrawals.
- 529 Plans: Education savings accounts with tax-free growth for qualified expenses.
Alternative Investment Structures
- Private Equity: Investing in non-public companies via buyout firms (e.g., Blackstone) or venture capital (e.g., Sequoia Capital). Illiquid but high returns (e.g., Uber’s 2019 IPO returned 100x for early investors).
- Commodities: Direct exposure (gold futures) or via ETFs (e.g., SPDR Gold Shares). Used as inflation hedges.
- Derivatives:
- Options: Contracts to buy/sell assets at set prices. Example: Protective puts to hedge equity downside.
- Futures: Agreements to trade assets at future dates (e.g., oil futures).
Case Study: The 2008 crisis saw gold surge 25% while equities collapsed, showcasing commodities’ diversification role.
