Because inflation is easy to see and feel – at the grocery store or gas station – it tends to raise the level of investors’ concerns about their investment choices.
There’s no question the current inflation rate of 8.5% (as of April 12, 2022), the highest since 1981, is significant. But we should remember that this inflation is occurring in the context of some of the strongest economic growth we’ve seen in the last 40 years.
It’s important to keep the broader context in mind to ensure that hasty decisions don’t negatively impact your investment portfolio.
Investors who react to market turbulence increase the likelihood that they will sell low and buy high. Investors intuitively know that they should buy low and sell high, but that isn’t easy when prices fall quickly.
Looking to Scripture, Proverbs 21:5 states, “The plans of the diligent lead to profit as surely as haste leads to poverty.” Patience and considering the long-term implications of an investment strategy are important to protecting your investments.
The average investor should invest for the long term and focus on controlling what’s within their power to control. Investors can control which investments they put in their portfolios and how often they change those investments.
It can be tempting to sell stocks that are performing poorly and buy others that have performed well. This, however, increases the risk that an investor is selling low and buying high.
That tendency, along with other investor behaviors, can create a significant drag on returns. Morningstar, an investment research firm, has quantified that drag over time.
Morningstar estimated that, on average over the last 10 years, the returns investors experience were about 1.7% per year lower than the stated returns of the underlying mutual funds*. Over your investing career, that 1.7% annually can create a huge difference in cumulative results.
How do passive investments fit in?
Passively managed funds typically seek to offer investors results approximately in line with a particular benchmark index, such as the 500 large U.S. companies in the S&P 500 Index.
Because these funds are like the overall market, investors are more likely to have measured expectations and will hold onto these types of investments for the long term.
Actively managed funds, however, are expected to outperform the market. And they may do this for a period, but they might underperform in the next period.
It can be difficult for investors to hold on through those periods of underperformance. For that reason, the investor’s more measured expectations and the less volatile performance of passive funds present a lower risk of selling or buying at inopportune times.
Praxis Mutual Funds offers four optimized index funds. As faith-based investors, we don’t want to own certain stocks in a particular index because of where the companies’ revenues come from or how they behave.
For example, Praxis screens out stocks that generate material revenue from tobacco, gambling, pornography and more.
Instead of simply removing those stocks and increasing the remaining stocks in the fund equally, Praxis will strategically invest the remaining money into other stocks with similar characteristics to the ones that were removed. By building the portfolio with similar characteristics, we aim to provide index-like returns.
Index funds can be effective at capturing the broad moves of the market. By investing in multiple index funds, investors can make sure their overall portfolio is right for them in terms of risk tolerance and asset allocation.
Balance is incredibly important. To us, that means getting market-like returns while making sure you are impacting the planet and its people in ways that support your values.
Beyond screening out companies
Investing according to our values means more than avoiding certain companies. At Praxis, we utilize seven impact strategies to ensure that our faith values are reflected across our funds.
We don’t just screen out companies; we want to take positive steps to influence companies’ impact on the world and its most vulnerable populations. This involves activities such as company engagement, proxy voting, investment in positive impact bonds and community development investing.
I invite you to read more about the fruits of our impact strategies in our news section here.