ETFs

Here's How Rich You'd Be If You'd Invested $500 in FAANG 6 Years Ago

Damian Davila — Thu, 31 May 2018 09:00:19 +0000

Warren Buffett said it best: "Someone's sitting in the shade today because someone planted a tree a long time ago." One of those big trees in the investing world is FAANG, an acronym for five high-performing technology stocks: Facebook, Apple, Amazon, Netflix, and Google (now Alphabet, Inc.).

Let's find out how a cool $500 investment in FAANG would have fared over a six-year investment period.

2012: Off to a good start

Since Facebook held its initial public offering (IPO) on May 18, 2012, this date will be our starting point. And it's a great one because Facebook's IPO at that time was the largest technology IPO in U.S. history, raising more than $16 billion.

Let's imagine that you allocated exactly $100 to each one of the FAANG stocks. Assuming that you could buy fractions of shares, here's how many shares of FAANG you would have acquired back on May 18, 2012, rounded to the nearest hundredth. In this and all calculations throughout this article, we'll use the closing price.

Facebook: $100 @ $38.23 per share = 2.61 shares
Apple: $100 @ $75.77 per share = 1.32 shares
Amazon: $100 @ $213.85 per share = 0.47 shares
Netflix: $100 @ $9.99 = 10.01 shares
Google: $100 @ $300.50 = 0.33 shares

At the end of 2012, your initial $500 in FAANG would be worth $537, up 7.51 percent mainly due to a 32.43 percent jump in Netflix's stock price over the same period.

2013: Netflix leading the pack

You would have loved watching Netflix's stock price this year, as it went up 297.6 percent year-over-year, closing at $52.60. After 2012, Facebook traded sideways and didn't trade above its IPO price until July 31, 2013. But then it too ended 2013 strong with a 105.30 percent year-over-year increase in price. At the end of 2013, your FAANG portfolio would be worth $1,147.50, up 113.69 percent from the previous year.

2014: A year of stock splits and slow growth

On June 9, 2014, Apple issued its fourth stock split — this time, a seven-for-one stock split. This means that your 1.32 would have become 9.38 shares. Earlier that year on March 27, 2014, Google executed a 100 percent stock spinoff, which is similar to a two-for-one stock split.

All said and done, your portfolio's 2014 year-end value of $1,160.95 ended slightly above that of 2013 (a 1.17 percent year-over-year increase). What caused the small return? On December 31, 2014 the stock prices of Amazon, Netflix, and Google were down 22.18, 7.22, and 4.24 percent respectively from exactly the year before.

FAANG beats the S&P 500 over six years

Let's fast-forward a few years to May 18, 2018 and analyze the performance of our investment in FAANG against the most common stock market bench mark, the S&P 500.

Assuming that you were to hold onto your entire $500 FAANG portfolio from May 18, 2012 until May, 18, 2018, your portfolio would have been worth a cool $5,059.62, a whopping 911.92 percent return over the six-year period. If you had put the same $500 investment in the S&P 500 you would have ended with $1,047.30 at the end of the six-year period. That's a very decent 109.46 percent return over the same six-year period, but far below that of the FAANG portfolio.

Should you invest in FAANG?

If it ain't broke, why fix it, right? After all, the FAANG investing strategy continues to pay off in 2018. However, this doesn't mean that you should put your entire nest egg in FAANG. Here are three key caveats when considering an investment in FAANG.

Investment strategy fit

"Does FAANG match my investment strategy?" This is the biggest question that you should ask yourself before considering an investment in FAANG. If you're very close to retirement age, are very adverse to risk, or require a consistent stream of dividend payouts for income, then FAANG stocks may not be right for you. Make sure to first analyze FAANG from the perspective of your portfolio strategy.

Tolerance for volatility

As FAANG companies continue to push the boundaries of technology, the stock market continues to reward their valuation. However, sometimes the pendulum swings in the other direction. Remember the Facebook CEO's testimony before Congress on April 10, 2018 due to privacy concerns? The price of one Facebook share went from a high of $185.09 on March 16, 2018 to $165.04 on April 10, 2018. Could you have stomached a 10.83 percent loss over a 25-day period?

Overexposure to FAANG

If you hold an S&P 500 index fund, you're already exposed to FAANG. Let's assume that you hold the Vanguard 500 Index Fund Investor Shares. By owning one share of this Vanguard index fund, your portfolio has an allocation of 3.7 percent to Apple, 2.8 percent to Amazon, 2.7 percent to Google, and 1.80 percent to Facebook.

And that's before taking account any other investments you might hold. If you also have another index fund in the technology sector, you probably have an even greater holding of each one of those investments. For example, the Vanguard Information Technology Index Fund Admiral Shares [Nasdaq: VITAX] has Apple, Amazon, and Google among its top four largest holdings.

There are many mutual funds out there that already include Apple, Facebook, Amazon, Google, or Netflix among their holdings. Make sure to consider how much your existing portfolio already has allocated to FAANG before you add even more shares of these high-growth stocks.

How can you invest in FAANG without breaking the bank

With individual shares of Amazon and Google trading at $1,574.37 and $1,066.36, respectively on May 18, 2018, it is impossible to make the same original investment of $500 to buy all five of the individual stocks that make up FAANG as we did in this experiment.

Still, there is a simple way to start investing in FAANG: exchange-traded funds (ETFs). Similar to an index fund, an ETF tracks an asset or basket of assets. Unlike an index fund, an ETF can be traded several times throughout the day and doesn't require a minimum investment.

There are three key reasons why ETFs make investing in FAANG more approachable for the average investor.

The expense ratio (the percentage of assets deducted each fiscal year for fund expenses) for ETFs is generally lower than that for funds tracking the same type of investment. For example, the Vanguard Growth ETF has a 0.05 percent annual expense ratio, while the average annual expense ratio of similar growth funds is 1.10 percent.
Some brokerage houses charge no trading fees when you stick to in-house ETFs. For example, users of the Vanguard Brokerage Account can trade without fees as long as they buy Vanguard ETFs.
There is no minimum investment, so you could buy as little as one share of an ETF. Generally, prices for one share of FAANG ETFs range from $10 to a few hundred dollars. This prevents you from putting all your eggs in one basket. Remember that historical returns (even as great as those from FAANG) are no guarantee of future returns. So, you still should diversify your portfolio.

Here's a list of FAANG ETFs to get you started on your research, but make sure to look at other lists as well. Buyer beware: By definition, a FAANG ETF is one that offers an investor at least 1 percent exposure to FAANG stocks. While diversification is great, select an ETF that best matches your target exposure to these five high-growth technology stocks.

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This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Ways to Compare Stock Market Investments

Tim Lemke — Mon, 23 Apr 2018 08:30:09 +0000

When investing, we are faced with an overwhelming menu of things to choose from. There are tens of thousands of stocks, a mind-boggling number of mutual funds and ETFs, plus a dizzying array of bonds. How can we make sense of any of this to decide what makes a good investment?

It helps to know the basic elements of an investment so you know how to compare one product to another. This may require some work, but it can often be fun to dig into the details of why one investment is better than another. Here are some key things to examine.

1. Growth potential

Most people that are far away from retirement age seek investments that will grow over time. Ideally, they're looking for investments that will allow them to build a sizable retirement fund and outpace the returns offered by a basic bank account. There are some investments, such as stocks, that historically rise in value and are great for younger investors. Mutual funds and ETFs can offer solid growth as well. Bonds, however, are more likely to offer lower, but more stable returns.

As you become savvier in grasping the inner workings of specific investments, you can become skilled at knowing when an investment is undervalued and perhaps poised for big growth — or overvalued and ready for a price decline. Understanding the growth potential in certain investments can help you find the right mix for your individual portfolio. (See also: 9 Ways to Tell If a Stock Is Worth Buying)

2. Sector and industry

If you don't know a lot about a stock investment at first, it helps to learn what the company does to make its money. Companies are grouped into sectors based on the type of business they operate in; within sectors, there are smaller segments called industries. Typically, stocks are grouped into 11 different sectors — including health care, financials, energy, and consumer staples, to name a few — and there can be anywhere from two to 15 industries in each sector. A well-balanced stock portfolio will have some exposure to all of these sectors and as many of these industries as possible.

When investing, it helps to learn how these sectors perform compared to the broader stock market. Some sectors perform better than the market, while others underperform. Some are resilient in tough economic times, while others are more vulnerable to bad news. Understanding these industries can help you make smart comparisons when evaluating stocks.

3. Market capitalization and asset class

Stocks are usually categorized by size, also referred to as market capitalization. A company's market capitalization, or market cap, refers to the value of all outstanding shares (which is its stock price multiplied by the total number of shares outstanding).

There are large-cap stocks, which comprise the largest publicly traded companies. There are mid-cap stocks, which are medium-sized firms. And there are small-cap and even micro-cap stocks, comprising smaller companies. These categories are also called asset classes.

Generally speaking, large-cap stocks offer solid, steady growth potential for shareholders. Shares of smaller companies can offer bigger returns, but may also be riskier investments. Understanding the unique characteristics of stocks in each asset class can help you make comparisons between investments and find stocks that make sense for your financial goals.

4. Risk and volatility

Stocks of smaller companies can be riskier than some other investments. Understanding risk — and your own tolerance for it — can help you compare investments with confidence.

It's important to note that the potential for higher returns comes with the potential for higher risk. Finding that risk-reward sweet spot is the key to successful investing. Too much risk can result in you losing a lot of money. Avoiding risk altogether may prevent you from getting the returns needed to reach your financial goals.

Volatility and risk go hand in hand. When an investment goes up and down in value rapidly, we often say it's a volatile investment. There are ways to make money off that volatility, but for most investors, it's best to see steadier, consistent returns. (See also: How the Risk Averse Can Get Into the Stock Market)

5. Earnings, and earnings per share

Companies make money. They also spend it. When companies make more money than they spend, that's usually a good thing for everyone, including investors. This extra money is often referred to as net earnings. And as an investor, you want to see earnings increase over time.

When comparing two companies in the same industry, it can help to examine earnings to see which may be doing better financially. But it's also important to look at earnings in the context of a company's size. To do this, simply take the earnings total and divide it by the number of shares outstanding. So, a company with $9 million in earnings and 20 million shares would have earnings per share of 45 cents. (See also: Beginner's Guide to Reading a Stock Table)

6. Financial news

Sometimes, just paying attention to the headlines can help you grasp whether an investment is a good one or not. Financial news can let you know of macroeconomic trends that may help or hurt certain investments, and update you on specific news regarding companies or products. When trying to decide between investments, do a quick news search to see if there's anything big you need to know. You don't have to go overboard; you can overwhelm yourself reading financial magazines and watching CNBC all day. But staying generally informed can certainly be helpful.

7. Dividends and dividend yields

Many companies choose to distribute earnings to shareholders on a quarterly basis. This is great if you are a shareholder, because it's free income just for owning shares. When examining dividends, you should look at both the amount of the dividend and the "yield," which is the amount when compared to the share price.

For example, a company may pay shareholders 50 cents per share they own every quarter. That's the dividend yield. If shares of the company are priced at $35, the yield is about 1.4 percent per quarter, or 5.6 percent annually. When examining dividends, look to see if a company has a history of maintaining or even increasing dividends each year. If they do, that's a sign of a company on strong financial footing.

Keep in mind that if a company doesn't distribute dividends, that's not necessarily a bad thing. Many fast-growing companies choose to instead reinvest their earnings into business operations, and this can often help boost growth and make the company more valuable over time. Amazon may be the best example of a strong company that does not pay dividends.

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Ways to Add Gold to Your Portfolio

Dr Penny Pincher — Mon, 07 Aug 2017 08:00:05 +0000

Owning gold can be an attractive insurance policy in case of stock market turmoil or a decline in currency valuation. In times of economic uncertainty, gold prices tend to increase even when the value of other investments goes down.

If you are looking to reduce your exposure to stock market investments, or simply want to have something of value to trade in case of a zombie apocalypse, here are four ways you can invest in gold today.

1. Gold coins and bullion

The U.S. Mint issues American Eagle gold bullion coins in the following denominations:

1/10 ounce
¼ ounce
½ ounce
1 ounce

The selling price of these coins floats with the price of gold, plus you will pay a few percent premium for getting a minted coin instead of a plain piece of gold. With the current price of gold at over $1,200 an ounce, you can find 1/10 ounce American Eagles selling from dealers for under $150. Gold coins produced by the U.S. Mint are not sold directly to the public, but may be purchased from a network of authorized bullion dealers who buy the coins from the mint for resale.

Another option is the American Buffalo gold coin that comes in a 1 ounce denomination. This is a legal tender coin whose gold content is guaranteed by the U.S. Government. These coins are available at coin dealers and participating banks. The South African Krugerrand, Canadian Gold Maple Leaf, Australian Gold Nugget, Chinese Gold Panda, and British Gold Britannia are other popular gold coins from around the world.

A less expensive alternative to gold coins is to buy gold bars or gold rounds. These are not as impressive to look at, but are priced near the current trading price, or "spot price," for gold. This form of bullion may have simple markings with the weight and purity of the gold.

If the thought of keeping gold hidden in your closet or safe makes you nervous, consider using a bullion trading and storage platform. You can buy and sell physical gold bullion and it never has to leave the secure vault where it is stored unless you want to take it out. This gives you the benefit of directly owning gold without the hassle of transporting and storing it.

2. Gold jewelry

An advantage of buying gold in the form of jewelry is that you can wear and enjoy your investment, and it is highly transportable. A smart way to invest in gold is to give gold jewelry as a gift. A gift of precious metal jewelry will hold its value and possibly grow in value while most other gifts depreciate and eventually end up in a landfill.

When buying gold jewelry, you need to pay attention not only to the weight of the jewelry, but also the purity of the gold. Pure gold is designated as 24 karat gold. But pure gold is too soft and malleable for jewelry, so it is often mixed with other metals to make the jewelry harder and stronger. For example, jewelry that is 18 karat gold is 18/24, or 75 percent gold and 25 percent other metals. You can divide the karat rating of jewelry by 24 to determine the fraction of gold that it contains.

Sometimes you can find broken, tangled, or damaged gold jewelry for sale at a pawnshop for less than the spot price of gold. Just make sure you are buying solid gold, and not just gold plated items.

3. Gold exchange traded funds (ETFs)

A gold ETF is a fund that aims to track the price of gold. Some funds actually hold gold, while others do not own gold, but use derivative contracts instead. Gold ETFs allow a quick and easy way to get an investment that tracks the price of gold, and are convenient for large transactions since you do not need to move or store a lot of gold.

There are a couple of potential downsides to investing in a gold ETF. When you buy shares in a gold ETF, you might not actually own any gold — in some cases, you will own only shares in the fund. Since the fund tracks the price of gold, you may not have a problem with this. But if you are trying to reduce your exposure to large financial institutions by investing in gold, buying shares in a fund run by a large financial institution might not meet your goal. Also, some gold ETFs sell some of the gold that they hold to cover expenses, so the amount of gold per share that you own can be reduced over time.

4. Gold industry stocks and mutual funds

Another way to get a piece of the gold market is to buy stock of companies involved in gold mining and gold production. When gold prices go up, the stock prices of these companies can also go way up. Conversely, when gold prices go down, the stock prices of these companies can go way down.

You can buy individual company stocks or mutual funds that provide holdings in a number of companies in the gold industry. This market segment is especially volatile, but may provide a hedge against other types of investments in your portfolio.

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This article is from Dr Penny Pincher of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The 3 Rules Every Mediocre Investor Must Know

Philip Brewer — Mon, 27 Feb 2017 10:30:46 +0000

Mediocre financial advice can earn you mediocre investment returns — and mediocre investment returns are all you need to save for a house, send your kids to college, and fund your (potentially early) retirement. Mediocre investment advice is pretty straightforward. In fact, the only thing that's complicated about getting mediocre financial results is the stuff that comes before investing: Things like earning money, keeping your debt in check, finding a career, living frugally, and most crucially, building an adequate emergency fund.

Once you've got those things taken care of, you're ready to start investing. If you're at that point, here's my mediocre investment advice: Create a diversified portfolio of low-cost investments and rebalance it annually.

Diversified Portfolio

It's important to have diversity at several levels. Eventually you'll want diversity in investment types — not just stocks, but also bonds, real estate, precious metals, foreign currency, cash, etc. More importantly, you want finer-grained diversity especially in the earlier stages of building your portfolio. Don't let your portfolio get concentrated in just one or a few companies. (For what it's worth, don't let it get concentrated in the stock of your employer, either. That sets you up for a catastrophe, because if your employer runs into trouble, the value of your portfolio can crash at the same time your job is at risk.)

In the medium term — after you've got a well-diversified stock selection, but before it's time to branch out into more exotic investments — you'll want to expand the diversity of types of companies. Not just big companies, but also medium-sized and small companies. Not just U.S. companies, but also foreign companies. Not just tech companies, but also industrial companies and financial companies, and so on.

Diversity wins two ways. First, it's safer: As long as all your money isn't in just one thing, it doesn't matter so much whether it's a good year or a bad year for that thing. Second, it produces higher returns: No one can know which investment will be best, but a diversified portfolio probably has at least some money invested in some investments that will do especially well. (Of course retrospectively, there will have been one investment that does best, and risking having all your money in that would have produced the highest possible return — but that's exactly what a mediocre investor knows better than to attempt.)

Of course, you don't want a random selection of investments, even if such a thing might be quite diverse. You want a reasonably balanced portfolio — something I'll talk about at the end of this post.

Low-Cost Investments

The less money you pay in fees and commissions, the more money you have invested in earning a return.

Getting this right is so much easier now than it was when I started investing! In those days, you could scarcely avoid losing several percent of your money right off the top to commissions, and then lose another percent or two annually to fees. Now it's easy to make a stock trade for less than $10 in commissions, and it's easy to find mutual funds and exchange-traded funds that charge fees of only a fraction of 1%.

Still, it's easy to screw this up. Any investment that's advertised is paying its advertising budget somehow — probably with fees from investors. Any investment that's sold by agents or brokers is paying those agents or brokers somehow — probably with commissions or fees from investors.

All those costs come straight out of your return. Keep them to a minimum.

Rebalance Annually

Your diversified portfolio will immediately start getting less diversified: Your winning investments will become a larger fraction of your portfolio while your losers will become a smaller fraction. In the short term, that's great. Who doesn't want a portfolio loaded with winners? Pretty soon though, you start losing the advantages of diversification. Last year's winners will inevitably become losers eventually, and you don't want that to happen after they've become a huge share of your portfolio.

The solution is to restore the original diversity. Sell some of the winners, and use the resulting cash to buy some more of the losers. It's the easiest possible way to buy low and sell high. (Maybe you don't want to buy exactly the losers — not if their poor performance leads you think there's something really wrong with them. But buy something kind of like them. Health care companies probably belong in your portfolio, even if many of them did badly this year.)

There are costs to rebalancing — costs in time and effort (figuring out what to sell and what to buy), and actual costs in commissions and fees. Because of that, you probably wouldn't want to rebalance constantly. You could make a case for monthly or quarterly rebalancing, but even that seems like a lot of effort for a small portfolio. Annually seems to hit the sweet spot.

What Goes Into a Diversified Portfolio?

What I'm going to suggest is that you start with a balanced portfolio of stocks and bonds.

It's not that there aren't plenty of other worthy investment options — cash, gold, silver, real estate, foreign currencies, etc. — it's just that they all have complications of one sort or another, and you can get started on earning your mediocre returns without them.

My mediocre investment advice then is that your portfolio should be a balance of stocks (for maximum growth) and bonds (for income and stability).

Finding the Right Balance Comes Down to Age — Yours

What's the right balance? An old rule of thumb was that 100 minus your age would be a good target percentage for the stock portion of your portfolio. At the start of your career, you'd have nearly 80% of your investments in stocks, and that fraction would gradually decline to about 35% as you approached retirement. The theory was that a young person can afford to take big risks, because he or she has time to wait for an eventual market rebound (and because during the early phase of building up a portfolio, even a large percentage loss is a small dollar amount). This makes a certain amount of sense. In fact, you could argue that a stock market that collapsed and then stayed down just when you started investing would be great — it would give you decades to buy stocks cheap.

That rule of thumb isn't bad, although with people living longer these days, it probably makes sense to keep a higher portion of stocks in your portfolio during the last years before and first years after retirement. Once you hit 50, maybe only cut your stock portfolio by 1% every two years.

When you're just getting started, feel free to keep it very simple. Perhaps just start putting money into a broad-based stock fund (such as an S&P 500 index fund). You can add a bond fund right away if you want, or wait until your annual rebalancing.

There are mutual funds that will manage this balance for you, holding stocks and bonds with a balance that shifts over time to some target date, at which point they'll hold a portfolio suitable for someone who has retired. You don't need them. In particular, they tend to have higher expenses, violating the "low cost" principle. You can do it easily enough for yourself. (Of course if you find that you don't do your annual rebalancing, then maybe paying a fund to do it for you is worth the expense.)

As an alternative to mutual funds, you can use exchange traded funds or ETFs. It doesn't matter.

Once your portfolio of stocks is large, you probably want to move beyond a single fund. Look at the other low-cost funds offered by the same fund family that provides your S&P 500 index fund. Consider adding a fund that includes foreign stocks (especially if the dollar seems strong at the time you'll be buying). Consider adding a fund that includes dividend-paying stocks (especially if interest rates are low relative to dividends).

Follow these mediocre tips, and you'll be racking up mediocre returns in no time! And remember — mediocre returns are all you need to live well and retire well.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Investments That Aren't Stocks or Bonds

Damian Davila — Tue, 07 Feb 2017 10:00:14 +0000

Times are changing. Back in 2007, 65% of American adults reported investing in stocks. Fast forward to 2016, and only 52% said they have money invested in equities. This represents the lowest ownership rate of stocks in the 19 years of Gallup's annual economy and personal finance survey.

So, where is all the money going? While there are no clear answers to this question, there are alternatives to the stock market which might be palatable to certain investors. We'll explore these asset classes and ways in which even average investors might take advantage of their opportunities.

5 Types of Alternative Investments

While there is an ever-growing list of alternative investments, here are the five most common categories.

1. Private Equity

Unlike shares from publicly traded companies or exchange-listed mutual funds, shares of private equity investments aren't available on a public exchange. Instead, private equity is only available through private companies that seek underperforming businesses, turn them around using their team of expert managers, and increase profitability of those businesses. Once the market value of the purchased business increases, the private equity firm sells that business and gains a percentage fee from the sale proceeds. Additionally, managers of private equity firms often gain an annual fee for providing their management expertise to acquired companies.

2. Venture Capital

A subset of private equity firms, venture capital companies focus on startups and small businesses that have a long-term growth potential. Venture capital is a great opportunity to secure much-needed financing for companies with very limited operational history. In exchange for that cash flow injection, startup founders and small business owners provide venture capitalists (also known as "angel investors") a major say in most management decisions of the startup.

In recent years, some recipients of venture capital have turned into "unicorns" — companies with an estimated valuation of more than $1 billion — with Forbes listing American ride-sharing firm Uber and Chinese consumer electronics manufacturer Xiamoi in the number one and two spots, respectively. Venture capitalists are the first to profit when a startup or small business is acquired by a larger company or becomes listed on the stock exchange through an initial public offering (IPO). Unfortunately, angel investing usually requires significant capital of your own, so it's difficult for most investors to gain access to this investment class.

3. Hedge Funds

These are yet another subset of private equity firms. They're called hedge funds because when they first started, they had the objective to limit — or hedge — investment risk through a series of financial vehicles and investment strategies. However, that definition no longer applies and hedge funds are known as aggressive, risk-seeking investment funds that typically use leverage to offer "alpha" (abnormal rate of return against a benchmark).

Like private equity and venture capital firms, hedge funds pool funds from a number of accredited and institutional investors. Unlike other private equity and venture capital firms, hedge funds focus on a much broader set of assets and investments strategies, including equity long-short, distressed assets, arbitrage, macro-trends, and managed futures. Like angel investing, hedge funds are often reserved for investors with significant capital.

4. Managed Futures

Wealth managers, mainly those of hedge funds, use futures (financial obligations for a buyer to purchase an asset or a seller to sell an asset at a predetermined future date) and options (rights to buy or sell an asset at expiration) to diversify among asset classes and mitigate the risk of an existing portfolio. Futures and options provide a way to diversity risk that isn't available through investments in direct equity.

In addition to futures and options, a wealth manager could use other derivatives, such as forward contracts, swaps, and mortgage-backed securities to diversify a portfolio. All of these types of contracts are very complex and have been subject to scrutiny by several government agencies. For a primer on mortgage-backed securities and other derivatives, watch The Big Short.

5. Real Assets

These are firms that focus in the speculation of real assets. By using their expertise in a specific field, such as real estate, wine production, or art appraisal, these companies acquire tangible assets in the hope of gain — but with the obvious risk of loss. Lately, there has been an explosion in investment in luxury and collectible goods of all forms.

How Can You Invest in Alternative Investments?

You can invest directly as an accredited investor or through an exchange traded fund (ETF) or retirement account.

Accredited Investor

Generally, only institutional investors (organizations that invest on behalf of its members) or accredited investors (individual investors or entities that meet income, net worth, asset size, governance status, or professional experience requirements set by the Securities and Exchange Commission) have access to private equity, venture capital, and other types of alternative investments.

Some alternative investment firms may charge accredited investors a membership fee to be able to invest. For example, the Hawaii-based venture capital firm Hawaii Angels charges individual membership fees for out-of-state investors starting at $700 per year.

Chances are that you won't meet the SEC requirements to become an accredited investor. For example, the SEC requires any natural person to have an individual or joint net worth of at least $1 million, or an individual income in excess of $200,000 in each of the two most recent years ($300,000 in case of joint income) and a reasonable expectation of sustaining the same income level in the current year. According to the latest data from the U.S. Census Bureau, the median household income stands at $53,889, which means there aren't many of us who qualify.

Exchange Traded Fund

Individual investors not meeting the SEC requirements can leverage exchange-traded funds (ETFs) to gain exposure to capital invested in alternative investments. For example, the PowerShares Global Listed Private Equity Portfolio ETF and the Proshares Global Listed Private Equity ETF allow you to invest in private equity portfolios.

One key advantage of ETFs is their liquidity. Because they're traded just like stocks, one potential drawback is that there are over 1,400 U.S.-based ETFs, making it difficult for individual investors to pick the "winners." (See also: 8 Ways ETFs Can Put More Money in Your Pocket Than Mutual Funds)

Retirement Account

Your 401K or IRA may already offer you the option to gain exposure to some alternative investments. Many retirement accounts offer a real estate investment trust (REIT) within their available funds for plan holders. A REIT owns or invests in income-producing real estate assets, such as shopping malls, apartment buildings, and warehouses, and in real estate debt, such as mortgages and other types of loans.

Talk with your plan administrator to learn more about your full set of options in your retirement accounts. Some retirement accounts may already offer prospectuses of all funds available in the plan through an online platform that you can access after setting up your account.

The Bottom Line: Invest Carefully in Alternative Investments

All types of alternative investment firms seek extraordinary returns through their expertise within a specific field. A higher rate of return always comes with a higher level of risk, so make sure to only invest in alternative investments when you're fully comfortable with that level of risk.

Depending on your tolerance for risk and total available investment fund, financial advisers suggest investing between 5% and 20% in alternative investments. Less than 5% won't be enough to move the needle in your total portfolio return, and over 20% may be increasing your total portfolio risk beyond that of your desired target.

And don't forget to check the schedule of fees! Whenever evaluating whether an alternative investment is worthwhile, consider the total cost to determine whether or not those investments are suitable to you.

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

6 Ways to Invest When You're In Debt

Tim Lemke — Wed, 23 Nov 2016 11:30:07 +0000

You know you need to begin investing to save for the future, but you still have some debt to pay off. It is possible to take care of both at the same time?

The short answer is that yes, you can pay down debt and invest at the same time. In many ways, this is a personal choice. If you despise debt and sleep better at night knowing that you're paying it off as quickly as possible, that's fine. But if you can tolerate paying off debt at a slower rate and investing some money, you may end up ahead of the game financially over the long-term.

Here are some things to consider when deciding how much to invest and how much debt to pay off.

1. Minimum Payments First, Then Invest

While it's certainly possible to pay down debt and invest at the same time, it's never a good idea to invest if you can't make your minimum payments first. If you don't make minimum payments, you'll be on the hook for higher interest, late fees, and penalties. Not to mention that your credit score will take a big hit. Consider investing your money only if you know you can set money aside and still make at least the minimum payments on debt.

2. Tackle the High Interest Debt

If your debt is tied up in credit cards and other things that come with high interest rates, you may want to hold off on investing until that's under control. Credit cards have interest rates in the double digits, and you're unlikely to generate an investment return that outpaces that. Once that high-interest debt is down to zero, then investing becomes much more possible. (See also: Fastest Way to Pay Off 10K in Credit Card Debt)

3. Use Your 401K Plan

If you work for an employer that offers a 401K plan or something similar, it's worth taking part even if you have some debt. That's because most employers will match contributions up to a certain amount. So it's like getting free money. Any contributions you make to a 401K are deducted from your taxable income, so there are great tax advantages for taking part. Invest what you can while still paying down your debt. Then, when your debt is paid off, increase your contributions.

4. Look at Low-Cost Mutual Funds and ETFs

If most of your debt is tied up in low-interest things like student loans or mortgages, it's okay to set aside some money to invest in things that will generate a good return. In fact, there are many financial planners that argue against paying off low-interest loans early if market returns are higher than interest rates. Over time, stocks have averaged returns of about 7%, which is much higher than interest rates these days. To get this type of return, consider looking at mutual funds and exchange-traded funds that have low fees and are designed to track the performance of the overall stock market.

5. Find Investments That Trade Without a Commission

If you're trying to invest and pay down debt at the same time, there's a good chance you may only be able to invest a little at a time. That's okay, but it's important to be aware of the fees and commissions you pay every time you buy and sell. If you're only buying a few shares of a stock but paying $8 in a commission, for example, that fee is cutting into a sizable percentage of your investment. Fortunately, many discount brokerages allow you to trade certain types of investments without paying a commission. Fidelity offers fee-free investing on all iShares ETFs, ETrade offers many commission-free ETFs from WisdomTree and Global X, and TD Ameritrade offers more than 100 ETFs with no transaction fees.

6. Automate as Much as Possible

Finding the balance between investing and paying off debt requires some discipline. If you have some debt but are considering investing, determine in advance what your ideal balance is. Then, set up automatic monthly transfers of money into an investment account, and automate your bills as well. If you get extra money or a raise, consider tweaking the balance accordingly. When you automate, it takes the guesswork out, allows you to stay consistent, and makes it easier to do other financial planning.

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Signs an ETF Isn't Right for You

Tim Lemke — Thu, 03 Nov 2016 09:30:25 +0000

In recent years, exchange traded funds, or ETFs, have become a common part of many retirement portfolios. They work much like mutual funds, but can be traded throughout the day and often have lower costs. But how do you know if an ETF makes sense for you? After all, there are literally thousands of ETFs available, all with unique characteristics and goals.

Most financial advisers suggest that investors keep things simple by finding ETFs that track major benchmark indexes, such as the S&P 500. They should generally have low fees and fit in with other investments in your portfolio, too.

Here are some key ways to determine if an ETF isn't right for you.

1. It Has High Fees

Anytime you purchase a mutual fund or ETF, it's important to note how much of your money is going to fund managers and other expenses. High fees can take a big cut out of your overall earnings, and there's little evidence that ETFs with higher fees perform better than cheaper ones. It's possible to own very solid ETFs with expense ratios at 0.1% or lower. If your ETF's expense ratio is significantly higher, it may be time to invest in something else.

"Anything above 0.3%, and it gets a little excessive," says Justin Halverson of Great Waters Financial in Minneapolis.

2. You Don't Understand It

As ETFs have grown in popularity, they've also grown in number — and complexity. That means there are many "boutique" ETFs with very unique philosophies and goals. There are ETFs that zero in on very specific industries or market sectors. There are ETFs that do elaborate things involving leverage, or track obscure indexes. For most investors, these ETFs are complicated and unnecessary.

"You can get as fancy as you want with it," said Charlie Harriman, a financial adviser at Cloud Investments LLC in Huntsville, Alabama. "We usually advise that investors stick with the staples and things they know."

3. It's Too Risky

Some of the unique ETFs mentioned above are designed to generate big returns in some cases, but there's a huge downside if markets go south. Some ETFs use leverage to potentially amplify returns by two or three times an underlying index — thus, they can amplify losses during downturns. The average investor who is saving for the long term does not need to take on additional risk with ETFs that are designed for short-term trading.

4. It's Too Conservative

It's important that your investments match up with your financial goals. This means that if you're a young investor, you probably don't need a bonds ETF, or an ETF with low-growth dividend stocks. These types of ETFs may help you avoid a big loss during a market downturn, but you'll never be able to amass the kind of wealth you need in retirement unless you get a bit more aggressive.

5. Its Holdings Overlap With Other Things You Own

Diversification is great, but sometimes you can go overboard. When you invest in an ETF, you are getting exposure to a wide range of stocks, and there may be other ETFs with similar holdings. For instance, an ETF that tracks the overall stock market may own a good chunk of Apple stock, and a tech-focused ETF may own a lot of Apple stock as well. So it may not necessarily make sense to own both. Be sure to check the list of holdings for each ETF you own in order to avoid redundancy in your portfolio.

6. You Can't Trade It for Free

Many discount brokerage firms allow account holders to trade certain ETFs without paying a commission. For example, Fidelity allows fee-free trades for all ETFs offered by iShares. By eliminating this commission, you could save upward of $7 on every stock purchase, which is a lot of money if you make frequent purchases. This is particularly advantageous for younger investors who prefer to invest a little at a time rather than one large sum.

If you're looking at an ETF to buy but it's not available without paying a commission, consider switching to a similar ETF that is. If your broker does not offer commission-free trades on ETFs, maybe that's a good excuse to switch brokers.

7. It Doesn't Track an Index Very Well

Many ETFs are designed to track a specific benchmark index, such as the S&P 500 or Russell 2000. If they do what they are supposed to, your returns will be closely aligned with the performance of these indexes. But some ETFs do it better than others. It's easy to find an ETF's "tracking error," which measures the difference between an ETF's performance and the benchmark it's supposed to be tracking. Most ETFs will have a tracking error of less than a tenth of a percent.

"If you see a high tracking error, this could work out to an investor's benefit, but it may also be to their detriment," Halverson says.

8. It's Not Traded Very Heavily

The only way an ETF is sold is if there is a buyer. Likewise, you can't buy a stock if no one is selling. With most ETFs, it's easy to buy and sell because there is a large trading volume — meaning that there are plenty of buyers and plenty of sellers. And when there is a high volume, there is rarely a big spread between the "bid" and the "ask" prices. But what happens if an ETF has a low trading volume?

Halverson said this could mean that the ask and bid prices are far apart, and it may be hard to complete a sale at the price you want. Most investors, he said, will find it easier and better financially to trade ETFs that are more commonly traded.

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7 Reasons You Shouldn't Invest Like Warren Buffett

Tim Lemke — Thu, 22 Sep 2016 09:00:05 +0000

Warren Buffett is, by most accounts, one of the most successful investors in history. The CEO of Berkshire Hathaway has amassed billions of dollars (more than $65 billion, at last count) through his savvy understanding of corporations' performance and the stock market.

But investing like Warren Buffett isn't easy, and an examination of Berkshire's holdings indicates that average investors might not necessarily benefit by following his every move.

Here's a look at some reasons to avoid investing like Warren Buffett.

1. Because You Can't

We can all try to invest like Warren Buffett, but at a certain point it will be clear that he can do things that us mere mortals can't. Buffett has access to information that most people wish they had. He's super wealthy, so he can buy shares in much larger quantities and take risks that we simply can't. He has mountains of cash, and the reputation to cut deals that we can't make. He has access to different types of investments (preferred stock, venture capital) that are often unavailable to non-wealthy people. It's possible to follow his general approach to investing, but at a certain point it's nearly impossible to do what he does.

2. His Goals Aren't the Same as Yours

The average person should be investing with long-term growth in mind, focused primarily on building a large retirement fund. An older investor might invest for income through dividend stocks and bonds. Berkshire Hathaway's investment motives, however, are far more complex. While it is focused on building wealth over the long-term, it also makes decisions to please its shareholders in the short-term. It makes acquisitions that don't make sense immediately, but have a broader strategic value.

3. He's Not Very Diversified

Berkshire Hathaway is a large and sprawling company with investments in a wide range of industries. But most of the company's holdings are still comprised of a handful of companies. More than half of the company's value is tied up in its stakes of Kraft, Coca-Cola, Wells Fargo, and IBM. Nearly 40% of Berkshire's portfolio stems from the consumer staples sector, while another 30% is tied up in financials. Meanwhile, the company has relatively small investments in major sectors including health care, energy, or telecommunications.

4. He Sometimes Invests With His Heart, Not His Head

Yes, even Warren Buffett is known to invest with his heart rather than his head. Not all of his investments are unemotional and purely driven by cold facts. Consider his affection for Coca-Cola. (He's known to drink several Cokes a day.) While it's true that Coca-Cola is one of the stock market's great success stories, it's actually underperformed the broader stock market over the last five years. Despite this, Buffett's Berkshire Hathaway has about 400 million shares of Coca-Cola, or 9% of the company.

5. He's Missed Out on Technology

When tech took off in the 1990s, Warren Buffett was not on board. No big investments in Microsoft, Apple, or Cisco. And he's also declined to invest in recent tech success stories including Alphabet (neé Google), Amazon, Netflix, or Facebook. He is a big investor in IBM, but bought shares late in the game and the company has had several years in a row of declining revenues.

Buffett has said he hasn't invested in tech because he doesn't understand it. While it's wise to avoid investing in something you don't understand, it also means he's missed out on some big gains over the years.

6. You're Better Off With Mutual Funds and ETFs

Warren Buffett is a great stock picker. His Berkshire Hathaway is a sprawling firm with investments in a wide range of companies in various industries. But for most people, it's foolish to try to invest in individual companies and expect to beat the broader stock market. It takes a lot of work to assemble a well-balanced portfolio if you're buying individual stocks. Mutual funds and exchange-traded funds offer the ability to invest in the broader stock market without worrying about share prices of individual companies.

7. He's Too U.S.-Centric

There's nothing wrong with betting on America and its companies. But a well-diversified portfolio should also have a good amount of international exposure, and Warren Buffett has tended to invest heavily in U.S.-based companies while ignoring the potential growth from overseas firms.

The suggested amount of exposure to international and emerging market stocks varies depending on the investor's age and goals. But Morningstar's Lifetime Allocation Indexes are one possible guide. These indexes, which offer a mix of investments appropriately balanced for a person's retirement age, have between 10% and 40% invested in non-U. S. stocks. Morningstar suggests holding more international stocks the further you are from retirement.

Warren Buffett hasn't eschewed international investing entirely, as Berkshire Hathaway does have holdings in European insurance companies and recently bought a German motorcycle accessory manufacturer. And some Berkshire holdings, including Coca-Cola and IBM, do have a significant overseas presence. But many of Berkshire's top holdings, including U.S. Bancorp, Wells Fargo, and Charter Communications, offer very little international exposure.

This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Signs Your Retirement Is on Track

Tim Lemke — Thu, 28 Jul 2016 09:00:11 +0000

You feel like you're a diligent saver, and are doing all you can to ensure you have a comfortable retirement. But how do you know if you're doing things right? It's hard to predict how much money you'll need, and it seems impossible to know if you're on the right track when retirement is years or even decades away.

Thankfully, there are some easy ways to tell if your retirement planning is sound. If your portfolio has most or all of these characteristics, keep up the good work and don't fret!

1. Most of the Funds Are in Tax-Advantaged Accounts

When saving for retirement, it's important to place your money in accounts that shield you from paying unnecessary taxes. A 401K is a common plan offered by employers that allows you to contribute and invest in a variety of different mutual funds. Any money you contribute will be deducted from your taxable income. It's also possible to invest in a Roth IRA, which allows you to invest and avoid paying taxes on any gains. If all or most of your money is in these accounts, you'll be saving thousands of dollars and will have a much higher net return on your investments.

2. You've Been Contributing Heavily

It's hard to know exactly how much you should put into your retirement accounts, but "as much as you can" is usually good advice. If you're maxing out your allowable contributions to 401K or IRA plans (or both), you're probably doing quite well. For 401K plans, you can contribute up to $18,000 annually. IRA plans can accept $5,500 in contributions each year. Even if you're not maxing out these accounts, contributing enough to take advantage of your employer's match of 401K contributions is one good threshold to hit. As much as people like to talk about stock market gains helping them get rich, the truth is that your portfolio's value is helped a lot more by the amount you're contributing in the first place.

3. You've Seen Steady Growth Over Time

Take a look at your portfolio's performance on a line chart. Are you generally seeing an upward trend, without a lot of wild ups and downs? Does it seem like your savings is steadily growing over time, even during periods when the stock market is not doing well? A good retirement portfolio should generally be free of volatility, and see steady gains as time goes on.

4. Your Projections Look Good

No one knows how the stock market will perform in the future, but you can make some reasonable assumptions based on historical market returns. The S&P 500 has seen average annual growth of about 7% since 2006, and annual average gains are even higher the farther you go back. If your portfolio's performance has been in line with these annual averages, you're probably in good shape, as long as you're contributing a significant amount.

It may be possible to project how much money you'll have in retirement by taking the amount you have now, then adding your contributions and the annual average return through your retirement year.

5. Your Investments Are Focused on Growth

Unless you are close to retirement, your portfolio should be heavy on investments that promise growth over the long term. This means a big dose of stocks, rather than bonds or cash. Small cap and value stocks should be a driver of most retirement portfolios, as they often promise the most growth potential.

It's tempting to want to be conservative with your investments, because stocks can be risky, and no one likes to feel vulnerable to a bad day in the stock market. But building a large retirement next egg requires you to overcome your fears and recognize the positive historical returns of stocks.

6. Your Portfolio Is Well-Balanced

It's always a good exercise to examine your investments to see if you are too heavily invested in any one sector or asset class. Sometimes, your portfolio can get out of whack, and will require rebalancing of your assets. If you are working hard to keep your investments nicely balanced, you'll likely be shielded from any major swings in the market and should see solid growth over time. There is one caveat here, which is that buying and selling during rebalancing could have tax implications, so you'll want to weigh the costs and benefits each time you're considering it.

7. You're Not Paying Too Much in Fees

A robust retirement portfolio should probably contain some mutual funds and/or exchange traded funds (ETFs). But these investments often come with management fees, commissions, transaction fees and other costs. A typical investor pays about 1.5% in fees, according to Rebalance IRA. That could add up to thousands of dollars over time. To avoid losing money to fees, look for investments with very low expense ratios, and those that trade without a commission. Low-cost investments often outperform those with higher expense ratios anyway. So if the costs in your retirement portfolio are low, that's one more thing you're doing well.

8. You Haven't Spent Any of It

There may be times in your life when you'll be tempted to withdraw money from your retirement accounts to pay for other expenses. There's a cost to doing this; any money taken early from these accounts is subject to being taxed, and you'll have to pay a 10% early withdrawal penalty if you take money early from a 401K. And of course, on top of these penalties and taxes, you'll lose out on any future growth this money might have accrued. If you've been diligent about not touching your retirement savings early, you'll be in much better financial shape than if you had raided these funds.

How's your retirement looking?

This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Are You Choosing the Right Fund for Your Portfolio?

Matt Bell — Wed, 27 Jul 2016 09:30:36 +0000

With a market of over $30 trillion, mutual funds are some of the most popular investments. But the $3 trillion ETF (Exchange Traded Fund) market is catching up quickly. So, what are ETFs? How do they differ from mutual funds? And are they right for you? Here's what you need to know:

Mutual Funds 101

When you invest in an individual stock, the success of your investment is completely dependent upon the success of that one company. But when you invest in a mutual fund, your money is diversified. It's pooled with many other investors' money and then invested in many companies, based on the design of the fund or the decisions of the fund manager.

It's the same with bonds and bond funds, or real estate and real estate funds.

Think of an exchange-traded fund as a close cousin of a mutual fund. It, too, manages a pool of money from many investors, spreading it among many investments. But there are some very important differences between ETFs and mutual funds.

ETFs Are Priced Throughout the Day

When you enter an order to purchase a mutual fund, the order will fill at the end of the day, after the value of all of its underlying assets are tallied.

ETFs, on the other hand, can be bought and sold throughout the day like stocks. When you enter an order to purchase an ETF, your order will typically be filled very soon after entering the order at a price very close to the price you saw when you placed the order.

That's one of the main reasons why ETFs were created. On October 19, 1987, a day now known as "Black Monday," the U.S. stock market fell by nearly 23%. Mutual fund investors who wanted to sell their shares couldn't until all the damage had been done. Three years later, the first ETF was launched, giving investors all of the diversifying benefits of a mutual fund but the flexibility to buy or sell throughout the trading day.

ETFs Have Lower Expenses

Exchange-traded funds tend to have lower operating expenses than mutual funds, and that lower cost structure is passed along to investors in the form of lower expense ratios. For example, Vanguard's S&P 500 index mutual fund (ticker symbol VFINX) has an expense ratio of .16%. If you invest $1,000 in the fund, $1.60 will go toward fund expenses. That's already very low. However, if you invest in Vanguard's S&P 500 exchange-traded fund (ticker symbol VOO), you'll pay an even lower expense ratio of .05% — or 50 cents per $1,000 invested.

ETFs Have Lower Minimums

Many mutual funds have minimum initial investment amount requirements. Common amounts range from $250 to $3,000, but some funds require as much as $10,000.

With ETFs, the minimum investment amount required is the cost of one share. If you wanted to invest in Vanguard's VFINX mutual fund, you'd need to come up with at least $3,000 for your initial investment. However, getting started with what, in essence, is the ETF version of the same fund, VOO, would cost only about $190 — the price of one share when this article was written.

Which Is Better?

There are three main factors that can help you decide whether to go with a mutual fund or an exchange-traded fund.

Availability

You may not have a choice. Some 401K plans don't yet include ETFs in the investment options they make available to participants. If that's true with your workplace plan, you'll have to go with one or more of the available mutual funds.

Strategy

While the ETF universe is growing rapidly, there are still many more mutual funds. So, it could be that the investment strategy you're following calls for the use of a particular mutual fund and there are no suitable ETF substitutes.

Cost

If you're following an investment strategy that calls for the use of a particular fund that's available as a mutual fund or an ETF, check on each one's expense ratio. It's very likely that the ETF will cost less, making it the better choice.

One Last Consideration

Some critics say ETFs can get investors in trouble by encouraging more trading. They argue that because the funds can be bought and sold throughout the day, they'll tempt otherwise conservative investors to take undue risk and turn them into roll-the-dice day-traders.

But that's like arguing that because some people get into car accidents, no one should be allowed to drive. If you follow the rules of the road for wise investing — if you're a long-term investor, not a short-term trader — ETFs can be a very efficient, cost-effective investment vehicle.

So, which is it for you? Mutual fund or ETF?

This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Money Moves to Make as Soon as You Conquer Debt

Mikey Rox — Fri, 15 Jul 2016 09:00:17 +0000

Congratulations — you're debt free! Now what?

The road to debt elimination was long and treacherous, but just because the black cloud of lingering bills is no longer hanging over your head, that doesn't mean your financial house is in order. It's in better shape, sure, but you've still got a ways to go. To continue working toward that goal, here are a few smart moves you should make as soon as you get out of the red:

1. Rearrange and Trim Your Budget

Your top priority when getting out of debt is to not get back into debt. To accomplish that, you'll need to make changes to your spending and savings habits. You'll also need to revisit your budget and rearrange your priorities. Now that you don't have credit card or loan payments bleeding you dry every month, you'll have more disposable income — and you need to decide what you'll do with it to improve your quality of life and set yourself up for the future. Cut out anything that's unnecessary: Maybe it's the cable that you don't watch much of, the gym membership you don't use, or subscriptions to services you can live without. Whatever is it, cut the fat and don't look back.

2. Get Back to Building Your Emergency Fund

If you've been digging yourself out of a negative-money pit, chances are you don't have much of an emergency fund — and that needs to change ASAP. Building an emergency fund is the best way to avoid a potential debt scenario in the future. You'll be able to draw from that account to pay off life's little surprises in full, so you're not constantly treading water every time something unexpected happens.

"I recommend having an emergency fund saved up equal to six months' worth of expenses," says financial planner Russell Robertson of Alidade Wealth Partners in Atlanta, GA. "This will give you time to get back on your feet if something unforeseen happens without completely disrupting everything in your life."

3. Check in on Your Credit Situation

Brace yourself. If you've been battling debt for an extended period of time — especially if you've only being sending in minimum payments — your credit situation is likely less than ideal. The good news, however, is that you're in the clear now (debt-wise, anyway), and this is the best time to start rebuilding your credit.

Having a solid credit score puts you in a strong position when you need to finance a purchase, like a house or car, or apply for a new line of credit. It's always a good idea to know where you stand with credit and take steps to improve it.

4. Max Out Your Matching-Dollar Opportunities for Retirement

Like your emergency fund, contributions to your 401K and IRA were probably low (or perhaps even nonexistent) while you concentrated on paying down your debt. With more funds freed up now, it's important to start concentrating on your future — especially your retirement goals — and that includes maxing out dollar-matching opportunities to take full advantage of free money.

"401K plans in 2016 have a contribution limit of $18,000 a year, plus an extra $6,000 for people over 50, so with no debt to pay, you might have the opportunity to reach that limit now," says financial planner and investment adviser Jaycob Arbogast of Arbogast Advisers. "Similarly, an IRA has a $5,500 limit for people under 50 and a $6,500 limit for people 50-plus, so maxing out those plans might be a good idea too. For example, with a 6% return, adding an extra $5,000 each year to your retirement savings from age 50 to 60 could add an additional $65,000 to your retirement savings. That's a great boost that someone in debt might not be able to maintain."

5. Start Investing With Long-Term Returns in Mind

Personally, I recommend investing in real estate, but what you invest in is up to you, so long as you're investing. Outside of your emergency fund, your money should never sit in a savings account earning fractions of pennies. Instead, you'll be better off putting that money in places that promise bigger returns over the long term, so you can meet your savings goals sooner and continue making more investments for (hopefully) a more prosperous life.

Alternatively, Robertson recommends the stock market.

"If your budget still has room for more saving, put that money to work by investing in the markets," he advises. "Exchange-traded funds (ETFs) are a great way to get diversified, low-cost exposure, and many online brokerages will offer commission-free ETF options as well."

6. Put Money Back Into the Investments You Already Have — Like Your Home

For many people, their homes are their biggest investments. To ensure that investment pays off the way you want and need it to, you have to maintain it. Thus, when you've paid off your debt, start thinking about home improvement projects that will increase value. Just be careful that you're not taking on projects that cost more than the house is worth. The last thing you need is to dump your savings into your home if the project doesn't enhance the house enough to make it worthwhile in the long run.

7. Open a Money Market Account for Higher Interest on Savings

If you have a substantial amount of savings in your emergency fund — and you should — that money shouldn't be in a traditional savings account. Contact your bank, or research others, to find savings accounts that offer the best interest rates, like money market accounts or high yield savings. Bottom line, there's absolutely no reason you shouldn't be getting the most bank for your buck, especially where savings are concerned.

Robertson agrees, and in this particular case, rescinds his recommendation to invest in stocks.

"If there is something specific you are saving up for — a celebratory trip to Europe? A wedding? — within the next two to three years, I would recommend keeping that money out of the stock market," he says. "Instead, consider a money market account or CD from an online bank. In many cases you can get close to 1% interest right now on cash that is still guaranteed up to FDIC limits (currently $250,000). In fact, this is a good idea for that emergency fund as well — something that earns interest and is separate from your everyday checking account."

What else should the newly debt-free do with their money?

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This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

You're Wasting Up to $42,532 by Not Investing Your Gasoline Savings

Damian Davila — Mon, 02 May 2016 09:30:25 +0000

Gas prices are as low as they have been in a long time. In April 2016, the U.S. Energy Information Administration (EIA) forecasted that the average full price of regular grade gasoline will be lower in July 2016 ($2.07 per gallon) than at the same time last year ($2.79 per gallon).

That means the average American will save about $1,000 on gas this year. But unless you're banking those gas savings, you're wasting an opportunity to improve your financial situation. That's because money saved and invested compounds over time, and a mere $1000 could turn into tens of thousands, instead.

Here is why you're wasting up to $42,532 by not making smart use of your gas savings.

Make an Investment

Among the best pieces of financial wisdom from Warren Buffett is, "someone's sitting in the shade today because someone planted a tree a long time ago." Whether it's by dining out more often or buying more clothes, spending that extra $1,000 per year instead of saving or investing it is a decision that your future self will regret dearly.

Today is the best day to start an investment, even if it's with a small amount. If you were to invest $83.33 every month (about $1,000 a year) for 20 years in an online high-yield savings account with a 1% annual interest rate, you would have a total of $22,137.21 at the end of the 20-year period.

With such a long-term investing period, you would do even better with alternate forms of investment. For example, if you were to make the same string of deposits in an investment account paying a 4% annual rate of return, your investment would be worth $30,418.19 at the end of the 20-year period.

Of course, you would do best by putting that series of monthly $83.33 deposits in an exchange-traded fund (ETF), which is a marketable security tracking a market index, such as the S&P 500 or Russell 2000 indexes. The historical average annual return for the S&P 500, adjusted for inflation is around 7%. So, if you were to put $83.33 every month in an ETF tracking the S&P 500 for 20 years, you would end up with $42,532.14 after 20 years before applicable fees or taxes.

Making a consistent monthly deposit over a long period of time allows you to leverage the power of interest compounding, making the most of your gas savings.

Pay Down High-Interest Debt

Of course, you may want more immediate gratification with your gas savings. By using your gas savings to pay more than your minimum monthly payment on high interest credit cards, you can potentially save up to a few thousands of dollars every year.

Let's assume that you have a total balance of $4,534 on a credit card with a 25.24% annual percentage rate (APR) and that your monthly minimum payment is $140.56. By making only the minimum payment, you wouldn't pay off the total card balance for 18 years, and would end up paying an estimated total of $12,592!

By just increasing your monthly payment an extra $40.44 (about half of the estimated gas savings), you would pay off the credit card in only three years and save an estimated $6,081.

Another reason to pay down those high-interest credit cards is that those interest payments aren't tax deductible. Unlike your interest payments on mortgages, home equity loans, and student loans, your interest payments on credit cards or auto loans offer no tax advantage.

The Bottom Line

Gas prices will eventually go back up. For now, the EIA predicts that the average retail price for U.S. regular grade gas will be around the $2 mark until December 2017. Make the most out of your gas savings for the next year by investing the extra cash or paying down your high-interest debt.

What are other ways to make the most of your gasoline savings?

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

A Beginner’s Guide to Investing in Frontier Markets

Damian Davila — Thu, 21 Apr 2016 09:01:08 +0000

For many years, investors were able to capitalize in the accelerated growth of emerging markets, such as Brazil and China. However, the economic problems in Greece and China have demonstrated that some emerging market economies are experiencing a slower rate of growth and, in some cases, facing substantial economic roadblocks.

Seeking alternatives for emerging markets, some investors are turning to so-called "frontier markets." While less developed than emerging nations, frontier market nations are experiencing such accelerated growth that they may provide aggressive returns to investors willing to take on the risk.

What Are Frontier Markets?

While there are many lists detailing what countries are considered frontier markets, the MSCI market classification is the most widely accepted. The MSCI Frontier Markets Index is made of 120 stocks from 23 frontier economies, including Argentina, Lithuania, Nigeria, and Sri Lanka. With 500 stocks from 34 frontier markets, the S&P Frontier BMI is another index that provides a comprehensive benchmark of the frontier market economy as a whole.

Frontier markets are characterized by their high volatility. For example, the MSCI Frontier Markets Index had a 72.74% annual gain in 2005 — and a 54.10% annual loss in 2008. Investors seeking potentially high returns in frontier markets need to understand that they will be facing higher risks, such as large currency fluctuations, political instability, and unfamiliar — or relaxed — regulatory systems.

Why Frontier Markets Matter

Despite the higher risks, many companies are investing in these markets for the long run. One example is the Coca-Cola Company.

Coca-Cola has substantial investments in heavy soda-drinking nations in developed markets, such as the United States and Belgium, and emerging ones, such as Mexico and Brazil. However, frontier nations are the ones promising the most growth for the beverage company.

In 2014, Argentinians consumed the most soft drinks per capita in the world, a whopping 154.6 liters. That's one liter per person more and 18 liters per capita more than U.S. drinkers (#2 on the list) and Mexican drinkers (#4 on the list) purchased in the same year. This explains why Coca-Cola's CEO pledged to invest $1 billion in Argentina over a four-year period starting in 2016.

Vietnam is another frontier market of interest to Coca-Cola. Over the 2013–2015 period, the southeast Asian nation was one of the world's fastest growing markets for the brand. It has been estimated that the consumption of soft drink liters per capita in Vietnam increased by over 105% over the 2009–2014 period.

Just like Coca-Cola, many other domestic and international companies are interested in frontier market nations. Even governments recognize the importance of increasing trade relations with up-and-raising developing nations. For example, the Trans-Pacific Partnership (TPP) trade agreement signed in February 2016 aims to lower trade barriers between 12 nations, including Vietnam.

How to Invest in Frontier Markets

For the average individual investor, buying stocks in individual companies trading in frontier market stock exchanges may prove impractical for several reasons.

Trading volume for frontier market stocks is generally lower than that for U.S. stocks, which produces more volatility and prevents efficient market transactions.
Finding "winners" is very challenging for individual investors without connections in those markets. Many investors can track the price of Bao Viet Holdings, the largest insurance company in Vietnam and the seventh largest listed company by market capitalization in that nation, but very few can name stocks in Estonia or Kenya.
Less-developed nations are still working on implementing international financial accounting standards, putting investors in the dark about the latest developments.

Therefore, the average investor has three main ways to invest in frontier markets.

1. U.S Companies Focusing on Frontier Markets

First, an investor could invest in U.S.-traded companies that have strong interests in frontier markets. Besides Coca-Cola [NYSE:KO], Facebook, Inc. [NASDAQ:FB], and Apple, Inc. [NASDAQ:AAPL] are other companies eyeing those fast-growing nations.

Facebook is working hard on increasing its presence in frontier nations. Through its 2G Tuesdays initiative, Facebook engineers are learning how to adapt the features of the social network app to work seamlessly even on a 2G Internet network. Also, Facebook is offering free Internet access to cellphone users in Kenya, Bangladesh, and Pakistan and working on reaching similar agreements with cellphone carriers in other frontier markets.
Trying to diversify its Asian portfolio, Apple opened a subsidiary company in Vietnam back in 2015 with an investment of 15 billion Vietnamese dong (over $670,000). In 2014, sales of Apple's products in Vietnam grew five times faster than in India. Beyond Vietnam, Apple is looking to expand in other frontier markets.

2. Frontier Market Exchange-Traded Funds (ETFs)

Frontier market ETFs allow investors to include frontier stocks in their investment portfolios. For example, the iShares MSCI Frontier 100 [NYSE Arca:FM] tracks the MSCI Frontier Markets 100 Index and holds over $408.70 million in net assets as of March 2016. By meeting minimum liquidity standards, ETFs allow investors to liquidate their positions with more ease when necessary. (See also: 10 Questions to Ask Before You Sell a Stock or a Fund)

3. Mutual Funds Focusing on Frontier Markets

Structured and maintained to meet the demand of investors interested in frontier markets, mutual funds focusing on frontier markets seek to produce capital gains from stocks traded in less developed exchanges. Some examples are the Templeton Frontier Markets [MUTF:TFMAX] and the Wasatch Frontier Emerging Small Countries Fund [MUTF:WAFMX].

Investors who are particularly bullish in individual nations should consider ETFs and mutual funds focusing on specific frontier nations.

The Bottom Line

To compensate for slower growth in developed and emerging markets, investors can look into frontier markets. By investing in U.S. publicly traded companies, ETFs, and mutual funds focusing on frontier markets, individual investors can access these markets with better liquidity and more diversification. However, an individual investor should assess applicable fees for such investment vehicles, understand the higher risk involved in such investments, and limit the exposure to a number that is consistent with the investor's overall objective.

How are you investing in frontier markets?

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Things Everyone Should Know About the Commodities Markets

Tim Lemke — Thu, 14 Apr 2016 10:01:03 +0000

It's common in the investment world to hear a lot about commodities. These are things like oil, soybeans, gold, and even cattle, which can be bought and sold on exchanges, similar to stocks.

The price of commodities plays a big role in our economy, from how much it costs to fuel our cars, to the price of a gallon of milk. It's possible to earn money trying to predict how the price of these commodities will move, although it can be risky.

Investing in commodities is not for beginners, but it's helpful to know some of the basics of how they work and how they may impact other parts of your portfolio — and even your day-to-day life.

1. There Are Four (or Three) Basic Groups of Commodities

Commodities can be lumped together in an infinite number of ways, but are generally placed in four groups:

Energy (Things like oil and natural gas)
Metals (Gold, silver, platinum, zinc, etc.)
Livestock and meat (Cattle, pork bellies, hogs, etc.)
Agricultural (Corn, soybeans, coffee, and so forth)

Some people like to group agricultural and livestock together. But no matter how they are categorized, it's possible to invest in certain groups of commodities through funds and ETFs that track specific commodity exchanges.

2. The Chicago Mercantile Exchange Is the Place

We all know the New York Stock Exchange and NASDAQ as the places to buy and sell traditional stocks. But for commodities, the world's largest exchange is the Chicago Merc or CME, located on Wacker Drive. About 80% of the trades on the CME are done electronically, but a portion still come from "open outcry" in which traders stand in a "pit" and call out orders, prices, and quantities.

3. They Are Volatile

If you're looking for slow and steady growth, commodities aren't for you. In fact, volatility is pretty much the norm, and it's gotten worse in recent years. A report from consulting firm Deloitte said that several commodity groups including oil, natural gas, coffee, and copper, have seen price increases of 30% to 60% over a three to six month period. And between 1997 and 2012, there were far more extreme price changes than the previous 15 years.

4. Commodities Are Impacted by the Dollar

Just about every aspect of the world economy is impacted by currency values in some way, but commodity prices are especially sensitive. That's because commodities are often priced in dollars around the world due to faith in the American economy. In the U.S., a strong dollar usually means low prices for commodities. And the inverse is true; it will take more dollars to buy commodities when the value of the dollar goes down, so commodity prices go up as well.

5. Weather and World Events Can Affect Commodity Prices

Commodity investors often find themselves becoming experts in meteorology and world affairs, because of the various things that can impact commodity prices. Maybe it's a drought in the Southeast United States that has taken out soybean crops. Or perhaps the threat of a hurricane that could temporarily shut down oil refineries. Everything from floods to flies to civil war can impact the supply of certain goods, thus impacting prices.

6. It's Okay for Your Portfolio to Have Commodities, But Not Too Many

Many financial advisers suggest holding commodities along with stocks, bonds, and real estate as part of a diverse portfolio, particularly if your nest egg is large. But keep in mind that commodities don't pay dividends or interest, and very few have a terrific track record of gains over the long term. Charles Rotblut of the American Association of Individual Investors told the Wall Street Journal that most investors should only consider investing in commodities after having the basic allocations down. In the same publication, Rick Ferri, an advocate of low-cost index fund and ETF investing, called commodities "dead money" and said most people would be better off without them.

7. You Can Invest in the Future With Commodities (Sort Of)

Investors who want to avoid some of the risk of commodity price fluctuations can buy something called a "futures contract," which is essentially an agreement to buy or sell a commodity at a certain price at a certain date. Investors who are sellers get to lock in prices this way. Investing with commodities futures is not for inexperienced investors, as it requires a certain amount of cash up front and often involves the borrowing of money, or leverage. It is easy to lose a lot of money in a short amount of time this way.

8. It's Possible to Have Commodities Exposure Without Owning Commodities

If you don't feel comfortable trading commodities futures or owning commodity ETFs, you can buy shares of stock in companies that work with those commodities. For instance, an investor can buy shares of a company involved in gold mining, or in producing equipment for oil fields. By going this route, it's possible to diversify your portfolio with exposure to commodities, but avoid some of the volatility.

Are there any commodities in your portfolio?

This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Ways "Boring" Investments Make Life Exciting

Qiana Chavaia — Mon, 01 Feb 2016 14:00:04 +0000

To jump-start 2016, I resolved to get physically fit by joining DailyBurn with celebrity trainer Bob Harper. Based on my target goals, the program began with BlackFire, a strategic fitness program of diverse routines designed to make your muscles burn and push your body beyond its limits. But exotic training programs like these can deplete you and only work when balanced by proper nutrition and diet.

The same is true for investing — going too exotic is not good for your portfolio and can throw you off balance. Mixing things up by adding in some "boring" investments can offer steady growth and offset the possibility of market volatility. And if you're like most of us, keeping and growing your money can provide more real excitement than any fad or risky investment.

Here are four ways "boring" investments make life more exciting.

1. Less Market Volatility

The markets are down these days and some investors are in a frenzy. But instead of abandoning ship, like many people do, try balancing your portfolio with asset classes that carry less risk. This is the number one way boring investments are more exciting — because during times of panic, you don't have to. Review your allocation strategy accordingly.

Another plus: When you avoid assuming unnecessary investment risks, you'll have more money on hand to take calculated risks and profit when riskier investments fall.

2. Cost-Efficient

Boring investments cost less due to their lower total expense ratios. Traditional mutual funds are actively managed and indexed mutual funds have administrative fees costing slightly more than ETFs, but both are substantially more cost-efficient in comparison to individual stocks. Morningstar Investment Research estimates the average asset-weighted mid-growth index mutual fund costs 0.39%, while ETFs average 0.23%. (See also: The Top 5 ETFs You Should Buy Now)

This cost efficiency adds up over time, saving you thousands of dollars over a lifetime of investing. And you know what's exciting? Having more money at the end of the day.

3. Tax-Efficient

Maximizing your portfolio's tax efficiency can save you big bucks. As an example, one common strategy to offset capital gains is tax-loss harvesting, which offsets profits with tax deductions on losses (up to $3,000 annually). Another "boring" investment that can help you save on taxes is municipal bonds. The income payouts from muni bonds are exempt from federal, state, and city tax. And "boring" investments like ETFs and mutual funds have less turnover since they are passively managed, making them tax-efficient.

(For 2016, the maximum capital gains tax is 20%. How much you pay depends on your income. If you're in the 10% to 15% marginal tax bracket, or a person who has earned below $50,400 (head of household) or $75,300 (joint filers), you will owe zero tax on income derived from the sale of securities.)

4. Hands-Free Investments

Don't find investing all that exciting, in general? Then consider hands-off investments such as target-date ETFs or mutual funds which free you to do whatever really excites you with your time. Or, consider using a low-cost robo-advisor to manage your money for you. Then all you have to do is sit back and watch your money grow. (See also: Should You Trust Your Money With These 4 Popular Financial Robo-Advisers?)

What boring investments do you find thrilling?

This article is from Qiana Chavaia of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: