Investment

How to Stay Calm During a Market Fluctuation

Emily Guy Birken — Mon, 02 Nov 2020 17:32:44 +0000

The last few weeks, I've been covering my eyes before I look at my investments, and only peeking through my fingers — as if I'm facing Freddy Kruger rather than a series of numbers. It doesn't help that the financial headlines are full of frightening potential futures: a possible recession, trade wars, and potential market corrections.

It's enough to make me want to take all of my money out of my investments and put it somewhere safe, like my mattress.

But no matter how overwhelming a market fluctuation may be, I also know that pulling my money out of the market is the worst thing I could do when my portfolio is trending downward. That's because the only way to guarantee that momentary losses become permanent is to sell.

Of course, knowing that you should stay the course is a lot easier said than done. If you're tempted to cut your losses when you hear gloom-and-doom financial predictions, it's especially important to learn how to keep your cool. Here are some ways you can stay calm when the market is scary.

Remember that it's okay to hide

Hiding your head in the sand gets a lot of flak, but there are times when it really is the best course of action. That's because of a cognitive bias that prompts us to take action in response to fear. We feel as though doing anything, even if it is counterproductive, is preferable to sitting around doing nothing. But listening to the action bias is the reason why people sell when the market is at its lowest and buy when it's at its highest. They're afraid of doing nothing.

Since it's nearly impossible to overcome the voice in our heads shouting at us to "Do something!" when the market is falling, the easier method of overcoming the action bias is to simply ignore your portfolio.

Of course, that doesn't mean you should never check on your holdings. However, obsessively consuming financial news and checking your portfolio on a daily basis will lead you to making fear-based (or greed-based) decisions, rather than following your rational investing strategy.

Instead, plan to check how your investments are doing on a regular schedule — either every month or every quarter. This will give you the information you need to keep your asset allocation balanced and make necessary changes, without falling victim to the action bias. (See also: 5 Ways to Invest Like a Pro — No Financial Adviser Required)

Take comfort in history

Although the phrase "past performance is no guarantee of future results" is all but tattooed on the foreheads of every stock market analyst and financial planner, there is good reason to look at the past performance of the market as a whole. If you study the long-term trends and overall historical returns, you'll see that markets inevitably trend upwards.

Knowing that the market will recover does not make the short-term losses and volatility any more fun to live through, but it is easier to put any momentary losses you're experiencing in context. Savvy investors who didn't panic through the market corrections of 2000 and 2008 saw their portfolios recover over time. As stressful as any decline may be, trusting in a solid investment plan and the long-term historical trends of the market can help you stay the course and feel confident that you and your money will get to the other side. (See also: How to Prepare Your Money for the Coming Economic Slowdown)

Make a volatility plan

One of the reasons why we tend to overreact to volatility is because we forget that it's a natural part of financial markets. Market downturns are normal, and we should expect to live through several of them in a long investing career. However, we often expect that markets will only go up. With that kind of expectation, even a minor dip can feel overwhelming.

A good way to counteract those expectations (and the resulting fear when they're not met) is to create a plan for what you'll do during a downturn.

Your volatility plan could be as simple as committing to your head-in-the-sand strategy for downturns. Knowing ahead of time that you'll reduce your portfolio check-ins when things are looking grim can help you stick to that plan.

Your plan can also be proactive, rather than just reactive. Since you know that market downturns are normal and natural, decide ahead of time how you'll incorporate these fluctuations into your investing strategy. You might decide to purchase more investments during a downturn, rather than see it as something to fear. (See also: 7 Easy Ways to Build an Emergency Fund From $0)

Don't panic

Human beings are not wired to be rational investors, which is why we tend to be so bad at it. Our emotions can get the better of our rational strategies, especially when we're feeling afraid. But selling your investments because of market volatility and scary headlines is using a permanent solution for a temporary problem.

Think through how to respond to frightening market changes before they happen. Then you know that you already have a plan to fall back on, and you're less likely to simply react out of fear.

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

How to Get Your Kid Started With Investing

Carrie Kirby — Sat, 08 Aug 2020 17:32:44 +0000

My daughter recently lost $80 in her bedroom. It's just gone. One theory is that we accidentally donated it to Goodwill, since she had stored it in an old book and we'd been clearing out a lot of junk. But it got me thinking: What would be a better place to keep money she's not using?

She's been bringing in some respectable allowance earnings with the chores she's taken on recently. Plus, she always receives some money for birthdays, and she doesn't spend much. Maybe an investment account?

While the investing rules are a little different for minors compared to adults, it's not hard to get your child started investing. Even if they only make a little money, the experience may encourage them to start investing for retirement early in adulthood, which can set them up for life. Here's how to show your kid the basics of investing.

Determine what kind of account to set up

Children can set up savings, checking, or brokerage accounts using the Uniform Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA). All they need is an adult (presumably you) to sign on as the account's custodian. This means you have to approve what your child does with the money until your kid is of age, which is 18 or 21, depending on what state you live in. Because the funds or investments in a UTMA legally belong to your child, once they're in this account, they can only be spent for your child's benefit. You can't deposit $100 in your child's UTMA account and later decide you want it back or transfer it to another child.

Setting up a UTMA account is much like setting up any other account. You can walk into a bank or credit union and open one for your child by filling out some paperwork and showing your identification, or you can go online to sign up for one with a firm such as Vanguard.

Your child could also set up a UTMA 529 savings plan. The 529 is a college savings vehicle that has tax advantages, but also comes with restrictions on how it can be spent. More on that below.

Aside from a traditional brokerage account, your child could also try a micro-investing account, since they're likely to be starting with a small amount of money. You can set up a custodial account through Stash or Stockpile — in fact, Stockpile even works with BusyKid, an app that helps families track kids' chores and pay their allowances digitally.

Besides an investment account, you may also need to open a checking or money market UTMA for your child and link it to the brokerage account, as a way to fund the brokerage account and a place to receive dividends and other proceeds.

Unless they have earned income from working, your kids can't set up a traditional or Roth individual retirement account. (See also: 9 Essential Personal Finance Skills to Teach Your Kid Before They Move Out)

Figure out what investment vehicles to use

Once their account is set up, kids have access to the same investment products that adults do, such as mutual funds, individual stocks, or exchange-traded funds. Which products they choose depends on their interests, how much money they have to start with, and how actively they wish to invest.

A child who is interested in following one or more companies in the news and making active investment choices may want to buy individual stocks. Look for a brokerage firm with no minimum initial deposit (or a low one) and low trade fees. While this is a concrete and exciting way to start understanding the stock market, make sure that kids understand that for the long haul, many financial advisers recommend investing in funds over individual stocks.

If your child doesn't have any individual companies in mind, but would like to invest in the market as a whole, a mutual fund such as an S&P 500 index fund is a great way to go. Good ones have low expenses, meaning that your kid gets to keep more of his/her investment. Unfortunately, mutual funds do tend to require minimum investments. For instance, to buy shares in Charles Schwab's often-recommended S&P 500 index fund, you need to open a Schwab brokerage account with a $1,000 initial deposit. However, there is one way around that: You can also open a Schwab account with a $100 deposit — but you have to deposit an additional $100 each month until the account has a $1,000 balance.

Your child could also buy exchange-traded funds, which work a lot like mutual funds but tend to have lower minimum investments.

Another way to get started with a small initial investment is to use one of the micro-investing apps mentioned above, which split one share of stock or of an ETF and sells the investor a fraction of it. These apps can make getting started very simple for young kids by characterizing investments by category. In exchange for making things this simple for you, these services usually charge a monthly fee; Stash's is $1 per month.

While your child could also opt to invest in Treasury bonds or certificates of deposit, at today's low interest rates, this probably wouldn't be a very exciting way for them to learn about investing.

What about taxes?

Does your child have to pay taxes on their investment gains? Do they have to file their own tax return? The answer to both questions is, "It depends."

If your child's investment income is less than $1,050, don't worry about it; you don't need to report this to the Internal Revenue Service. If the child's investment income is less than $12,000, the parent can opt to report it on their own tax return, or file a separate return for the child. At more than $12,000, you have to file a tax return for your child.

What rate will your kid pay? Unearned income up to $2,100 will get taxed at between 0 percent and 10 percent, depending on what kind of income it is. After that, your child's unearned income will be taxed at your rate, no matter if you file separately or together. So don't imagine that you can save a bundle on taxes by transferring all your investment accounts to your kids — the IRS caught on to that gambit years ago.

If your child chose to put their money in a UTMA 529 plan, they never have to pay federal taxes (and generally not state taxes either) on the earnings, as long as they spend it on qualifying educational expenses, such as tuition and textbooks.

Will investing hurt their chances of getting college aid?

It's important to note that when it's time to apply for college financial aid, assets in the child's name count against them more than assets in the parents' name. Unless you're sure your family won't qualify for financial aid — and outside of the 1 percent, that's not usually something you can be sure of in advance — encourage your child to choose shorter-term goals for their investment account. They could choose a goal of anything from buying a new Lego set, to a week of sleep-away camp, to their first car.

Again, putting their investments in a 529 plan changes the situation a bit. Even if the child is the account owner, the financial aid officers consider assets in a 529 account a parental asset. This is great, because only about 5 percent of parental assets count against financial aid eligibility, compared to 20 percent of student assets in a non-529 UTMA account.

If your student does invest college savings in their own name, have them spend their own money first before you tap into a 529 plan or any other savings you are holding for their education.

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

The 6 Best Ways to Invest Just $100 Per Month This Year

Holly Johnson — Fri, 07 Feb 2020 09:00:10 +0000

The new year is the perfect time to ditch poor financial habits and pick up some new ones. Maybe you decided that this is the year you'll finally pay off high interest credit card debt, or perhaps you're using a budget for the first time in your life. Whatever your goals are, you probably know that it will take time and perseverance to get there.

But how should you invest your money? If you have an extra $100 per month to spare, there's more than one way to build wealth and finally get ahead.

We reached out to financial advisors to find out how they would invest an extra $100 per month in the new year, and here's what they said.

1. Bump up your 401(k) contributions

Colorado financial planner Mitchell Bloom of Bloom Wealth says your workplace 401(k) is a good place to start if your employer offers one, and particularly if you can qualify for an employer match. After all, an employer match you can qualify for is the closest thing to "free money" you'll ever receive at work, so you might as well take advantage.

You can strive to boost the percentage of your 401(k) contributions in order to funnel approximately $100 more into your account each month, but you may also be able to set aside a flat $100 in funds monthly if your workplace plan allows.

Either way, money in a 401(k) plan can grow tax-free and compound over time, and you won't have to pay taxes on distributions until you reach retirement age.

Also note that if you don't have a workplace retirement plan, all isn't lost.

Instead, you may want to "consider using a low-cost advisory firm like Betterment, where they will build a fully diversified globally allocated portfolio model with fractional shares so you can achieve diversification with a small investment amount," says Bloom.

2. Save $100 per month in a Roth IRA

Jeff Rose of Good Financial Cents says that consumers can also consider saving money in a Roth IRA if they meet requirements to contribute. While this type of account requires you to invest money that has already been taxed, your contributions can grow tax-free and compound until you reach retirement age. Once you're 59 ½ or older, you can withdraw money from a Roth IRA without paying income taxes, which is pretty sweet.

In 2020, most people can contribute up to $6,000 to a Roth IRA and traditional IRA account. However, individuals ages 50 and older can contribute an additional $1,000 for the year for a total of $7,000.

Income limits do apply, however. Married couples who file taxes jointly can't contribute to a Roth IRA if they earn over $206,000, and their contributions are phased out for incomes between $196,000 and $205,999. Single filers with incomes over $139,000 cannot contribute, and their contributions will be phased out for incomes between $124,000 and $138,999. (See also: 401(k) or IRA? You Need Both)

3. Save for emergencies

Also, consider saving for emergencies if you haven't already. Financial advisor Jake Northrup of Experience Your Wealth says that your emergency fund should include at least three months of living expenses, but potentially more.

You'll likely want to keep your emergency fund in an account you can access such as a high-yield savings account. While this means your emergency cash won't bring in a huge return, this money can literally save your finances if you face a surprise medical bill you can't pay or experience a job loss.

Further, having a fully funded emergency fund can also help you avoid charging up credit card balances with exorbitant interest rates. (See also: 7 Easy Ways to Build an Emergency Fund From $0)

4. Save for future healthcare expenses in an HSA

Financial planner Taylor Schulte, who is also host of the Stay Wealthy Retirement Podcast, says that assuming an emergency savings fund is in place and high-interest debt is paid off, the best place to put extra cash is into a Health Savings Account (HSA).

"The HSA is the magical unicorn of tax-advantaged investment accounts," he says. "Unlike any other account, they are triple tax-advantaged."

Schulte says this because you can invest up to certain limits on a tax-advantaged basis each year, then your money grows tax-free. When you take distributions in order to pay for qualified healthcare expenses, you won't pay taxes then, either.

There are some requirements in order to use an HSA, however, including the requirement that you have a high deductible health plan. For 2020, the Internal Revenue Service (IRS) defines a high deductible health plan as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family, notes Healthcare.gov. Also note that any high deductible health plan's total yearly out-of-pocket expenses must be less than $6,900 for an individual or $13,800 for a family.

Morgan Ranstrom, who works as a financial planner in Minneapolis, MN, says you should strive to keep enough cash in your HSA to pay your insurance's annual deductible in case of unexpected health costs, but beyond that you can invest the rest for long-term growth.

"With regular contributions, potential investment growth, and minimal withdrawals, you'll have an account that may be used to fund medical expenses in retirement without tax penalty," he says. "How great is that?"

5. Pay off high interest credit card debt

While you may not consider debt repayment as an investment, the financial return can work similarly. Note that any debt you pay off is no longer charging an outrageous interest rate, and that means more money in your pocket each month that you can save or invest for the future.

Debt expert Chris Peach, who teaches consumers how to pay off debt through his Awesome Money Course, says you should check to see the interest rate you're paying on your credit cards, keeping in mind that the average credit card APR is well over 17%.

"For most people, getting an 18% return on your investment every year is more like a dream come true than a reality," he says. Fortunately, you can achieve that return by paying off high interest debt and saving the money you would normally pay toward interest each month.

Let's say you have a credit card balance of $10,000 at 18% APR and you've been making minimum payments on this card for years. Making the minimum payment of $200 each month would take you another 94 months to pay off the balance, which also results in $8,622 more in total interest paid, notes Peach.

But what if you were able to invest $100 per month as an over payment on your credit card?

"Though it may not sound like a ton of money, $100 more per month will pay the balance off 47 months earlier and saves almost $4,000 in interest," says Peach. "Not bad for a $100 monthly investment if you ask me."

6. Invest in yourself

Fee-only financial advisor Russ Thornton, who focuses on providing retirement planning for women, says an investment in yourself can also pay off in a big way. "This could be used to buy books, audiobooks, online courses, offline courses, professional associations, personal training sessions, or something else," he says.

If you acquire new or deeper knowledge that could help you perform your job, it could help you get a bigger raise or even a promotion, whereas learning a new skill could help you create a side hustle that could ultimately help you bring in more income.

You could even get involved with a professional association or networking group to build your network, says Thornton. "This could help with your current career or might open doors to new opportunities — both personal or professional."

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

Why Private Banking Isn't Just for Millionaires Anymore

Philip Brewer — Fri, 08 Mar 2019 22:43:46 +0000

In the past, if you had $1 million — or better, $10 million — there were private banks and bankers who would provide services you wouldn't get from an ordinary bank. But thanks to changes in the financial industry, ordinary, non-wealthy people can now access almost all of these services, if they're willing to do a bit of the legwork themselves.

The sorts of services that private banks provide fall into four general categories: Banking services, investment services, advisory services, and perqs. Of course, they also come at a price, which you can largely avoid if you roll your own.

Banking services

One thing that private banks provide are standard banking services. They receive your deposits, process your payments, transfer your money, offer loans, etc. Your ordinary non-private bank will do all of these things as well, but in the old days, they expected you to show up in-person at the bank. Since you can now do these things online, rolling your own private-bank equivalent is easy.

Let's say you're traveling abroad, meet someone lovely that you'd like to spend more time with, and decide to extend your travels. In the old days, a private banker could really help with logistics — get someone to collect your mail, sort through it to find any checks or bills you'd received, and get them deposited or paid as the case may be. If incoming checks didn't quite cover your new travel expenses, they could also float you a quick loan. They could also get local currency delivered to you.

But now, handling these sorts of affairs is much easier for people to do on their own. Your incoming funds are direct deposited to your account. Your bills are set to be paid automatically, or you can can pay them online. Local currency is as close as the nearest ATM.

Loans, in particular, used to be a major competitive advantage for private bankers. Because your private banker had intimate knowledge of the state of your finances, they were uniquely positioned to be able to immediately approve a loan — either a short-term loan, or a longer-term loan to buy a third home or restructure your business. Now every credit card will allow you to take a cash advance at least as large as a prudent banker would allow. (A very expensive loan, mind you, but one that'll be approved faster than even a private banker could.)

Investing services

Private banks have an investment arm. The fee they charge is a fraction of your assets under management, but the fee scales down as you have more to invest.

Of course, most banks have investment options nowadays, and every brokerage can provide banking services. They will also manage your money for a fraction of the assets under management. Or, for a much smaller fraction of the money under management, you can create your own investment portfolio. Put your money into low-cost mutual funds or buy some ETFs in your brokerage account and you'll likely do as well in the market as the rich guy whose private banker has hooked him up with a top investment adviser. (See also: How One Mediocre Investor Prospered After the Market Crash)

Advising services

Besides actual banking services, a private banker can connect you with all sorts of professionals that the wealthy need: tax accountants, estate planners, investment managers, and so on. If you're really wealthy, it can make sense to wrap all these advisers together with a private banker.

But if you're not that wealthy, you probably don't need your banker to pull everything together, as long as you're willing to do the leg work yourself. It's not that hard to find a good tax guy or accountant, and a lawyer who can write a will or a trust. (See also: 5 Estate Planning Questions Everyone Should Ask)

Perqs

This is where the movie version of the private banker meets real life. One category of perqs is called concierge services. Your private banker can hook you up with hard-to-get tickets, invitations to exclusive events, make complicated travel arrangements, and so on. This category is so popular these days that just about everybody is offering it — in particular, all the upscale credit cards have a concierge service. They've started outsourcing the work to firms that specialize in it — something that's an option for you as well.

It's probably cheaper to hire a personal assistant to do these things for you, and of course much cheaper to do it yourself.

Legitimate needs

If you're really rich — investable assets in excess of $25 million, let's say — there will be private bankers interested in your business, and they may be able to provide services that are worth the $125,000 or more they're likely to cost each year.

For example, restructuring a multi-million dollar business so that Dad can partially cash out while passing the rest of the business on to his kids is likely to require a whole range of experts in accounting, taxes, and estate planning, plus a banker. A private banker is probably your best entryway into getting services of that sort.

Or let's say you're buying a private jet. Even if you're genuinely rich enough to afford one, you probably don't have all that money sitting around in cash. Your private banker will be pleased to produce a custom financing package based on intimate knowledge of what cash you do have and what investment transactions are already in the works. They'll also handle the payment and make a conference room available for you and the seller to finalize the transaction.

Short of that sort of wealth and complexity, you can almost certainly get the services you need for much less than what a private banker would charge (if they'd even take your business). (See also: The 5 Millennial Money Apps Everyone Should Use)

My advice

Banking services — even the sorts that used to be specialized for rich people — are routinely available to ordinary people at very reasonable prices, thanks to innovation and the internet. Because banks now all own brokerage firms and brokerage firms now all own banks, you can go either way when you pick the firm where you'll roll your own private bank. The advantage of a brokerage firm is that you can use your investments as collateral for a loan — the interest rate is typically half to a third of what a cash advance on a credit card would cost you. The advantage of a bank is that they have local offices where you can get cash, talk to a banker, use their conference room to close a deal, etc.

You want to avoid money center banks and major regional banks — they're only interested in earning million-dollar fees for putting together billion-dollar deals. What you want is a bank one step down in size. (My bank isn't in the top 100 biggest banks, but it is in the top 200.) Banks that size, especially ones with a local connection, will have bankers who are actually interested in providing services to individual people, rather than just to major corporations. And a banker who will provide personal service can be just as good as a private banker.

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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:

3 Things You Should Consider Before Selling Your House for Cash

Toni Husbands — Wed, 20 Feb 2019 09:00:11 +0000

In August of 2017, an investor called us and offered to buy our condo for cash. We didn't have it listed for sale. The condo was in great condition, the rent we charged covered expenses, and it was in a very nice area that consistently attracted stable tenants. My husband and I took about five minutes to confer before deciding to accept the offer.

The offer was cash. We estimated it was about $10,000 less than we might have made through a traditional sale. After accounting for realtor commissions, taxes, and the time required to sell our condo; we felt the convenience of an as-is cash sale was worth it. The closing took less than two weeks. By the end of August, we had an extra $35,000 in the bank.

Selling your house for cash can be a dream come true. In these cases, investors are looking for a quick transaction. They aren't generally concerned with repairs. Real estate agents are not involved, so the cost of a broker's commission is waived. In my case, the inspection walkthrough was merely a formality. The as-is cash closing was also a piece of cake. (See also: How to Sell Your Home When You're Underwater on Your Mortgage)

The investors who contacted us were the building's property managers. They already owned other rental units in the building, so we were able to verify their legitimacy quickly. However, all that glitters is not gold. This industry is rife with scammers looking to swindle you, and you should be careful working with people who advertise a service to buy houses for cash on traditional media sources, online, or even street corners (we've all seen the signs nailed to light posts).

If you're considering selling your house for cash to an investor, make sure you do your homework, and back away if you detect any of the following red flags.

It's a foreign investor

People who contact you from foreign countries offering to buy your house sight unseen should set off alarm bells. In some cases, scammers submit legal-looking documents or send you to websites that look professional. They might say they're moving to another country for work. However, these people are either never available to speak in person or don't have a local representative to work with directly. In some cases, the scam artists will send a foreign check with a mistaken overpayment. They ask unsuspecting homeowners to refund the overpayment only to find that the check doesn't clear. This will leave the homeowner on the hook for whatever monies were transferred out.

Be wary of dealing with buyers in foreign countries who aren't readily available by phone or video conference. And never take any action with funds deposited until you've waited the requisite time for a check to clear. (See also: How to Protect Elderly Loved Ones From Financial Scams)

They only communicate via email

Investors may contact you through a variety of methods. However, once a deal is reached, someone should want to inspect the property in person. If you're dealing with a potential investor who only wants to communicate via email, you might be dealing with a scammer. Legitimate buyers have no problem showing up and walking through a property they intend to purchase.

The investor doesn't negotiate

As-is cash home buyers are in this market to find deals. They aren't interested in paying the market rate for any property. The investors will negotiate the price down to account for any repairs needed so they can sell the home again for a profit. Homeowners willing to sell to an as-is cash buyer must be willing to accept a significant reduction in their asking price.

If you're communicating with a potential buyer who requires no repairs and is willing to pay top dollar for your home, run. Anyone offering full price for a house without requiring any work on your end is likely trying to rip you off.

How to avoid a scam

There are plenty of legitimate investors or buyers who are willing to pay cash for your home as-is. This type of transaction works well for those who don't have the money to make repairs or renovations needed. You may also like the idea of a fast, hassle-free closing. Maybe you've become an accidental landlord after relocating, or you've inherited a house from a family member and you want out of the arrangement.

There are plenty of good reasons to approach a quick-buy investor, and homeowners can still make smart choices in pursuing this type of transaction. Here's how to do it right.

Google the investor

Always do a Google search and look for independent reviews online. Angry people who are swindled out of money tend to leave a trail in cyberspace. Start with a quick search on the company's or investor's name. You should also check to see if they're members of the Better Business Bureau, or if there are any complaints with the State Attorney's office.

Hire a lawyer

While not required, hiring an attorney can help ensure that the process is followed correctly and legally. Legitimate investors will welcome this process.

Check references

Follow up with their references. Legitimate investors will have worked with other homeowners who can share their experience — good or bad.

Pay attention to how they present themselves

Keep an eye on their professionalism. If their correspondence is laden with typos, or their forms of advertising are sketchy (illegal posters nailed to light posts, for example), you should avoid them. If an investor doesn't present professionally and you want to sell your home for as-is for cash, find someone who does.

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

Investing Is Great, But Saving Is Even Better

Tim Lemke — Tue, 24 Jul 2018 08:00:09 +0000

When people talk about investing, they often emphasize getting the most return for their money. If they are getting a 7 percent return on their stock portfolio, they'll strive to get 8 percent. If they are already at 8 percent, they'll push for 9 percent or more.

Shooting for a high return is laudable, but what often gets lost in this discussion is the most powerful element of building wealth: saving as much money as you can in the first place.

It's important to remember that individual investors can't control stock market returns. They also can't entirely control the cost of commissions, fees, taxes, and the like. They can, however, control their own rate of savings. And there is ample evidence that it is the initial savings, not investment gains, that determines how much you end up with over time.

Let's examine this phenomenon further.

Saving more can offset lackluster returns

If you save as much as you can, you don't have to stress as much about getting the optimal return on your investments. In fact, a boost in savings can often be more powerful than a higher rate of return.

Here are two scenarios to illustrate this point.

In the first scenario, you save $5,000 per year for 30 years and get a healthy 10 percent annual return. This results in about $900,000.

In the second scenario, you save $8,000 per year for 30 years, but you only average an 8 percent annual return. You will end up with around $978,000 in this second scenario. In other words, just $3,000 additional dollars each year (or $250 per month) can more than offset a 2 percent difference in return. Bump the savings up to $10,000 per year, and you're looking at more than $1.2 million in the end. (See also: 6 Confidence-Inspiring Facts About the Stock Market)

Saving more can supercharge great returns

In an ideal world, you're able to save a lot and get a great return on your investments. When these things happen together, the results can be amazing.

Let's revisit the scenarios above. Imagine if you were able to boost your contributions from $5,000 to $8,000 annually while also getting that great 10 percent return. You'd be looking at $1.44 million 30 years later. In other words, that additional $3,000 each year results in $500,000 more over time.

Saving more can let you be more conservative

Not everyone is entirely comfortable with the notion of investing. There is always an element of risk when you put money in the markets, and everyone's tolerance for this is different. If you don't save a lot of money up front, you may find yourself trying aggressive and risky investing strategies to make up the difference. That cannot only take you out of your comfort zone, but lead to financial disaster.

If you save as much as you can, you can afford to be more cautious about what you invest in. This is especially true for older investors who are looking to preserve their savings as they near retirement. (See also: 4 Simple Ways to Conquer Your Fear of Investing)

More savings can mean more matching funds

If you have a 401(k) plan through your employer, you are likely eligible to receive matching contributions from the company. For example, the organization may choose to match all contributions up to 5 percent of your salary. Some match even more than that. It's free money, but you don't get that money unless you contribute yourself.

Fidelity reports that one in five 401(k) plan holders don't put in enough to get all potential matching funds. If you are unsure of how much to contribute to your 401(k), the best answer is as much as possible, but at least up to the maximum company match. (See also: 7 Things You Should Know About Your 401(k) Match)

Saving more can give you a bigger tax break

With traditional IRAs and 401(k) plans, any money you contribute is deducted from your taxable income. So let's say you earn $50,000 annually and contribute $5,000 into your 401(k). That means only $45,000 is taxed; under current tax law, that's $1,100 less you would pay in taxes compared to $50,000.

Investors can contribute up to $18,500 annually into a 401(k). With traditional IRAs, you can contribute as much as $5,500 each year. That is a big chunk of money that can grow into an even more massive sum over time and will lead to big tax savings.

You can withdraw Roth IRA contributions early, but not gains

If you have a Roth IRA, it's generally not a good idea to take out money before you retire. But, if you run into a financial crisis, you are permitted to take out your own contributions without paying any penalty or taxes. For this reason, there are some financial advisers who say it's OK to think of a Roth as an emergency fund if you have nowhere else to turn.

If you take out capital gains, however, you must pay tax on that money and a 10 percent early withdrawal penalty. Thus, if you don't put in a lot of money into your Roth to begin with, you may not really have that much available to withdraw. (See also: 7 Penalty-Free Ways to Withdraw Money From Your Retirement Account)

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4 Golden Rules of Investing in Retirement

Matt Bell — Thu, 19 Jul 2018 08:00:09 +0000

After you've spent a lifetime investing for retirement, it can feel very different to invest in retirement. Many retirees are hesitant to start withdrawing from the nest eggs they've carefully built over the years. And, they sometimes feel especially nervous about managing that account, knowing it needs to last as long as they do.

Thankfully, there are some guidelines that can help. Here are four golden rules for investing in retirement.

1. Don't be too conservative

Longevity is increasing. Your retirement could last for two decades or more. According to the Social Security Administration, a 65-year-old man today can expect to live to nearly age 85. A 65-year-old woman today can expect to live past age 86. And those are just averages. Many people will live well into their 90s.

Of course, given a choice, most people would prefer to live a long life. However, the more years you spend in retirement, the longer your nest egg will need to last. That's why it's important to avoid being overly conservative with your investments in your later years. Bond-like returns will only get you so far. (See also: 5 Ways Longevity Is Changing Retirement Planning — And What to Do About It)

This reality is reflected in many of today's target-date funds. For example, Vanguard's Target Retirement 2020 fund, which is designed for people right on the cusp of retirement, currently has 54 percent of its assets invested in stocks. The lowest level of stock exposure Vanguard's target-date funds ever hit is 30 percent, which occurs seven years after each fund's target date. Thereafter, it remains fixed.

If you're managing your own portfolio, you would be wise to take a page from these professionally managed portfolios and make sure you're maintaining a healthy exposure to stocks. (See also: 7 Reasons You're Never Too Old to Buy Stocks)

2. Don't be too aggressive

By the same token, you can't afford to get carried away with risk. With the current long-running bull market showing few signs of running out of steam, it may be tempting to take on more risk than you should, especially if you feel somewhat behind on your retirement savings. But that would be dangerous to your portfolio and your peace of mind.

Instead, trust the rules of asset allocation. If your optimal asset allocation calls for a 50/50 stock/bond mix, stick with that. One day, the bull market will end and you'll be glad you weren't invested any more aggressively than you should have been. If you're not sure what your optimal mix should be, Vanguard's asset allocation questionnaire can help you figure it out.

Remember, if your nest egg isn't as large as it should be, you have other options besides taking undue risk with your investments. For example, if you're still in the workforce, pushing back your intended retirement date even by a few months or a year can make a noticeable difference in your financial health. (See also: How One More Year of Work Can Transform Your Retirement)

3. Consider maintaining a cash "bucket"

One of the biggest threats to your portfolio in retirement goes by the fancy name of sequence of returns risk. That refers to the possibility that the market could fall just as you enter retirement. While the market naturally ebbs and flows over time, a significant downturn right at the start of retirement can put a strain on your cash flow throughout retirement.

Especially if you lean toward the conservative side of the risk spectrum, one way to manage that risk is to implement the bucket strategy — creating a cash account containing two to three years' worth of essential living expenses. That can help you avoid having to withdraw from your investment account in a bear market.

When the market is falling, you draw living expenses from your cash bucket, giving your investment account time to recover. When the market is growing, you draw from your investment account while also using a portion of your gains to refill your cash bucket. (See also: 8 Ways to Preserve Your Net Worth in Retirement)

4. Make sure you're on the same page as your spouse

Within many marriages, there's a division of labor, with each spouse taking the lead in different areas. If one of you has been managing the investments, now is the time to bring the other into the process. Otherwise, when the investment-manager spouse dies, it can leave the surviving spouse ill-equipped to take over.

If you handle the investments in your household, start talking about your investments with your spouse. How many accounts do you have and what's the total balance? What are the online passwords? What strategy are you following with your investments? If you were to die first, how would you recommend your spouse manage the account? If you're using a fairly involved approach, is there a simplified alternative? (See also: 5 Money Conversations Couples Should Have Before Retirement)

One of the sweetest rewards of a life lived well is peace of mind in your later years. When it comes to experiencing financial peace of mind during retirement, the four steps described above should help.

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How Bond Prices and Yields Work

Tim Lemke — Wed, 04 Jul 2018 08:30:14 +0000

When we talk about investing, we frequently talk about stocks. Stocks are likely to make up a the bulk of your investment portfolio during the majority of your investing years.

Bonds, which tend to be less risky but also less rewarding, are more important as you get closer to retirement. However, bonds can be a helpful part of your investment mix at any age, and it's important to understand how they work — even if you don't own many of them right now.

Let's examine bonds and why we should pay close attention to them these days. (See also: 5 Crucial Things You Should Know About Bonds)

How government bonds work

A bond is simply a vehicle that governments and companies use to borrow money. People buy bonds, and in exchange, receive interest payments. Our country would barely be able to function without bonds.

For the sake of this discussion, let's focus on government bonds. The U.S. government floats many different securities, but the most common are the 30-year and 10-year Treasury bonds. These bonds pay interest every six months, and the principal of the bond — often referred to as "par value" — is paid in full after 30 or 10 years.

There are also popular securities called Treasury Inflation-Protected Securities (TIPS). The principal of a TIPS can go up or down depending on the movement of the Consumer Price Index.

U.S. Treasuries are very popular worldwide because they are backed by the full faith and credit of the U.S. government, which has historically always repaid its debts.

Yield and price

If you plan to hold onto a bond until it matures, you'll likely want to take a look at its yield, which is simply a calculation of how much money you'll make on the investment. So for example, let's say you have a $10,000 30-year bond with an annual interest rate of 5 percent. This would mean you'd get $500 per year. This is the bond's annual yield. It's also referred to as the "nominal" yield.

There's another factor that determines how much money you make from a bond, and that is price.

Let's say that the owner of the $10,000 bond above chooses to sell the bond before it matures, for $9,000 — maybe because the issuing company is struggling to stay afloat, or because interest rates are about to see a substantial rise. The buyer of the bond will still continue to get interest payments based on the face value of the bond ($10,000). These interest payments are fixed.

Thus, the buyer is receiving the same payments, but because the buyer paid less for the bond, the yield is 5.55 percent. ($500/$9,000=0.0555, or 5.55 percent).

When a bond is selling for more than its issue value, we often hear people say it is trading "at a premium." If it is selling at less than its issue value, it is selling "at a discount."

Generally speaking, people seek to find bonds selling at a discount, because they result in a higher yield.

Why prices rise and fall

The price of bonds is very closely impacted by interest rates. The prevailing interest rate — that is, the interest rate on bonds being issued at that particular time — can make any other bond seem more or less attractive to investors.

To illustrate this, let's say you hold a 30-year bond with a 5 percent interest rate, but rates have been rising and now average 6 percent. Because your bond now has an interest rate that is lower than the prevailing average, it's less attractive to investors. Thus, if you want to sell the bond, you may have to lower the price to ensure investors can get the same yield.

The opposite is also true. When interest rates are falling, any bond with a higher interest rate becomes more attractive and can demand a higher price.

Inflation is known to indirectly impact bond prices because it is accompanied by higher interest rates.

Bond prices are also indirectly impacted by the performance of the stock market. When the stock market is doing well, people tend to flock to stocks and their potential for higher returns, which in turn depresses demand and prices for bonds. But during times of economic distress, investors will often flock to the relative safety of bonds and this can cause prices to rise.

Why it matters now

Treasury yields have been on the rise in 2018, with the interest rate on a 30-year Treasury growing from about 2.8 percent at the start of the year to 3.1 percent as of the end of May. The yield on the 10-year Treasury is more than 2.9 percent, compared to 2.4 percent at the start of 2018.

There are many reasons why yields have increased, but generally they have to do with confidence in the economy and in the stock market. Treasury yields rise inversely to prices. Thus, a high yield suggests that demand for bonds is weak and that's depressing prices.

The trend is only expected to strengthen. The government is predicted to issue a lot of new bonds in 2018 as it looks to cover the cost of new tax cuts. Having more bonds in the market will lower demand for any individual bond, so prices will fall and yields will rise.

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Do You Have These Key Character Traits for Investing Success?

Toni Husbands — Fri, 22 Jun 2018 08:30:23 +0000

Warren Buffett, the Oracle of Omaha, summed up the key to investing success like this: "Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing."

Let's say you and I have ordinary intelligence and want to improve our investing chops. What are the traits that make for a great investor?

Compassion

Hollywood is awash with stories of money men who live by this mantra: "Greed is good." The Gordon Gekko character is burned into our collective memories for life. From The Boiler Room to The Wolf of Wall Street, we get it — the industry is full of sharks.

It turns out, sharkiness may work against you in the world of finance.

A study published by the Society for Personality and Social Psychology looked at the behavior of hedge fund managers over a decade. Managers with psychopathic, narcissistic, or Machiavellian personalities underperformed their peers by 1 percent annually. Over time, their ruthless approach to decision making added up to notable losses.

By avoiding aggressive instincts and underhanded tendencies, we can focus on developing the positive, compassionate traits that have helped billionaire investors like Warren Buffett and George Soros achieve amazing results. This means leaving the shady, cunning type of investor to Hollywood. (See also: The 5 Best Pieces of Financial Wisdom From Warren Buffett)

Optimism

Some people avoid investing altogether because they believe they'll never succeed at it. That mentality can become a self-fulfilling prophecy. Make no mistake; if you never take the plunge into investing, you're guaranteed to never see any returns.

Believing that you have the ability to be successful at investing and building wealth is the frame of mind you should always strive for. Whether you endeavor to develop the skills and DIY your approach to investing, or seek the services of a qualified money manager, believing in your ability to make sound financial decisions will help you move forward.

Optimism can be hard to sustain, but immersing yourself in a world of productive investment information has never been easier. Connect with groups through Facebook, browse personal finance websites, and follow the advice of investors with a track record of long-term success. Seeing your glass as half-full is great for the bottom line. (See also: 6 Confidence-Inspiring Facts About the Stock Market)

Patience

Successful billionaires like Warren Buffett take a long-term approach to investing. "Our favorite holding period is forever," he's quoted as saying. Patience will help you avoid reacting rashly to groupthink surrounding market fluctuations or hyperbolic headlines predicting the end of life as we know it. You may have done some research and found that the stock market's average annual return is 7 percent when you look at any 10-year period. This information feeds your optimism, and therefore you're willing to be patient. And your patience will help you keep a long-term perspective.

Goal-orientation

Since investing success requires a long-term perspective, goal-oriented people tend to have a leg up in this arena. Staying focused on the end goal helps you avoid distractions. Deciding whether you're investing for retirement, to purchase a house, or to save for a child's college fund will determine your best course of action. Setting interim goals, like completing an investing for beginners class or interviewing three financial planners, keeps goal-oriented people on the path to desired results.

Levelheadedness

Do you keep a cool head when everyone around you is in meltdown mode? Do you immediately default to the next steps required in the midst of a crisis? Your levelheaded temperament may easily be the most important personality predictor of success with investing, not your intellect. That is according to Mr. Warren Buffett.

Panic in the markets can be contagious; especially when our hard-earned cash is at stake. Your ability to remain calm in the face of short-term fluctuations will lead to better decisions and opportunities that investors who follow the crowd may overlook. (See also: 6 Investment Truths to Remember When the Stock Market Is Down)

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How to Start Investing With Just $100

Kat Tretina — Wed, 20 Jun 2018 08:30:29 +0000

When you're on a tight budget, investing often feels like something only wealthy people can afford to do. If you have just a few dollars left over every month, you might think it's out of reach for someone in your shoes.

This is particularly true among young people. A 2016 Stash survey reported that 41 percent of millennials feel that they don't have enough money to invest in the stock market — and 70 percent feel they need at least $100 to get started. That mentality can be a costly mistake. If you don't invest, you greatly risk underfunding your retirement savings.

The thinking that you have to be wealthy to invest is false. There are ways you can get started in investing without having tons of cash on hand. Below, find out more about some low-cost ways to enter the stock market. (See also: You Can Start Investing With a Lot Less Money Than You Think)

5 ways to invest with little money

Many traditional brokers have high minimum investments. For example, Vanguard has a $1,000 minimum if you want to open a Roth IRA and $3,000 for some other accounts. When you have just a few dollars to invest, opening an account with a traditional broker can be impractical, if not impossible.

Plus, they can be confusing. They throw a lot of jargon at you — mutual funds, index funds, exchange-traded funds (ETFs) — and it can be overwhelming to a new investor. However, investing doesn't have to be overwhelming or expensive. Here's how you can get started. (See also: Investments Worth Making With $50 or Less)

1. Invest your spare change

If your budget is tight and finding even $50 a month to invest is impossible for you, spare change investment apps like Acorns might be a smart option.

With Acorns, you connect your credit and debit cards to your account. Any purchase you make — including routine things like groceries or gas — is rounded up to the next dollar amount and the extra change is invested. For example, if you bought lunch and it cost $6.50, the app would round it up to $7, depositing the extra 50 cents into your investment fund.

Once your change totals $5, the app invests that money into a portfolio of your choice. Acorns offers five versions based on your comfort with risk, and costs between $1 and $3 per month to use. (See also: Everyone's Using Spare Change Apps — Are They Really Worth It?)

2. Engage in micro-investing

If you have some extra money in your budget, you can go a step further than just investing your spare change. Micro-investing — where you invest small amounts — can help you build a portfolio. Robinhood is a no-fee micro-investing app you can use to buy stocks and ETFs. All you need to get started is enough money to buy one share. Depending on the company or ETF you choose, that could be as little as $25. (See also: With Micro-Investing, Your Smartphone Pays YOU)

3. Set up a recurring transfer with a robo-adviser

As your income grows and your financial situation improves, investing spare change and micro-investing might not be as effective as it should be. Your investments with those apps might only add up to $15 to $20 per month. That's a good start, but you'll get better results by investing larger amounts.

You can set up a recurring transfer with sites like Betterment to take your investments to the next level. Betterment is a robo-adviser service, which can be helpful if you don't know much about the stock market and you want guidance on what kind of stocks and funds to choose. Betterment charges a .25 percent annual fee for accounts under $100,000. (See also: 9 Questions You Should Ask Before Hiring a Robo-Adviser)

That recurring $100 per month transfer can pay off in the long run. If you are 25 and make a one-time $100 investment, that $100 would turn into $2,172 by the time you're 65 (assuming an annual return of 8 percent).

Continue to contribute month after month, and you can see even more significant returns. If you set up recurring $100 contributions and stuck to that schedule until you were 65, you would have invested $48,000 of your own money. But, thanks to the stock market, your balance would grow to a whopping $337,909. (See also: 7 Reasons Millennials Should Stop Being Afraid of the Stock Market)

4. Set up a CD

If you're not ready to enter the stock market, there's another way to invest: Setting up a certificate of deposit (CD). With a CD, you essentially loan money to a bank, and they pay interest to you on the loan. The returns are higher than that of a regular savings account, however, they still won't be nearly as high as if you'd invested in the markets. You also can't touch that money for a set period of time; usually 12 months or more. (See also: The Best Ways to Invest $50, $500, or $5,000)

5. Start investing in a 401(k)

If your employer offers a 401(k) plan, you can start investing right away; there's no minimum to open an account. You can set up regular deductions from your paycheck, so the money is invested automatically every single month. You likely won't even notice it.

You can start investing small amounts, if that's all you can afford at first. For example, you can set your 401(k) contributions to as little as $25 each pay period. Over time, compound interest can turn those small investments into big returns.

As you earn more money, you can increase your monthly contributions. Your employer may even offer a company match on those contributions, which is free money you should never turn down. (See also: 8 Critical 401(k) Questions You Need to Ask Your Employer)

Finding money to invest

You really can't afford to avoid the stock market if you plan on having a stable retirement. Without the muscle of annual returns, you run the very real risk of coming up short.

If you're already stretched thin and can't find any extra money to invest, focus on boosting your income and using that extra cash to get started. You can consider asking for a raise, taking on a side gig, or selling some hot-ticket items around the house. (See also: 4 Best Ways to Invest Your First $1,000)

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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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Should You Treat Your Social Security Benefits Like a Bond?

Matt Bell — Thu, 17 May 2018 08:30:19 +0000

As you may know, one of your most important investment decisions has to do with asset allocation — that is, how much of your portfolio should be invested in various asset classes, such as stocks and bonds. The optimal answer has mostly to do with your age and risk tolerance.

When you're young, you have time to ride out the market's ups and downs, so it's generally best to tilt your portfolio toward riskier but potentially more rewarding investments, such as stocks. As you get older, it's wise to change that mix, reducing your stock exposure and increasing your use of less volatile investments, such as bonds.

Your risk tolerance also plays a role. If you're comfortable with risk, that may point you toward a more stock-heavy portfolio. If you prefer the safer side of the spectrum, you may want a more conservative investment mix.

But here's where our esoteric-sounding opening question comes in: What if you could put a present value on your future Social Security benefits? And what if you added that amount to your current investment portfolio? That would make your portfolio much larger, and it would change how you're investing, which is exactly what investing legend and Vanguard Founder Jack Bogle recommends. (See also: The Basics of Asset Allocation)

Running the numbers

Let's say you have investments totaling $450,000 and your optimal asset allocation is 60 percent stocks and 40 percent bonds. That means you should have $270,000 invested in stocks and $180,000 in bonds.

Let's also assume your estimated Social Security benefits will be $1,250 per month, or $15,000 per year, beginning at age 67 (you can see your estimated benefits by making an account the Social Security Administration's website). This exercise also requires that you make an assumption about your life expectancy; let's assume you'll live another 20 years after you start collecting Social Security.

Bogle would suggest valuing your portfolio at $750,000. That's $450,000 of actual investments plus $300,000 of assumed future Social Security benefits ($15,000 per year times 20 years). There are other ways of determining the present value of your future benefits, but taking the annual estimated benefit amount and multiplying it by the number of years you expect to live after starting to claim benefits is the simplest.

Applying a 60/40 allocation to your newly inflated $750,000 portfolio would mean your optimal investment mix is $450,000 in stocks and $300,000 in bonds. Bogle suggests that since Social Security is a virtually guaranteed benefit, that $300,000 "asset" is a conservative asset — more like a bond than a stock. That means you're free to invest your entire actual $450,000 portfolio in stocks. (See also: 7 Reasons You're Never Too Old to Buy Stocks)

What could go wrong?

Proponents of this idea, such as Bogle, point out that the much more aggressive approach it would enable you to take with your actual investments would give you the potential to grow your nest egg much larger. Historically, stocks have far outperformed bonds, so in theory that's correct.

However, it would also mean taking on much more risk than you are right now and having to endure much more volatility than you may be comfortable with, especially as you get older. For example, how would you like to be 65 years old, have your entire retirement portfolio invested in equities, go through a bear market similar to 2008, and lose 50 percent?

Plus, let's say that leaving an inheritance is important to you. What if you go through a 2008-style bear market when you're in your 60s or 70s and that assumption you made about living to age 87 doesn't work so well? The only part of your portfolio that would be left behind is your actual portfolio, which just got cut in half.

What about the rest of your portfolio — the $300,000 of future Social Security benefits? The minute you die, the value of those benefits drops to $0. Are you comfortable with that?

One more concern is whether Social Security will even exist by the time you retire. While it's hard to imagine the organization ever completely disappearing, it's much easier to envision a day when benefits will be reduced based on household income — so-called means testing. The amount of money current workers are paying into the program simply isn't enough to continue paying beneficiaries the full amount they are owed indefinitely.

Not for the faint of heart

Only if you are extremely risk tolerant should you consider factoring future Social Security benefits into your asset allocation. Even then, you would be wise to factor in only a portion of those benefits.

For most, however, because of the added stress this approach would bring, especially at a time of life when peace of mind will be increasingly important, it probably doesn't make sense.

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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 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:

Best Money Tips: How to Start Trading Cryptocurrency

Amy Lu — Wed, 18 Apr 2018 08:30:10 +0000

Welcome to Wise Bread's Best Money Tips Roundup! Today we found articles on cryptocurrency trading for beginners, how to build a minimalist pantry, and tips for planning a debt-free vacation.

Best Money Tips: Investing Rules You Should Know By Heart

Amy Lu — Fri, 13 Apr 2018 08:30:10 +0000

Welcome to Wise Bread's Best Money Tips Roundup! Today we found articles on investing rules you should know by heart, the best fad diets that actually work, and smart things to do with your tax refund.