2022 was a bad year for investors. See the red lines in the graph below? …that’s 2022!
Back in October (around what turned out to be the bottom of the market) I wrote:
2022 is, by far, the worst year for stock/bond portfolios since 1950. We know that stocks can, and will, drop 20%+ in a year. But the fact that bonds are also down 15%+…that’s different.
Now, the real question: what should you do about it?
Should you stop investing? Stocks and bonds are both down…so jump ship altogether?!
No. Definitely not. Remember, “the true cost of long-term investing is psychological.” It hurts to see your portfolio value drop. I know. But success comes from enduring that pain and, if you can, leaning into it. Keep investing.
Should you sell your bonds?
No. It’s too late for that anyway. The leading indicator for future bond returns is the current interest rate. Having bond rates at ~4% right now is a strong signal that you’ll achieve ~4% returns on near-future bonds.
So…should I just sit here and take it?! That’s not advice!
Remember what John Bogle famously said:
My rule — and it’s good only about 99% of the time, so I have to be careful here — when these crises come along, the best rule you can possible follow is not ‘Don’t stand there, do something,’ but ‘Don’t do something, stand there!’John Bogle
Don’t do something? Stand there?!
It feels almost inhuman, right? We’re biologically wired for action. We want to do something!
You can consider something like tax-loss harvesting or rebalancing. But you should not consider abandoning your long-term investing plan.
That’s the difference between an emotional investor who reacts to their gut and a rational investor who follows logical rules. Your gut wants to end the pain…to do something. But logic suggests you do otherwise. Will you succumb to your gut? Or listen to the combined logic of many investors far wiser than me or you?
I’m listening to the wise guys.
2022 is a uniquely bad year. It’s understandable to feel glum about it. But you don’t need a uniquely special reaction. Stay the course. Just keep buying. Let the markets and your portfolio recover in the long run.
From the article: Nowhere to Hide: Why 2022 is a Uniquely Bad Investing Year
Back to 2023. Yes, I’m here today to say:
Just kidding! The truth is it’s a little too early to say I told you so. One bad year of investment performance (2022) shouldn’t ruin our moods, and a half year of great performance (2023) shouldn’t make us over-exuberant. We might not be out of the woods completely. I just don’t know. And neither does anyone else.
But if you allowed 2022 to sour your puss and you chose to abandon your investment plan…yikes! Your results aren’t looking too good.
The chart below shows the S&P 500 (dark) and a 60/40 portfolio (light) from October 12, 2022 (the market bottom) to today (7/20/23).
The S&P is up 29% in 9 months. The conservatively diversified 60/40 is up 19% in that period. If you abandoned your portfolio at the end of 2022 and missed those gains…again, I say yikes.
This is Example 1A of why you should stay the course. The headlines at the end of ’22 and the beginning of ’23 were awful. The stock market was taking a dump, the economy was surely headed for recession, and Barbara Walters died.
July 2022, Bloomberg: “Wall Street Says a Recession is Coming. Consumers Say It’s Already Here.”
September 2022, The World Bank: “Risk of Global Recession in 2023 Rises Amid Simultaneous Rate Hikes”
November 2022, CNBC: “Bezos urges consumers and business owners to reduce risk in the face of a likely recession.”
December 2022, NPR: “Barbara Walters, trailblazing journalist, has died at age 93.”
January 2023, Wall Street Journal: “Big Banks Prepare for a Recession”
Who would voluntarily invest in those headwinds?
I know who! Someone who understood market history, had a long-term mindset, and detached emotion from their financial decisions. Not easy, but very possible.
A bunch of The Best Interest readers did phenomenally well these past 9 months. Not because they’re stock-picking wizards, but instead because they buy a diversified set of income-producing assets month after month, then hold those assets for the long term.
Further reading: How I Invest
Investing won’t always feel good. But the times that feel bad are often the best, most important times to stay the course. We’ll never know in the moment, and won’t find out until sufficient time passes. But with the benefit of hindsight, we usually realize, “How about that…the time that felt terrible was the market bottom, and we’ve only gone up from there.”
That’s the lesson so far in 2023.
That lesson might pivot tomorrow. I just don’t know.
But that’s the point. The exact point. I just don’t know. Neither do you, nor the experts writing the headlines.
And that’s why I’ll continue to stay the course.
Thank you for reading! If you enjoyed this article, join 6500+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
Want to learn more about The Best Interest’s back story? Read here.
If you prefer to listen, check out The Best Interest Podcast.
Disability insurance is the most underrated type of insurance, and one that I routinely would see clients skip. Who ever thinks they will become disabled?
Hard truth – According to some statistics from the Council for Disability Awareness, 1 in 4 workers who are 20 years old will be disabled before they retire. That’s a shocking number for most people to consider. If you can’t perform your job, you can’t earn money, and that’s where a disability insurance plan can save the day.
The best disability insurance companies make it easy to get a quote online. Below you can quickly get a quote from top rated disability insurance companies we recommend, or keep reading to learn more about disability insurance and its uses.
Table of Contents
Quotes From Top Rated Disability Insurance Companies We Recommend
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#1
Quotes from the top disability carriers to ensure you find the best rates
Helps thousands of consumers apply for disability insurance each year
Rated Excellent on TrustPilot
Benefit terms range from 3 months to age 67
Choose your waiting period
Multiple riders add flexibility to your policy
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Benefit periods from as little as 2 years or all the way to retirement age
Family care benefit provides coverage for up to a year if policyholder has to take off work to care for a child, spouse, or parent
10% discount to business owners and an additional 10% to preferred occupational classes.
Offers the option of Full Coverage for Mental/Nervous disabilities or a 10% discount for a 2 year limitation.
Rated A (Excellent) by A.M. Best for financial strength
What is Disability Insurance?
The idea behind disability insurance is simple.
It operates similar to a traditional life insurance plan, but instead of paying out upon your death, it pays out if you become disabled.
Coverage for these plans can vary in the size. Just like with other kinds of insurance plans, every disability policy is different.
If you already know what you want and just want to browse different rates from several carriers, click here.
Some plans are going to replace 45 %of your income, while others are going to give more replacement at 65%.
The more replacement coverage you want, the more you’re going to pay for your plan.
The Differences with Workman’s Compensation
When an employee suffers an injury on the job, oftentimes their employer will compensate them through worker’s compensation.
It is important to understand the difference between disability insurance and worker’s compensation – because the two are not the same thing.
The key difference between workers’ compensation and disability insurance is that workers’ compensation (or workers’ comp) pays for injuries that are work-related. Employers will obtain workers’ comp insurance in order to pay for incidents that occur on the job.
If workers sustain injuries on the job, it is oftentimes up to the employer to pay for the person’s medical bills, as well as for the individual’s lost wages if the employee must take time off work because of the injury.
An employee who collects payment via workers’ comp will typically, however, not have a long-term disability, but rather a temporary injury from which he or she will soon return.
On the other hand, disability insurance pays for a percentage of a person’s earnings if the insured is not able to work due to an injury or illness – regardless of whether that injury or accident happened at work or elsewhere.
In addition, if the disability insurance policy is an individual policy (versus an employer-sponsored group plan), the insured will be covered under the policy regardless of who he or she is employed through.
According to the Council for Disability Awareness, less than 5 percent of disabling accidents and illnesses are work related.
This means that the other 95 percent are not – and that these other 95 percent are also not covered by workers’ compensation insurance.
What About Social Security Disability Benefits?
It can be extremely difficult to qualify for Social Security’s disability benefits. For example, Social Security will only pay benefits if a person is considered to be totally disabled. This means that the individual cannot do work that they did previously, nor can they do other jobs either.
In addition, the person’s disability must have lasted, or be expected to last, for at least one year or result in death.
An individual must also have collected enough work credits in order to qualify for Social Security disability benefits.
You can take a look at the 2019 Social Security Administration limits and rates for OASDI and social security here.
The number of credits will be dependent on the age that the individual is when he or she becomes disabled.
With that in mind, the importance of disability insurance becomes even more clear.
This type of insurance can provide you with the additional funds that you need to help pay living expenses – without the need to dip into savings, retirement assets, or worse yet – use credit – for the purpose of paying day to day bills until you are back on the job.
If Social Security deems that a person’s situation qualifies, there is still a five month waiting period before benefits are paid.
This, too, can create a financial hardship for many people in terms of paying living expenses – especially if there are added medical costs due to the illness or injury that has been suffered.
So, we know Social Security won’t give the money you need and workman’s comp probably won’t cover it, so now what?
This is why you should explore a private disability insurance policy.
Types of Disability Insurance
The two main types of coverage are long-term disability and short-term disability.
You can probably guess from the name, but short-term policies are designed to cover employees for a much shorter time, anything shorter than two years.
Long-term disability, on the other hand, is built for anything past two years. A long-term disability insurance policy could continue to pay out for the rest of your life if it’s needed but typically runs from 5-10 years.
Some of the common causes for short-term disability insurance include:
having a baby
a severe illness
a major injury.
Long-term disability could include a lot of things, but some common causes are:
cancer
muscular disorders
cardiovascular complications
or serious injuries
Long-Term Disability vs. Short-Term Disability
Aside from the obvious, there are a few key differences between long-term disability and short-term disability.
One of those is the waiting period for a payout.
With short-term, policyholders can start receiving weekly checks as quickly as a 1 to 7 days after you file a claim for the policy.
With a long-term disability insurance policy, on the other hand, it can be anywhere from 90 days to 180 days.
If you’re looking at the cost difference between the two plans, short-term policies are going to be significantly more affordable than its long-term counterpart. Long-term plans can give you years more coverage which could translate to thousands and thousands of additional coverage from the insurance company.
Another key difference between the two kinds of plans is how you can get the coverage.
A lot of companies offer their employees short-term disability insurance, but almost no companies have a long-term disability insurance program.
If you want to get the long-term coverage, you’ll have to purchase a plan through a private insurance company. If your company offers any type of short-term disability insurance, you should always enroll in the program.
Group, Individual, Multi-life
Inside of the two main types of disability insurance are several “sub-types” of coverage.
One of those is group coverage.
These are policies which are offered through an employer and are offered to all the employees. Group coverage could be either short-term disability or long-term disability.
Employer-sponsored short-term plans are designed to pay for any disabilities which occur outside of the workplace. Short-term disabilities are much more common than long-term disabilities which could impact you for the rest of your life.
Individual Disability Insurance
If your company doesn’t have any sponsored plans, you can purchase a private policy through an insurance company.
You’ll be required to answer some medical questions and depending on the plan, take a medical exam.
Multi-Life Disability Insurance
When you’re shopping around for a disability insurance policy, you’ll probably come across plans being sold as “multi-life plans.”
The idea of these plans is to get several key people in a business (think of several doctors in a practice) to all apply at the same time with their plan.
The insurance company markets these policies as multi-life so they can offer simpler underwriting processes and pass some of the savings onto the policyholders.
Is Group Disability Enough?
For the employees who are lucky enough to get disability insurance through their employer, you still might be lacking. Just because you have a plan through your job, it might not be enough.
Let’s say you’re not able to go to work because of an accident. You can’t get to your job and pull in your paycheck, are you going to be able to pay for all of your monthly bills without having to make any extreme sacrifices.
To determine if your group disability insurance is enough, you’ll need to do some basic math.
Look at your plan and see how much coverage it provides.
For this example, let’s say it pays 50% of your salary. Now, take a look at your bills and expenses.
If the total of those numbers is more than 50% of your income, then your group disability isn’t enough.
If you’ve crunched the numbers and came to the jarring realization your group plan isn’t enough, the best choice is to purchase an additional individual plan.
Both of the policies can work together, and your individual plan can pick up the slack left behind.
What’s the Difference Between Owner-Occupation and Any-Occupation?
One of the most important things to understand about disability insurance plans are the differences between an owner-occupation plan and an any-occupation plan.
They may sound the same, but they completely change how your plan operates and the coverage it will give you.
First, let’s look at owner-occupation (sometimes called own-occupation protection). Policies with this protection will only pay out if you can no longer to the duties and tasks required to you by your job.
If you’re an electrician, but you can not do the simple tasks required on a day-to-day basis, then an own-occupation plan will pay you the benefits.
Any-occupation policies will only pay the benefits of the plan if you can no longer perform any occupation based on your education and work experience.
As you can tell, any-occupation policies have much stricter rules on the circumstances in which they will pay the policyholder.
Type of Disability Insurance
Description of Disability Insurance
Short-term disability insurance
Provides coverage for a limited period of time, usually up to 6 months, and replaces a portion of your income if you are unable to work due to illness or injury.
Long-term disability insurance
Provides coverage for a longer period of time, typically until retirement age, and replaces a portion of your income if you are unable to work due to illness or injury.
Group disability insurance
Provided by an employer as part of a benefits package, group disability insurance offers coverage to all employees and may be offered as short-term or long-term disability insurance.
Individual disability insurance
Purchased by an individual, this type of disability insurance offers customized coverage and can be either short-term or long-term disability insurance.
Own-occupation disability insurance
Offers coverage if you are unable to work in your specific occupation due to illness or injury, even if you are able to work in a different occupation.
Any-occupation disability insurance
Offers coverage only if you are unable to work in any occupation due to illness or injury.
Residual disability insurance
Offers coverage if you are able to work but have a reduction in income due to illness or injury.
How Much Does Disability Insurance Cost?
Now for the part everyone wants to know, how much is a disability insurance plan going to cost you?
Well, there are a lot of different factors which are going to affect how much the premiums are. It’s difficult for me to give an exact number without knowing your exact situation.
For example, the age of the applicant is going to play a major role in the premium rates. If a 25-year old applies for a policy, it’s going to be significantly cheaper than a plan for a 45-year old.
The general rule of thumb for disability insurance is the premiums are going to be anywhere from 1% to 3% of your gross income.
If you are making $100,000, you can budget for $1,000 – $3,000 every year.
As I mentioned, there are dozens of different factors which will completely change how much you pay.
If you’re a smoker, then you’re going to pay much more for your plan.
If you have a riskier job, you’re going to pay more.
The rule of thumb is exactly that.
How Much Disability Insurance Do You Need?
I alluded to the amount of disability insurance earlier in this article, but now let’s take a hard look at how much coverage you should have.
Not having enough disability insurance protection could cause some serious financial strain if something were to happen.
First, let’s look at your living expenses. If you don’t already have a budget, take some time to look at all of your monthly bills (power bill, water bill, mortgage payment, etc.) and your spending (groceries, gas, etc.).
On top of those monthly expenses, add in a few “unexpected” bills as well. You never know when something is going to break or an extra bill is going to pop up.
You want to have some cushion in your budgeting. Otherwise, you end up living paycheck-to-paycheck.
After you have the monthly expenses number, you can do some subtracting.
If you aren’t working, your expenses are going to look very different than they do now. For example, if you aren’t driving to work every day, you probably won’t be spending as much on gas.
You won’t be spending money on work clothes, and you will probably cut out some additional “entertainment expenses” as well.
Now you have a new number, your monthly expenses minus some tweaks.
The next number you want to add to the equation is any income you’ll make from other sources besides your disability insurance plan.
This category can include any money from your investments, money from your spouse or partner’s job (or a second job if they decide to add another job) and any additional disability income you may qualify for.
If you’re the main income earner in your home, then having disability insurance is one of the most important purchases you can make.
Key Man
For most people, they purchase disability insurance for their family and loved ones. for others, they buy a plan to protect their business.
If you’re one of the foundational workers in your business (ex. an owner, CEO, etc.), then you should consider buying a disability insurance policy for your company.
Key man plans operate a little differently than a traditional disability policy. With these policies, the business pays the premiums for the plan, and if something were to happen to you and you couldn’t perform your job, then the business is going to get the money from the payout.
These policies are a way for the companies to protect themselves against financial struggles if a key person in the business were unable to work because of illness or injury.
The company can use this money to outsource those duties or to hire someone to replace the key person while they are out with the disability.
Disability Insurance for High Income Occupations
There is a certain group of people which disability insurance could have some serious problems.
If you are a high-income earner, the standard disability insurance policy simply may not be enough. Just about every insurance company which sells one of these plans is going to have an income limit.
Regardless of the percentage they replace, they are not going to offer more than that limit.
Typically, these are doctors or lawyers who own their own firms, for example.
Some policyholders may find the insurance company’s limit is below the 60% they offer in income insurance.
If you’re one of these people, there are some things you can do to get the protection you need, regardless of how much money you make every year.
One option is to choose a company who offers higher limits. Each company has different coverage limits on their policy. We can help you shop around until you find one with a high enough limit for your needs.
Another route is to buy two separate plans from different companies. Sure, you’ll pay more in premiums every month, but you’ll have the protection in place if you ever need it.
Where to Get a Disability Insurance Quote
You now know the basics of disability insurance coverage, it’s time to go out and find a policy of your own.
There are more than 40 insurance companies which sell these plans. As I mentioned, they are all different. Some are going to have higher limits, offer a larger percentage, or have cheaper rates.
You need to find a company which suits your needs.
Before you pick a company, compare the rates and plans from several companies. You don’t buy the first house you see, why would you buy the first policy you find?
Sure, you can use your own time to contact those 40+ companies individually, or you can use a tool which will do the dirty work for you.
If you’ve decided you want to get disability insurance or supplement the coverage you already have from work, check out PolicyGenius. They are one of the few companies out there which can gather quotes from dozens of companies for disability insurance, all in one place.
PolicyGenius allows you to tailor your quotes to exactly the kind of policy you’re looking for; the perfect amount of coverage with the proper waiting period.
They know shopping for insurance isn’t easy, but they make it as quick as possible.
FAQs – Best Disability Insurance Quotes
How can I get the best disability insurance quotes?
To get the best disability insurance quotes, it’s important to shop around and compare policies from different insurance companies. You can request quotes online or by speaking with a licensed insurance agent. Be sure to provide accurate information about your occupation, income, and health to receive an accurate quote.
What factors can affect the cost of disability insurance?
The cost of disability insurance can be affected by several factors, including your age, occupation, health status, and the type and amount of coverage you select. Policies with longer benefit periods or more comprehensive coverage may be more expensive.
How much disability insurance coverage do I need?
The amount of disability insurance coverage you need depends on factors such as your income, monthly expenses, and savings. A general guideline is to have enough coverage to replace 60% to 80% of your income, but this may vary depending on your individual circumstances.
For many individuals and families, owning a home is a lifelong dream. However, with rising real estate prices, some may find themselves seeking financing beyond the conforming loan limit. This is where jumbo loans come into play.
What is a jumbo loan?
What exactly is a jumbo loan in New Mexico? A jumbo loan is a specialized type of mortgage that comes into play when you’re seeking financing for a home that surpasses the conforming loan limits (CLL) established by the Federal Housing Finance Agency (FHFA). Typically, this type of loan is necessary for upscale, luxurious properties or those situated in pricey housing markets like Santa Fe.
If the home you’re purchasing will require you to borrow more than the CLL, you’ll need to apply for a jumbo loan. Because of the larger loan amounts, jumbo loans typically carry stricter requirements and higher interest rates than conforming loans. Lenders may require a higher down payment, a lower debt-to-income ratio, and a stronger credit score to qualify for a jumbo loan in New Mexico.
What is the jumbo loan limit in New Mexico?
In New Mexico, the conforming loan limit is $726,200 across all counties. So, for example, if you’re buying a home in Santa Fe County , where the median sale price is $622,000, a loan limit exceeding $726,200 would be considered a jumbo loan.
As a reminder, the amount being borrowed is what determines whether or not you’ll need a jumbo loan, not the home price. So, if you were to put $50,000 down on a $750,000 home in Albuquerque, the mortgage would be $700,000, which is under the conforming loan limit for this area. In this case, your loan wouldn’t be considered a jumbo loan.
For more information on the conforming loan limit in your county, use the FHFA map.
What are the requirements for a jumbo loan in New Mexico?
Borrowers must meet stricter requirements to qualify for a jumbo loan than they would for a conforming loan. The specific requirements can vary from lender to lender, but below are the typical requirements for borrowers seeking a jumbo loan in New Mexico.
Higher credit score: In order to have your loan application approved for a jumbo loan, most lenders will require a credit score of 720 or higher. While some lenders may be more lenient and accept a score as low as 660, a score below this is generally not accepted. In contrast, a credit score as low as 620 could suffice for a conforming loan with some lenders.
Larger down payment: Obtaining a jumbo loan in New Mexico typically requires a larger down payment compared to a conventional loan. Lenders may require a down payment of 10% to 20% or more, depending on the specific loan program and the borrower’s financial situation. If you’re approved with a down payment less than 20%, keep in mind you’ll most likely be required to purchase private mortgage insurance (PMI).
More assets: During the asset review process, lenders typically request that jumbo loan borrowers provide evidence of sufficient liquid assets or savings to cover the equivalent of one year’s worth of loan payments.
Lower debt-to-income ratio (DTI): Lenders typically require a debt-to-income ratio (DTI) of under 43% for jumbo loan borrowers, although a DTI closer to 36% is preferred. This ratio is calculated by dividing the sum of all monthly debt payments by the borrower’s gross monthly income. A lower DTI indicates a stronger ability to repay the loan and can help borrowers secure more favorable terms and rates. It’s important for New Mexico borrowers seeking a jumbo mortgage to have a clear understanding of their DTI and take steps to improve it if necessary.
Additional home appraisals: When you buy a home in New Mexico, your lender will require a home appraisal to confirm that the property’s value is equal to or higher than the loan amount. In some cases, a lender may require an additional appraisal for a jumbo loan. In housing markets with very few comparable property sales, the cost of the appraisal may be higher than in cities with more frequent sales.
Yes, we’ve all heard it. Buying a home today might seem like the most unaffordable, and therefore impossible, it’s ever been. Home prices are near record levels, pushed up by bidding wars erupting on anything well-situated and move-in ready. Plus, mortgage rates are nearing 7%.
But here’s the thing: The baby boomers had it worse.
In May of this year, the typical buyer spent just under a third of their household income, about 32.8%, on housing. As uncomfortable as that might be, it’s not even close to how much buyers plunked down in the early 1980s.
In 1981, the same year the AIDS virus was identified, the Iran hostage crisis came to an end, and “Raiders of the Lost Ark” topped the box office charts, homebuyers that September and October spent 51.3% of their household income on their mortgage payments.
Let that sink in for a moment.
Furthermore, that percentage doesn’t even include what they paid for utilities, property taxes, insurance costs, and homeowners association fees.
Buying a home is “not as unaffordable as it’s ever been,” says Realtor.com® Chief Economist Danielle Hale. But, “in the grand scheme of things, housing is pretty unaffordable right now.”
To figure out how affordable buying a home has been over the past 50 years, the Realtor.com data team analyzed data going back to 1973. We looked at monthly existing single-family home prices from the National Association of Realtors®, weekly mortgage interest rates for 30-year fixed loans from Freddie Mac, and median annual household income from the U.S. Census Bureau. Then we calculated the typical mortgage payment of a buyer taking out a loan on the median-priced home and what percentage of their household income that would eat up.
The analysis doesn’t factor in regional price differences, new construction, or the percentage of income that individual buyers spent on homes.
“If you go back in history, you can find a period where housing is more unaffordable than it is now,” says Hale. “But you have to go back almost 40 years.”
Why today’s buyers wouldn’t want to purchase a home in 1981
In the fall of 1981, homes were cheap by today’s standards.
The typical single-family home cost just $66,125—about six times less than the cost this past May, according to the most recent data from NAR.
However, the typical household was bringing in only about $19,074 in 1981, according to U.S. Census Bureau data. And mortgage rates topped 18% that fall. (And you thought 7% was rough.)
Those turbo-sized rates meant that 99.5% of a buyer’s first year of mortgage payments was going toward just the towering amount of interest on the loan. The buyer didn’t pay down 10% on the principal of the balance until the 18th year of the loan, assuming the buyer didn’t refinance—which most buyers did. (This calculation includes a 20% down payment.)
Today’s average family is earning about $73,505 a year. But in May, they were contending with median existing-home prices of $410,100 and mortgage rates hovering in the mid-6% range and which have since risen to the high 6% territory. About 85% of their first year’s mortgage payments is going to interest.
One important difference is that instead of waiting nearly two decades to have 10% of their principal paid off, they achieve that milestone by year seven.
“Mortgage rates play a really substantial role in how affordable housing is at any time, especially since so many buyers buy with a mortgage,” says Hale.
Uncomfortable similarities between 1981 and 2023
There are a few similarities between then and now. Inflation was soaring in the early ’80s, causing the U.S. Federal Reserve to hike interest rates. (Sound familiar?) The nation was also in a full-blown recession in 1981. Fast-forward 42 years, and the nation appears to be flirting with another downturn.
The number of home sales slowed in the early 1980s as well as in this post-pandemic housing market as fewer folks can afford to buy due to higher mortgage rates.
Then, as now, most of those purchasing homes earn more than the median income—unless they had very generous family members, stock options, or trust funds. Or they’re existing homeowners who can put the equity they built in their last home into their new one.
“Boomers have been saying things were harder when we were young for a long time. And in some respects, they are right,” says Hale. “But in other respects, they don’t have the same amount of student loan debt and child care costs that young people have today.”
Plus, once mortgage rates fell, most folks who purchased homes in the early 1980s had refinanced their loans to lock in the new rates and “drastically” lower their monthly mortgage payments. By 1986, rates had fallen back down to the single digits.
Recessions and pandemics may be good times to buy homes
As counterintuitive as this may seem, recessions may be financially advantageous for buyers to purchase homes—if they remain employed and have the funds to do so. That’s because interest rates usually (but not always, as the early 1980s demonstrated) fall during economic downturns. That makes homebuying more affordable.
Over the past 50 years, homes were the most affordable as the country climbed out of the Great Recession. In early 2012 and 2013, buyers were spending about 14%—or less—of their income on a home. That’s because mortgage rates were below 4%.
The same thing happened in the early days of the pandemic. The economy ground to a halt as stay-at-home orders proliferated and mass layoffs ensued. To stimulate the economy, the Fed cut interest rates and mortgage rates fell below 3%—for the first time ever.
Those low rates triggered the big run-up in prices and offset those gains. Since buyers were spending less on interest, they could afford to purchase more house. The result? In spring 2020, buyers were spending just under 18% of their income on housing.
“Affordability is one of the factors that kicked off the buying frenzy that we saw in the early part of the pandemic,” says Hale.
It wasn’t until mortgage rates climbed above 4% in March 2022 that buyers began to get priced out. That month they spent just under 25% of their income on housing. As rates ticked up and affordability worsened, more buyers left the market and fewer homes went up for sale (as sellers didn’t want to give up their low rates).
The situation has only gotten worse, with buyers spending nearly a third of their income on housing in May.
“When housing is unaffordable, it’s very tempting to stretch your budget,” says Hale. But with inflation, rising property taxes, and high energy bills, “now’s probably not a good time to do that.”
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This is a guest post from Sara, who writes about reaching for a life of greater simplicity and deeper meaning at On Simplicity.
I’m a simple girl and I love simple solutions. That’s why I’ve fallen in love with DRIP investing — it’s about as simple as investing gets. If you’re an investor who likes to set it and forget it, DRIPs are a great weapon to have in your financial arsenal.
What Is a DRIP?
The term DRIP refers to “Dividend Reinvestment Program.” Don’t let the term fool you, though, because DRIPs go way beyond dividends. Essentially, when you open a DRIP account with a company, they’re letting you buy stock directly, cutting the brokerage firm out of the picture. This lets you buy additional stock with any dividends you earn, all without brokerage firms taking a bite of your profit.
The real beauty comes from the added perks of setting up a DRIP account. Many companies that offer DRIPs will also allow you to buy extra shares directly, again cutting out the middleman. Typically, you will need to set up a recurring transaction to get this benefit. In other words, you arrange to buy a certain dollar amount of stock each month (or quarter, depending on the company and plan you choose).
If this is all sounding a bit familiar, that’s because it’s not a new idea. Think of your 401(k): a little bit of money gets whisked away to buy shares of different funds each month. Do you miss that money? Probably not. Does it add up over time? You bet it does. The only difference with a DRIP is that you’re building shares in a single company.
What Are the Benefits of DRIP Investing?
Dollar cost averaging. Even though some people debate its benefits, there are some pretty strong arguments in favor of dollar cost averaging. You can minimize the effects of buying too low or too high, because you’re buying in on a regular basis.
Automated investing. Once you’re signed up, you’re good to go. You don’t have to track the P/E, try to time the market, remember to place more orders, or even fuss with an online broker. DRIPs are hands-down the easiest way to invest in individual company holdings.
Super-low transaction fees. You may get charged a fee for the annual DRIP service (or you may not). For instance, GE charges $12 a year. If you’re set up for an automated stock purchase each month, that’s $1 for a trade. Compared to traditional or online brokerages, that’s a huge savings.
Invest small amounts of money. You don’t have to invest thousands at a time. Some programs let you invest as little as $10 per month. If you’re not ready to invest a large amount, a DRIP account can help you build a solid position in a company over time with very small amounts.
What Are the Drawbacks?
DRIPs are not diversified. The cold, hard truth is that you’re investing in a single company, which always carries some risk. When you contribute to a mutual fund through your 401k each month, you’re buying shares of many companies. If one tanks, you don’t take a huge hit. When you invest your money in individual stocks, there’s nowhere to spread the risk. DRIPs should always be part of a diversified portfolio.
You’re tying up a portion of your monthly income. If your budget is extremely tight, then going without that extra chunk of change can be difficult (but not impossible).
Each company is different and requires a different sign-up process. The initial set-up can be a pain, as you may have to create an account with a third party transfer agent. They’ll need all the traditional information a brokerage would need, so the process is a bit more involved than creating a user name and password. Once you’ve gone through the initial set-up, though, expect smooth sailing.
The selection of available DRIPs is pretty small. This is actually a good thing, though, since DRIPs are ideally suited to blue chip companies that will be around for years to come. These companies, like P&>, AT&T, and GE are perfect for long-term investments, not quick profits.
How Do I Start?
Research the companies that offer DRIPs. The list is growing regularly, so don’t write off a company just because they aren’t on someone’s list.
Research the heck out of any company you’re considering investing in. Are they a good long-term investment? Do all the research you would normally do before any investment, and then do some more. You’re making a long-term commitment to this company, so be sure it’s a stock you’re comfortable going on autopilot with.
Contact the company (their website will usually have enough information to get started) and find out what you need to do to open an account.
Jump through the necessary hoops, provide your bank account info (your money can be pulled directly from your account, just like online bill pay), and you’re in.
A Word on Acronyms
You’ll see DRIPs referred to in many different ways: DRP, DIP (Direct Investment Plans), SPP (Stock Purchase Plans) and OCP (Optional Cash Purchase Plan). Each of these different account types has slight variations, but the DRIP (or DRP) is at the heart of each, and that’s why you’ll see it being referenced most often, and why I’ve used that terminology here in an introduction-level piece.
Again, I’m a simple girl. I’m not claiming to be the expert on DRIPs, just a very satisfied user. As with any investment, you need to do your own research before diving in. For a more in-depth explanation of DRIP investing, check out the Motley Fool’s take or MSN Money’s explanation (the latter piece also does a great job of running the numbers on reinvestment). If you like simple solutions and are a long-term investor, DRIPs are worth a look.
Mortgage rates dropped to 6.78% this week, the biggest weekly decline since mid-March, as investors digested a raft of mixed incoming economic data.
Freddie Mac’s Primary Mortgage Market Survey, which focuses on conventional and conforming loans with a 20% down payment, shows the 30-year fixed rate averaged 6.78% as of July 20, down from last week’s 6.96%. By contrast, the 30-year was at 5.54% a year ago at this time.
“As inflation slows, mortgage rates decreased this week,” said Sam Khater, Freddie Mac’s chief economist in a statement. “Still, the ongoing shortage of previously owned homes for sale has been a detriment to homebuyers looking to take advantage of declining rates. On the other hand, homebuilders have an edge in today’s market, and incoming data shows that homebuilder sentiment continues to rise.”
Homebuilder sentiment rose for the seventh consecutive month and new construction activity slightly pulled back as the cost of materials picked up. Simultaneously, retail sales improved modestly and industrial production declined on waning demand.
Other mortgage rate indexes showed mixed results:
HousingWire’s Mortgage Rates Center showed Optimal Blue’s 30-year fixed rate for conventional loans at 6.74% on Wednesday, compared to 6.85% the previous week. However, the 30-year fixed rate for conventional loans was at 7% at Mortgage News Daily on Thursday, up 13 basis points from the previous week.
After June’s relatively positive inflation data, the market’s attention has turned to the upcoming FOMC meeting.
“Though inflation has slowed, the level remains well above the 2% target and investors expect the Fed to hike interest rates in pursuit of this target,” said Hannah Jones, economist at Realtor.com, in a statement. “While the Federal Funds rate does not directly impact mortgage rates, it installs a floor beneath the cost of borrowing, meaning mortgage rates are likely to remain elevated for the time being.”
George Ratiu, chief economist at Keeping Current Matters, on the other hand, stressed that the spread between the 30-year fixed-rate mortgage and the 10-year Treasury remains north of 300 basis points. To Ratiu, it is a clear signal that investors are still pricing a premium for the higher macro risk.
This ongoing uncertainty permeating financial markets has a direct impact on mortgage rates.
As expected from the traditional vacation season, consumers are more focused on services and travel experiences this summer rather than buying products, added Ratiu.
At today’s rate, the mortgage payment for a median-priced home is about $2,300, a 13% premium compared to last year’s peak-price period. Ironically, the elevated mortgage rates are not making a dent on home prices, which remain high because of a depleted inventory. Hence, the lower mortgage rates bring little relief to hopeful homebuyers.
“Many home owners feel ‘locked-in’ by their current mortgage rate and are therefore choosing to hold off on listing their home for sale,” said Realtor.com’s Jones. “As a result, after more than a year of new listings lagging behind the previous year’s pace, the number of homes for sale has tracked lower than last year’s levels for the past four weeks. In light of limited home inventory, buyers are turning to new construction and builders are picking up the pace of construction to fill the gap.”
Economists largely agreed that current market dynamics are likely to persist until affordability and inventory gains are made.
If you haven’t heard of PNC Mortgage before, you probably will in the near future.
They’re a rapidly growing depository bank and mortgage lender with 2,600 branches across 19 states nationwide.
PNC is also one of the top 10 largest banks in the United States based on total assets. However, most of their retail operations tend to be in the Midwest and Northeast regions of the country.
But you can still apply for a home loan with the company from just about anywhere in the United States because they let you apply online, by phone, or in person at a branch.
Let’s learn more about PNC to see if they should be included in your home loan search.
Who Is PNC Bank?
A depository bank and mortgage lender with roots in Pittsburgh
The name is based on two former predecessors (Pittsburgh National Corporation and Provident National Corporation)
They acquired National City Mortgage during the housing crisis in 2008 to become a major mortgage player
A top-25 mortgage lender nationally that funded about $36 billion in home loans during 2021
The history of PNC Bank can be traced all the way back to the mid-1800s, though it’s unclear when they first began offering mortgages on residential properties.
But one thing is certain – they’ve been around a while and look to be growing larger as time goes on, especially in the home lending space.
One major catalyst in their growth story had to do with their timely acquisition of National City Mortgage, which was a major home loan lender until the housing crisis hit in the early 2000s.
PNC Mortgage basically reinvented itself with the merger thanks to National City’s large mortgage presence. They were a top-10 mortgage lender up until the crisis.
However, PNC has yet to crack the top-10 lender list themselves, though it’s probably a matter of time if they continue on the same course.
What Does PNC Mortgage Offer?
They offer both fixed and adjustable-rate loan options
Conforming and jumbo loans
FHA loans and VA loans
And home equity loans and lines of credit
PNC Mortgage offers a variety of home loan programs, including typical fixed-rate options like the popular 30-year fixed and 15-year fixed.
Additionally, you can get your hands on three different types of ARMs, including a 5/1 ARM, 7/1 ARM, and a 10/1 ARM.
If you happen to live in a more expensive region of the country, or have plans to buy a mega-mansion, know that they accept jumbo loan amounts up to $5 million. This should satisfy most borrowers out there.
Conventional loan options aside, they offer government home loans as well, including FHA loans and VA loans.
Both government loan options come in 30-year fixed and 5/1 ARM varieties.
PNC also offers three different types of home equity options, including a HELOC, a home equity loan, and a so-called “Home Equity Rapid Refinance.”
All three include a 0.25% interest rate discount when you set up and maintain automatic monthly payments via a linked PNC checking account.
The Home Equity Rapid Refinance is referred to as a “lower cost solution than a traditional fixed rate mortgage,” though they also say you can enjoy fixed payments for up to 30 years.
It’s somewhat unclear what it actually is, though it sounds kind of like a cash out refinance with limited closing costs. One twist is it seems to be a home equity loan that is in the first position (not subordinate), an important detail if you were to get foreclosed upon.
Anyway, a home appraisal fee isn’t required in many cases, and they allow LTVs as high as 84.9% with no private mortgage insurance. It sounds like a weird take on a home equity loan.
PNC Mortgage Rates Seem Competitive
PNC Mortgage openly advertises its mortgage rates
Which not all home loan lenders tend to do
They appear to be quite competitive relative to other lenders
But note that they often assume a 70-80% LTV ratio among other things
Speaking of interest rates, let’s talk about the rates at PNC Mortgage. First off, kudos to them for advertising their mortgage rates. Not all mortgage companies do.
My first impression – they’re quite competitive, but as always, we have to consider the assumptions they make. And they make some pretty big ones.
For conforming loan amounts, they assume you’re putting down 20% of the home purchase price, or that you have 20% equity in your home. Plenty of homeowners put down less when buying and/or have less equity.
They also expect you to have excellent credit, defined as a 740-credit score, and presume the property is a one-unit single-family home.
When it comes to jumbo loans, they make the same assumptions but base pricing on a 30% down payment, or 70% LTV.
While this isn’t uncommon (most lenders do this), you do have to pay attention to the assumptions to ensure you aren’t disappointed when you receive your actual rate quote.
Also take note of the lock period, which might be 30 or 60 days. If you accept a lower lock period you might be able to obtain an even lower mortgage rate.
PNC Mortgage Reviews
If their mortgage rates and closing costs are competitive by all means consider them
They also recently launched a digital home loan process powered by Blend
And they offer a free biweekly payment service and relationship discounts
But their reviews are a bit mixed so be sure to do your research
It’s hard to get super excited about going to a big, old bank to get a home loan.
But PNC Mortgage recently launched a revamped digital mortgage process backed by fintech company Blend in September 2022.
They also offer relationship discounts on their mortgage rates and home equity offerings, along with a free biweekly mortgage payment service.
However, they’re a little late to the party seeing that other major players, such as Rocket Mortgage from Quicken, and the digital offerings provided by the likes of Bank of America and Chase, have been around for years.
Maybe PNC can offer lower mortgage rates than the competition, which is certainly enough to choose them over another lender, but there doesn’t seem to be much else to talk about here.
They have their “Home Insight Planner,” which features some mortgage calculators and lets you generate home affordability scenarios, but it seems a bit clunky and not all that revolutionary.
They do service a lot of mortgages, so it’s possible you might actually be making your mortgage payments out to PNC if you get your home loan with them. This can be a plus if you’re sick of your mortgage loan being sold and transferred over and over.
But until PNC Mortgage does more to separate themselves from the crowd, they likely won’t attract many clients outside their existing customer base, especially as more disruptors emerge to shake up the scene.
Lastly, while they do have an ‘A+’ rating from the Better Business Bureau (BBB), many of their reviews are pretty low.
For example, they’ve got a 1.12/5 rating on the BBB website from reviews, a 1.3/5 on Trustpilot, and a 3.7/5 on WalletHub.
The one bright spot is Zillow, where they enjoy a 4.95/5, with most reviews likely more aligned with their home loan business than overall banking services.
If that’s the case, PNC could be a good choice among other mortgage companies out there.
PNC Mortgage Pros and Cons
The Good Stuff
Offer a digital mortgage process powered by Blend
Can apply for a home loan online, in-person, or by phone
Openly advertise their mortgage rates online
Relationship discounts for existing customers
Lots of loan programs to choose from including jumbos and home equity loans/lines
Licensed to do business nationwide
They service their own loans
A+ BBB rating
The Maybe Not
As a big bank they might be overly bureaucratic/slow
A business credit card is a lot like a personal credit card: Both let you borrow money and pay them off on an ongoing basis. But business credit cards typically come with features tailored toward entrepreneurs, like free employee cards and rewards on common business purchases, like office supplies.
Business credit cards offer other benefits as well. They are great tools for separating your business and personal finances, on-time payments can help you build business credit, and unlike other types of business financing, you may be able to qualify for one even if your business is new or small.
What is a business credit card?
A business credit card is a revolving line of credit that lets you spend up to a certain amount, pay off some or all of what you owe, then repeat that process. This can help you make purchases you need, even when your cash flow is uneven.
Technically, you can use consumer cards for business expenses. However, card issuers have products designed for business owners. These cards often come with higher credit limits than personal credit cards and make it easier to spot potential tax deductions, among other features.
Business credit cards are one of the easiest types of business financing to qualify for. Eligibility largely depends on your personal credit history, which can make business credit cards for new businesses and very small companies more accessible than traditional business loans.
How do business credit cards work?
Business credit cards work a lot like personal credit cards do. But for bookkeeping and liability purposes, you should only use a business credit card for your business expenses.
Broadly speaking, here’s how to use a business credit card:
Charge business expenses to the card.
Receive a statement that specifies how much you borrowed over the statement period and how much you need to pay back.
Make at least your minimum payment, but try to pay down your balance in full. If you can’t, you’ll pay interest on the remainder. Annual percentage rates (APRs) on business credit cards typically range from 20% to 30%.
Earn rewards, like cash back or airline miles, as a result of your spending.
Business owners may also have access to business charge cards. Charge cards have no credit limits, but you’ll need to pay them off in full every month or face stiff penalties. They’re best for businesses with robust cash flow that want to maximize rewards.
Benefits of business credit cards
Business credit cards help you build business credit. Business credit card issuers report your payment history to business credit bureaus. Making early or on-time payments can help build your credit history and strengthen your business credit score.
You can finance purchases as needed. Your business may not always have enough cash in the bank to stock up on inventory or make large purchases while keeping up with day-to-day expenses. Using a credit card can help spread out big-ticket items over time — especially if it’s a business credit card with a 0% APR intro period — or help you keep buying what you need during slow seasons.
You can get rewarded for your spending. For instance, business travel cards offer perks like airline miles, airport lounge access and hotel points. And using a cash back business credit card means you’ll get a percentage of what you spent — either across the board or in certain categories — typically as a cash deposit or credit at the end of each statement period.
Drawbacks of business credit cards
They’re not covered by the Card Act. The Credit Card Accountability Responsibility and Disclosure Act of 2009 (Card Act) created new consumer protections for credit card users, like limiting credit card fees and sudden changes to interest rates. But the rule doesn’t extend to business credit cards — which means interest rates can change with little warning and you may encounter fees that you’re not used to on personal credit cards.
They’re more expensive than other forms of financing. If you need to finance large expenses that you probably can’t pay back in one statement period, consider applying for a business loan or business line of credit instead. Those products are harder to qualify for than business credit cards, but they usually come with lower interest rates.
Is a business credit card right for you?
Business credit cards can be useful tools for companies of all sizes. You may be able to qualify for a business credit card whether you’re a solopreneur with a side gig or running a small business with multiple employees.
ETFs are tradable funds that investors can buy and sell on stock exchanges all day. They typically hold a basket of assets, such as stocks or bonds, and mirror the moves of another underlying index. Since its start almost three decades ago, the ETF industry has taken the financial world by storm, and there are thousands of different ETFs on the market that investors can choose from.
But each investor is different, and some ETFs likely won’t be a good fit for their portfolio or strategy. Learning to choose or pick ETFs that do fit your strategy can take some practice, but it’s good to have some guidelines in mind.
How Do I Pick an ETF?
There’s no right or wrong way to pick an exchange-traded fund (ETF), but you can follow a process to help you determine which securities may be the best fit for you. It starts with picking an asset class.
Step 1: Pick the Asset Class
Because the performance of an ETF is so closely tied to an underlying index, investors need to first decide which underlying asset class they want exposure to. The main asset classes are stocks, bonds, currencies, and commodities.
Risk is generally inversely correlated to return. So riskier assets have the potential to deliver greater returns, while safer assets tend to deliver reliable, albeit smaller, returns. Stocks are considered to be a riskier, more volatile asset class. Commodities even more so. Meanwhile, bonds tend to be safer but also deliver more muted returns.
Keep in mind, just because an investor buys an ETF that gives them exposure to one asset class, that doesn’t preclude them from buying another that invests in another market. In fact, it’s a healthy portfolio diversification strategy to allocate one’s money into different asset classes, a practice known as asset allocation.
Step 2: Narrow the Focus
Once an investor has chosen their asset class, they can dive deeper within that market. When it comes to stock ETFs, this usually involves picking an industry – like technology or financial – that they’d like to get greater exposure to. Equity ETFs may also focus on a specific attribute a stock can have. Or dividend ETFs, which hold shares of companies with regular payouts.
For bond ETFs, investors can decide between funds that invest in U.S. government-bond versus bonds issued by countries abroad, as well as investment-grade (higher quality) company debt versus high-yield (junk) bonds.
More recently, thematic ETFs have taken off. These are stock funds that tend to be much narrower than the traditional sector ETF. They can focus on a niche subsector, like robotics, electric cars or blockchain, or even modern trends, like the gig economy or working from home.
There are pros and cons to thematic ETFs: while they’re often marketed as a convenient way to wager on an investment story, they also tend to underperform the broader market. Thematic ETFs have also been criticized for being too narrow and not offering the wide breadth that ETFs were originally designed to offer.
Step 3: Explore Different ETF Strategies
ETFs began as a way to provide investors access to broad markets with a single investment. Since then however, the popularity of the industry has led to the creation of numerous different kinds of ETFs, some of which employ complex strategies.
Here are some of the different ETF types:
• Leveraged ETFs allow investors to make magnified bets on different assets or markets. So instead of replicating the move of the underlying index exactly, leveraged ETFs will produce a move that’s 2x or 3x.
• Inverse ETFs let investors wager against an asset, so shorting or betting that the price of a market will go down. So if on a given day, the underlying market goes down, the inverse ETF’s price will go up.
• Actively Managed ETFs invest in assets without following an index. While ETFs are usually a form of passive investing–the strategy of tracking another index–actively managed ETFs are like stock-picking strategies packaged into a tradable fund.
• Smart-Beta & Factor ETFs use a rules-based system — such as stock weightings, valuations, or volatility trends — to choose the investments in a fund. These funds are often considered a hybrid between passive and actively managed ETFs.
• Currency-Hedged ETFs are funds that let investors wager on a basket of overseas stocks, while mitigating the risk that stems from currency fluctuations.
Step 4: Look at ETF Costs
A fundamental reason why ETFs have become so influential is their low cost. Low ETF fees have compressed costs across the board in asset management. The average expense ratio of most ETFs has fallen over time. Expense ratios are a percentage of assets subtracted each year. So, an expense ratio of 0.45% means that the charge is $4.50 for every $1,000 invested each year.
Because the vast majority of ETFs tend to be passive, they tend to be much cheaper than mutual funds, many of which are still actively managed. More complex ETFs like leveraged funds, or actively managed ones, tend to have higher expense ratios. But some passive ETF fees have hit rock-bottom levels.
Step 5: Other Ways to Analyze ETFs
What about how well an ETF has done? Should that matter? While profitability can make an investment look more attractive, it shouldn’t be the only factor investors use when determining which ETF to buy. That’s because in investing, past performance is not indicative of future results.
For ETFs, another key measure of performance is how well it tracks the underlying index. Tracking errors, when a move in the ETF veers from one by the market it’s designed to track, can come up from time to time, particularly in leveraged funds or ones that invest in stocks overseas.
Looking at the assets under management (AUM) can be a helpful way to pick an ETF. A larger AUM can signal an ETF’s popularity, which in turn makes it more likely that it’s liquid, or easy to trade without impacting prices.
How to Find an ETF’s Holdings, Prospectus, and Fact Sheet
Another touted perk of ETFs is their transparency. Investors can look up what’s exactly in a fund by going to the ETF provider’s website and searching for the fund. Contacting the ETF provider directly for this information is also possible. ETF providers are required to update this information regularly.
Securities and Exchange Commission (SEC) regulation also requires that ETF providers make easily available an ETF’s prospectus. The prospectus has information about the ETF including its investment objective, the risks, fees, as well as expenses. For investors interested in an ETF, one of the most important things they can do is research the fund by carefully reading the prospectus.
Similarly, ETF fact sheets act like quick summaries of the fund, giving key information like performance, the top holdings, and other portfolio characteristics. ETF providers typically produce fact sheets every quarter and make them available on their website.
The Takeaway
Choosing an ETF from the thousands out there can seem daunting, but taking a step-by-step approach can help individuals sort through the multitude of options. A key step investors can take in researching ETFs is reading the fund’s prospectus, where they’ll find vital information on the investment objectives as well as potential risks.
Considerations include which asset class an investor wants to invest in; how broad or narrow of an exposure they want; costs — which are usually shown as expense ratios; and lastly, an ETF’s size can give clues on the popularity and liquidity of the fund. One ETF, on its own, can provide some diversification. However, some people choose to use a number of ETFs as building blocks to assembling a well-balanced portfolio.
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