Bull vs Bear Markets & What They Mean for Investors

Bull vs Bear Markets & What They Mean for Investors | Mint

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2.7 years on average. That’s definitely enough time for investors to make smart moves, grow their money, and plan ahead for their next steps. 

Considerations to note:

It’s also good to know that, in general, the economy has continued to grow over the long term. Market indexes have generally trended upward over the decades, meaning that most of the time, the economy tends to be bearish. (Note that you can also describe investors as bearish when they have an aggressive attitude toward their investments.) 

One thing that’s important to keep in mind, however, is that no one can technically predict how long a bear market will last, so even if the market trends upward in the long term, it’s still possible to lose money in the short term — people do it every day. 

What’s a bear market?

The bear market meaning is when the economy is receding; stock prices begin to fall, and investors become nervous about putting their money on the line. Similar to bullishness, you might also hear people talk about investors being bearish toward certain stocks or the market in general. This means that they sense the uneasiness in the market, and prices may begin to fall.

Relationship to employment:

Opposite to a bull market, bull markets may be accompanied by a rise in unemployment; this is because the stock market declines before a recession, causing companies to tighten their belts and lay off employees that they can no longer comfortably afford. 

Considerations to note:

It’s important to note that it’s not truly considered a “bear” market unless stocks have fallen 20% or more. For example, the Great Depression & the Recession of 2008 are both extreme cases of bear markets. 

How long does a bear market last?

The time that a bear market lasts can vary. The Depression and Recession lasted years. However, in general, market downturns last about 289 days — just under 10 months. One of the biggest differences when considering bull markets vs bear markets is that bear markets tend to be shorter-lasting

For investors who are in it for the long haul — such as those invested in index funds — it’s usually wise to wait out the bearish market, as bear markets are generally followed by bullish markets once unfavorable conditions have passed. 

However, for short-term investors looking to quickly grow profits, a bear market can be a difficult challenge. During a true bear market, some companies might significantly lose equity value, or may even go out of business completely. This is one of the reasons why investors should assess their risk tolerance before deciding on their investment strategy. 

Differences between bull vs bear markets

As you can probably guess, there are some significant differences between bull markets and bear markets. However, to better understand the economic conditions that lead to each one — and what to look out for to protect your capital — it’s important to highlight a few of the key differences. 

Supply and demand for securities

Supply and demand are the bread and butter of economics, so it’s good to know how they’re affected by bull and bear markets.

  • In a bull market:

There’s a huge demand for equities and securities; investors want to hitch a ride on all the growth companies are experiencing. This leads to a lower supply of stocks, which increases the price. 

  • In a bear market:

Supply is high, but nobody is buying. Investors are worried that stocks will continue to depreciate, making them risk-averse and unwilling to bet their capital. Stock prices sink, as there is a greater supply than demand. 

Investors’ attitudes

As mentioned above, bullish and bearish are terms that can be used to describe investors’ sentiments toward the market. You might say that investors have recently been bearish on oil futures, or bullish on software companies. But investors’ attitudes also have an effect on the stock market, creating a sort of feedback loop.

  • In a bear market:

When the market is in trouble, investors are often unwilling to put their money on the line, creating an atmosphere of doubt. This doubt ends up adding to the decrease in stock prices, as the decrease in demand sends shares’ value tumbling. 

  • In a bull market:

Oppositely, bullish markets inspire a lot of confidence, so more investors are eager to get in on the profits. This also creates a positive feedback loop, and the high demand sends share prices trending upward. 

Indicators of economic trends

The final difference to take note of is that, as mentioned above, bull markets are usually associated with strong economies, and bear markets with economies in trouble.

If you hear news of a bear market — particularly a serious bear market — you can be confident that the economy is headed for a rough patch, as the way the stock market performs is generally associated with the way the economy, on the whole, is performing. 

How COVID-19 induced bearish sentiment

Recently, the COVID-19 pandemic caused a lot of bearish sentiment among investors. That’s because, as governments were forced to put restrictions on consumer and business activity, and many people began to lose their jobs, stocks started to depreciate. 

That caused a chain reaction, as more and more investors were afraid of markets crashing even further, and became bearish about their investments. This spiraled, and the Dow Jones Industrial Average dropped over 20% — the worst drop since 1987. 

Since that initial drop, however, recovery has been consistent, and with news of the vaccine becoming widely available in the months ahead, investors are beginning to approach the market with more optimism. 

What should you do in each market?

Here’s the big question: if you’re looking at a bear or bull market, what should you do? Let’s take a look at each. 

Bull market

When the market is trending upward, there are generally two pieces of advice that you might hear from investors:

  • Take advantage of rising prices.
  • Buy stocks early and sell at their peak–also known as a buy and hold strategy.

This applies if you are investing in the short term. Note, however, that this is easier said than done. It’s good to remember that all investing comes with some degree of risk. This is why many investors choose to grow money slow and steady using low-risk investments.

If you’re investing for the long-term, it’s usually smart to let your investments appreciate and bide your time until you’re ready to use the money. 

Bear market

Bear markets are trickier, as it’s hard to say what companies may survive and bounce back with new profits once the storm clouds clear, and which ones simply go under — and take your capital with them. However, if you’re investing in the short term, it’s a good idea to research what companies are likely to survive, and only then consider investing in those. 

And remember, there is always a good degree of risk associated with investing in a volatile market

If you’re in it for the long haul (like an index fund or retirement account) it’s best to avoid panic selling. Chances are, as the history of the stock market has proved, the economy will recover, and your holdings will begin to appreciate again. 

Key takeaways

Here’s what to remember about bull markets vs bear markets: 

  • A bull market is when stocks are going up in value, and often, the economy and employment along with them. They usually last a couple of years.
  • A bear market is the opposite: stocks are losing value, the economy looks uncertain, unemployment might increase. Bear markets tend to last just a few months, but can be longer. 
  • Investor attitudes have a lot to do with the way markets perform — investors might feel bullish, boosting stock prices, or bearish, causing them to decrease. 
  • Ultimately, your investment strategy depends on your personal risk tolerance. However, it’s often wise to buy low and sell high during a bull market, and to be cautious about investing in a bear market, as the risk level is much higher. 

If you’re new to investing, or if you’d just like a helping hand along the way, it’s a good idea to consider Mint investment monitoring. The Mint app allows you to track your portfolio, along with savings, retirement, and other accounts, all in one convenient place. No matter what direction the market takes next, you’ll be able to keep a close eye on your holdings. 

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What Is a Stock Market Benchmark? – How to Measure Index Performance

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When researching investment opportunities or financial markets, you often hear something compared to something called a benchmark. You might see statements like “outperforming benchmark returns” or “lagging the benchmark.” 

Based on context, we can surmise that these terms mean an investment is performing better or worse than something, but what exactly is that something? What does a stock market benchmark mean for the average investor? 

Find out what benchmarks are and how you can use them to your advantage when investing.


What Is a Stock Market Benchmark (Index)?

A stock market benchmark, sometimes called a market index or benchmark index, is a carefully selected group of stocks meant to measure the overall performance of a group of equities or the market as a whole. Benchmarks are used as a standard or baseline against which specific investments or a portfolio’s performance can be measured.


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History of the Stock Market Benchmark

The first market index was created by Charles Dow and Edward Jones in 1884. The index was called the Dow Jones Transportation index and tracked the performance of the large railroad companies that were seen as a reflection of the United States economy at the time. 

That index evolved to become one of the best-known benchmarks, the Dow Jones Industrial Average, which today includes 30 of the largest industrial companies that represent the U.S. economy.  

Another classic market index was created by the Standard Statistics Company in 1923. Within a few years, the company developed 90 indexes that would be computed on a daily basis. 

The Standard Statistics Company evolved to become one of the biggest names on Wall Street: Standard & Poor’s, or S&P. Through a merger, the company’s name recently changed once again to S&P Dow Jones Indices. The company’s flagship index, the S&P 500 composite, is the most widely used benchmark in the U.S. today. 


Types of Benchmarks

Over the past century or so, benchmarks have become a crucial part of the complex machine that is the stock market. However, it’s important that you use the appropriate benchmark for what you plan to measure and compare — more on this later. 

There are several types of benchmarks investors use, each measuring different market segments. The most common types of benchmarks are:

Market Capitalization-Focused

The central theme to some indexes is market cap, or size of the constituents listed within it. There are four primary types of market-cap-focused indexes:

1. Blue Chips

A blue-chip benchmark is designed to track the results of the largest, most successful companies on the market. These companies are known for producing relatively predictable gains and revenue growth. 

The flagship blue-chip index in the United States is the Dow Jones Industrial Average. The Dow tracks 30 of the largest and most successful publicly traded companies in the U.S. 

2. Large-Cap

Large-cap stocks represent companies worth $10 billion or more. These are some of the largest companies in the world and tend to be leaders within their respective industries. Large-cap indexes list a diverse group of stocks in this category, tracking and measuring the performance of very large companies. 

The most popular large-cap index is the S&P 500, which tracks the 500 largest publicly traded companies in the U.S. It represents around 85% of the country’s total market cap.  

3. Mid-Cap

Mid-cap stocks represent companies worth between $2 billion and $10 billion. These companies tend to be just finding their footing in their respective industries. They’re not quite as predictable as large-cap stocks, but offer the potential for meaningful growth as these companies continue to grow and evolve. 

Mid-cap indexes are made up of a diversified list of these companies, giving investors the ability to track the performance of mid-sized companies. 

One of the most popular benchmarks in this category is the Russell Midcap Index, which is made up of the 800 smallest companies on the Russell 1000. 

4. Small-Cap

Small-cap indexes include stocks representing companies worth between $500 million and $2 billion. 

These companies are often in the beginning to intermediate stages of business, or may be experienced players in relatively small markets. A small-cap benchmark shows investors how smaller publicly traded companies are faring.

One of the most popular small-cap indexes is the S&P 600, the small-cap index also maintained by Standard & Poor’s that includes 600 smaller U.S. companies.. 

Sector-Focused

There are several sectors across the stock market. Some of the most popular include technology, biotechnology, energy, and consumer goods. Each sector is represented by a long list of benchmarks. 

One of the best examples of a sector-focused index is the Nasdaq. Known as a tech-heavy index, a large percentage of its constituents are within the technology and biotechnology sectors. 

Strategy-Focused

Some indexes have a central focus on an investment strategy. These usually fall into one of the following categories:

  • Growth Stocks. Growth-focused indexes track a diversified group of stocks known for producing compelling revenue, earnings, and price growth. One of the most popular in this category is the Russell 3000 Growth Index. 
  • Value Stocks. Value-focused indexes track a diversified group of stocks that are believed to be undervalued when compared to their peers. Investors believe that by investing in these stocks, they’ll outperform the market as the stocks recover from recent lows. One of the most popular in this category is the S&P 500 Value Index. 
  • Income Stocks. Income-focused indexes track stocks known for paying the highest dividends. One of the most popular benchmarks in this category is the S&P 500 Dividend Aristocrats. 

Asset Class Focused

Stocks aren’t the only asset class on the market, nor are they the only class of assets with a benchmark index to track them. Indexes exist to track bonds, commodities, futures, and more. If it’s an asset class, there’s likely an index that covers it.

A great example of indexes in this category is the S&P U.S. Treasury Bond Index, which tracks the performance of a highly diversified group of bonds issued by the U.S. Treasury.  

Risk-Focused

Risk-focused indexes are largely used to determine the level of volatility and variability in the market, helping investors understand what they’re up against in the battle between the bears and bulls. 

One of the most popular risk-focused indexes is the CBOE Volatility Index (VIX). 


How to Use a Benchmark

Benchmarks have become incredibly valuable tools for investors. Here are the different ways to use them:

Index Investing

With so many people tracking benchmark indexes, it was only a matter of time before they were used as investments themselves. These days, there’s a long list of index funds, which are mutual funds or exchange-traded funds (ETFs) that make investments that track the movement of an underlying index. These funds are based on an underlying index instead of the investment decisions of a fund manager. 

The index investment strategy (indexing) is centered around investing in these funds. Individuals investing in a benchmark index’s performance benefit greatly from heavy diversification. Indexing removes much of the research and decision-making from the process of managing investment portfolios. Index investors know the fund’s performance is likely to be very similar to that of the underlying index. 

Measure Portfolio Performance

Another common use for benchmarks is to measure the performance of your investment portfolio. All you need to do is compare your portfolio’s performance to the appropriate benchmark to see how well you’re stacking up. 

For example, if your portfolio is tech-heavy, consider comparing your performance to that of the Nasdaq. If your portfolio is outpacing the index, you’re in good shape. If it’s underperforming a comparable benchmark, it’s time to adjust your holdings because there’s more money to be made elsewhere. 

Gauge Economic Performance

Stock market indexes aren’t just a tool for understanding the performance of different segments of the market. Widespread benchmarks that focus on the market as a whole also tell you quite a bit about the state of the economy. 

After all, the economy and equities market are closely correlated. 

When economic conditions are good, stocks tend to be up. Conversely, when economic conditions look grim, stocks tend to be down. Paying attention to the movement in the largest flagship benchmarks for any economy will paint a picture of that economy’s health. 

Gauge Market Performance

The stock market is known for moving through a series of peaks and valleys. Benchmarks can be used to give you a clear picture of the market and market sentiment. 

In the U.S., the best benchmark for this is the S&P 500 index. That’s because the index lists 500 of the largest publicly traded companies in the U.S., representing 85% of the country’s market cap. 

With such a large representation of the domestic market, when the S&P is up, you can safely assume that stocks are generally trending in the upward direction, and vice versa. 

Measure Historical Performance

History tends to repeat itself. Although past performance isn’t always indicative of future results, the world’s most successful investors often use historical performance as a way to predict the returns they may generate. 

Tracking benchmarks throughout history gives you an idea of how the index has performed over time, the levels of volatility generally experienced, and the risk and reward associated with investing in the section of the market measured by the index.  

Determine Market Timing

Warren Buffett famously told investors to buy when fear is high and sell when greed sets in. Benchmarks can tell you when those emotions are taking hold in the market. 

CNNMoney created the Fear & Greed Index to help investors measure market sentiment when determining the best time to buy and sell stocks. Many other benchmarks can also be used to determine market sentiment to help you decide when to make your moves. 


Final Word

Stock market benchmarks have been around for more than a century and have proven to be valuable tools for investors and economists alike. Whether you compare your portfolio to a benchmark during rebalancing or invest directly in index funds, these tools are integral in the search of stock market success. 

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Joshua Rodriguez has worked in the finance and investing industry for more than a decade. In 2012, he decided he was ready to break free from the 9 to 5 rat race. By 2013, he became his own boss and hasn’t looked back since. Today, Joshua enjoys sharing his experience and expertise with up and comers to help enrich the financial lives of the masses rather than fuel the ongoing economic divide. When he’s not writing, helping up and comers in the freelance industry, and making his own investments and wise financial decisions, Joshua enjoys spending time with his wife, son, daughter, and eight large breed dogs. See what Joshua is up to by following his Twitter or contact him through his website, CNA Finance.

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How People with Pandemic-Induced Financial Fatigue Can Get Back on Track

People are worn out. They are trying to make it through the stress of the pandemic, a continually volatile market and record inflation. And, for many who are years from retirement, they have decades of work ahead of them.

These younger Americans are in the middle of their working years – those critical saving-for-retirement years. It’s not easy to keep those retirement goals in mind when current finances feel uncertain.

The new 2022 Retirement Risk Readiness study* from Allianz Life found that people who have yet to retire are much more concerned about their financial futures than retirees – particularly after two years of uncertainty with the pandemic.

The big point: People further from retirement feel financially at risk.

The majority of younger Americans (particularly those more than 10 years from retirement) are more afraid of running out of money than death. In the study, 63% of non-retirees said they fear running out of money more than death. Meanwhile, just 46% of retirees had the same fear. All people are saving and investing in the same market. Yet, these younger Americans are much more worried about their financial future.

Actions taken during the pandemic could be one reason they don’t feel secure because, according to the study, non-retired Americans made some financial decisions during the pandemic that left them in a precarious position:

  • 34% took cash out of investment accounts like a 401(k) or IRA.
  • 39% reduced the amount of money they were putting into retirement accounts.
  • 54% said they spent too much on non-necessities.

In general, people should refrain from touching retirement investment accounts until they leave the workforce. They should also maintain contributions to those accounts. But, these moves already happened – an opportunity lost. So, let’s focus on what people can do to address risks to their retirement security, starting today.

Here are some tips to get back, or stay, on track toward retirement goals. The proposed SECURE ACT 2.0 looks like it will pass at the time of this writing, and some of the provisions will help saving for retirement more attractive and affordable for younger pre-retirees.

Get back to basics

Sometimes you have to return to Finance 101. Re-examine your monthly income and expenses. Find out how much you can reasonably save – and then do it. Make a plan to pay off debt, especially high-interest or non-mortgage debt like credit card debt and car loans.

The hardest part about this process is that it involves work and brutal honesty. You have to write everything down – don’t expect you’ll remember everything. This is where commitment begins.

Then, start checking down the list of ways you can make those efforts work even harder for you. First consider putting those savings into a high-yield savings account. Once you have an emergency fund of around six months’ worth of expenses in cash, then you can start putting money into investment accounts.

If your employer offers a retirement savings plan, consider enrolling in it. Many companies also offer employees a match on contributions to a retirement account as part of their benefits package. Take full advantage of it. That means, if you make $50,000 a year and your company matches 5%, you could invest $2,500 into a 401(k) plan a year and automatically double that with another $2,500 from your employer. By the end of the year, you have just put 10% of your salary into retirement savings.

The proposed SECURE ACT 2.0 contains a provision that would provide for automatic enrollment for employees at a 3% contribution rate that will increase every year by 1%. Before this comes about, make sure you are comfortable with that amount. Also, if student loan debt is preventing you from being able to make contributions, there is currently a provision that would allow employers to match what you are paying in student loans with a contribution to your 401(k) or other employer plan. If the bill passes, you should ask about this.

You could also be eligible for tax credits for those contributions made to retirement accounts. The Saver’s Credit is available to some low-to-moderate income families. The Saver’s Credit gives a tax break for contributions made to an IRA or employer-sponsored retirement plan.

Automate your savings

The easiest way to save is not to have to think about it. This is one reason why 401(k) contributions are so great. They come out of your check each pay period without you having to make an active decision. This eliminates the temptation to spend, spend, spend. Particularly if you’re among the more than half of non-retirees who said they spent too much money on non-necessities during the pandemic.

Examining your budget could help figure out how you could change your monthly cash flow to put more money into savings and investment accounts. Automatic transfers from checking into these accounts will establish strong habits. You could start with something as simple as a $10 transfer into these types of accounts each week.

Catch-up contributions

Once you reach age 50, you can make catch-up contributions to IRAs and 401(k) plans. That means you can go beyond the normal limits to contributions allowed in those plans. This can help make up for not saving as much as you would have liked in the past.

The typical contribution limit for 401(k) plans is $20,500 in 2022. A catch-up contribution allows you to put another $6,500 into the plan. The proposed SECURE Act 2.0 has a provision to increase the catch up contributions to as much as $10,000 starting at age 62. There may also be a way your employer could match your Roth 401(k) contributions that could potentially add more tax-free retirement income for you later in life. You should consult with a tax adviser on whether this makes sense for you.

Manage your risk

Don’t be seduced by a potentially huge upside. If you’re feeling behind, you may want to protect the money that you are investing.

Sure, a riskier investment might have a bigger payoff over time than the traditional, safer choice. But, that means the risk to lose is higher too.

Consider creating a balanced portfolio of investments with varying levels of risks. That balance should include financial products like index funds, bonds and annuities that historically carry less risk. Investments that offer some risk mitigation, such as buffered (ETFs), or fixed indexed or registered index linked annuities (RILAs) with buffers could also be considered.

As you age, the more you should seek to control risk in your portfolio. Oftentimes these buffered products are a good compromise between a fixed investment that is not likely to keep pace with inflation and investing in something like stocks, which have inherent risks or are subject to volatility. Talk over your options with your financial adviser to come up with a balance between the need for growth and your ability or willingness to accept a certain level of risk.

Make more money

Between savings taking a back seat and record-setting inflation, you might just need to make more money to right your financial strategy. Sometimes the only way to save more is to make more.

Now might be the time to ask for a raise or look for a new, higher paying job. The labor market is in your favor with companies fighting to attract and retain talent. The study also found that 53% of non-retirees have had to or expect to find a job that pays more money due to the rising cost of living, so you’re not alone if you fall into this camp.

Use your increased earnings to increase your savings. Sure, it means you can spend more elsewhere too. Just be aware of lifestyle creep detracting from your future goals.

Create a long-term plan and consult a professional

Creating a long-term financial plan will help you think in detail about what you want those 20 to 30 retired years to look. The most important thing is that it has to be written down. Having a plan in your head does not work. While there is online software that can help, you really need to work with a professional who will create a plan for you. 

This takes work, which is why many people don’t do it. However, after you put in the initial effort, your plan is an invaluable asset that you can refer to, adjust and find comfort in as you move toward and through retirement.

A good written plan will also account for risks to that ideal future in retirement. Risks like volatility, inflation and longevity all pose a threat to those plans. You can incorporate financial strategies that can mitigate those risks. 

Creating this document will determine strategies to set yourself up to attain that retirement lifestyle you deserve. Your actions now will dictate how you will secure those retirement goals. There is no one-size-fits-all financial plan. These tips are in the “fits most” category. Your financial situation would benefit from the detailed assistance of a professional.

*Allianz Life Insurance Company of North America conducted an online survey, the 2022 Retirement Risk Readiness Study, in February 2022 with a nationally representative sample of 1,000 individuals age 25+ in the contiguous U.S. with an annual household income of $50k+ (single) / $75k+ (married/partnered) OR investable assets of $150k.

This content is for general educational purposes only. It is not, however, intended to provide fiduciary, tax or legal advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Allianz Life Insurance Company of North America, its affiliated companies, and their representatives and employees do not give fiduciary, tax or legal advice. Clients are encouraged to consult their tax advisor or attorney for their particular situation
Allianz does not offer financial planning services.
Registered Index Linked Annuities are subject to investment risk, including possible loss of principal. Investment returns and principal value will fluctuate with market conditions so that units, upon distribution, may be worth more or less than the original cost.
Investing involves risk including possible loss of principal.  There is no guarantee the funds will achieve their investment objectives and may not be suitable for all investors. 
Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Variable annuity guarantees do not apply to the performance of the variable subaccounts, which will fluctuate with market conditions.
Products are issued by Allianz Life Insurance Company of North America. Variable products are distributed by its affiliate, Allianz Life Financial Services, LLC, member FINRA, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297. 800.542.5427 www.allianzlife.com

Vice President, Advanced Markets, Allianz Life

Kelly LaVigne is vice president of advanced markets for Allianz Life Insurance Co., where he is responsible for the development of programs that assist financial professionals in serving clients with retirement, estate planning and tax-related strategies.

Source: kiplinger.com

Target Date Funds: What Are They and How to Choose One

A target date fund is a type of mutual fund designed to be an all-inclusive portfolio for long-term goals like retirement. While target date funds could be used for shorter-term purposes, the specified date of each fund — e.g. 2040, 2050, 2065, etc. — is typically years in the future, and indicates the approximate point at which the investor would begin withdrawing funds for their retirement needs (or another goal, like saving for college).

Unlike a regular mutual fund, which might include a relatively static mix of stocks and bonds, the underlying portfolio of a target date fund shifts its allocation over time, following what is known as a glide path. The glide path is basically a formula or algorithm that adjusts the fund’s asset allocation to become more conservative as the target date approaches, thus protecting investors’ money from potential volatility as they age.

If you’re wondering whether a target date fund might be the right choice for you, here are some things to consider.

What Is a Target Date Fund?

A target date fund (TDF) is a type of mutual fund where the underlying portfolio of the fund adjusts over time to become gradually more conservative until the fund reaches the “target date.” By starting out with a more aggressive allocation and slowly dialing back as years pass, the fund’s underlying portfolio may be able to deliver growth while minimizing risk.

This ready-made type of fund can be appealing to those who have a big goal (like retirement or saving for college), and who don’t want the uncertainty or potential risk of managing their money on their own.

While many college savings plans offer a target date option, target date funds are primarily used for retirement planning. The date of most target funds is typically specified by year, e.g. 2035, 2040, and so on. This enables investors to choose a fund that more or less matches their own target retirement date. For example, a 30-year-old today might plan to retire in 38 years at age 68, or in 2060. In that case, they might select a 2060 target date fund.

Investors typically choose target date funds for retirement because these funds are structured as long-term investment portfolios that include a ready-made asset allocation, or mix of stocks, bonds, and/or other securities. In a traditional portfolio, the investor chooses the securities — not so with a target fund. The investments within the fund, as well as the asset allocation, and the glide path (which adjusts the allocation over time), are predetermined by the fund provider.

Sometimes target date funds are invested directly in securities, but more commonly TDFs are considered “funds of funds,” and are invested in other mutual funds.

Target date funds don’t provide guaranteed income, like pensions, and they can gain or lose money, like any other investment.

Whereas an investor might have to rebalance their own portfolio over time to maintain their desired asset allocation, adjusting the mix of equities vs. fixed income to their changing needs or risk tolerance, target date funds do the rebalancing for the investor. This is what’s known as the glide path.

How Do Target Date Funds Work?

Now that we’ve answered the question, What is a target date fund?, we can move on to a detailed consideration of how these funds work. To understand the value of target date funds and why they’ve become so popular, it helps to know a bit about the history of retirement planning.

Brief Overview of Retirement Funding

In the last century or so, with technological and medical advances prolonging life, it has become important to help people save additional money for their later years. To that end, the United States introduced Social Security in 1935 as a type of public pension that would provide additional income for people as they aged. Social Security was meant to supplement people’s personal savings, family resources, and/or the pension supplied by their employer (if they had one).

By the late 1970s, though, the notion of steady income from an employer-provided pension was on the wane. So in 1978 a new retirement vehicle was introduced to help workers save and invest: the 401(k) plan.

While 401k accounts were provided by employers, they were and are chiefly funded by employee savings (and sometimes supplemental employer matching funds as well). But after these accounts were introduced, it quickly became clear that while some people were able to save a portion of their income, most didn’t know how to invest or manage these accounts.

The Need for Target Date Funds

To address this hurdle and help investors plan for the future, the notion of lifecycle or target date funds emerged. The idea was to provide people with a pre-set portfolio that included a mix of assets that would rebalance over time to protect investors from risk.

In theory, by the time the investor was approaching retirement, the fund’s asset allocation would be more conservative, thus potentially protecting them from losses. (Note: There has been some criticism of TDFs about their equity allocation after the target date has been reached. More on that below.)

Target date funds became increasingly popular after the Pension Protection Act of 2006 sanctioned the use of auto-enrollment features in 401k plans. Automatically enrolling employees into an organization’s retirement plan seemed smart — but raised the question of where to put employees’ money. This spurred the need for safe-harbor investments like target date funds, which are considered Qualified Default Investment Alternatives (QDIA) — and many 401k plans adopted the use of target date funds as their default investment.

Today nearly all employer-sponsored plans offer at least one target date fund option; some use target funds as their default investment choice (for those who don’t choose their own investments). Approximately $1.8 trillion dollars are invested in target funds, according to Morningstar.

What a Target Date Fund Is and Is Not

Target date funds have been subject to some misconceptions over time. Here are some key points to know about TDFs:

•   As noted above, target date funds don’t provide guaranteed income; i.e. they are not pensions. The amount you withdraw for income depends on how much is in the fund, and an array of other factors, e.g. your Social Security benefit and other investments.

•   Target date funds don’t “stop” at the retirement date. This misconception can be especially problematic for investors who believe, incorrectly, that they must withdraw their money at the target date, or who believe the fund’s allocation becomes static at this point. To clarify:

◦   The withdrawal of funds from a target date fund is determined by the type of account it’s in. Withdrawals from a TDF held in a 401k plan or IRA, for example, would be subject to taxes and required minimum distribution (RMD) rules.

◦   The TDF’s asset allocation may continue to shift, even after the target date — a factor that has also come under criticism.

•   Generally speaking, most investors don’t need more than one target date fund. Nothing is stopping you from owning one or two or several TDFs, but there is typically no need for multiple TDFs, as the holdings in one could overlap with the holdings in another — especially if they all have the same target date.

Example of a Target Date Fund

Most investment companies offer target date funds, from Black Rock to Vanguard to Charles Schwab, Fidelity, Wells Fargo, and so on. And though each company may have a different name for these funds (a lifecycle fund vs. a retirement fund, etc.), most include the target date. So a Retirement Fund 2050 would be similar to a Lifecycle Fund 2050.

How do you tell target date funds apart? Is one fund better than another? One way to decide which fund might suit you is to look at the glide path of the target date funds you’re considering. Basically, the glide path shows you what the asset allocation of the fund will be at different points in time. Since, again, you can’t change the allocation of the target fund — that’s governed by the managers or the algorithm that runs the fund — it’s important to feel comfortable with the fund’s asset allocation strategy.

How a Glide Path Might Work

Consider a target date fund for the year 2060. Someone who is about 30 today might purchase a 2060 target fund, as they will be 68 at the target date.

Hypothetically speaking, the portfolio allocation of a 2060 fund today — 38 years from the target date — might be 80% equities and 20% fixed income or cash/cash equivalents. This provides investors with potential for growth. And while there is also some risk exposure with an 80% investment in stocks, there is still time for the portfolio to recover from any losses, before money is withdrawn for retirement.

When five or 10 years have passed, the fund’s allocation might adjust to 70% equities and 30% fixed income securities. After another 10 years, say, the allocation might be closer to 50-50. The allocation at the target date, in the actual year 2060, might then be 30% equities, and 70% fixed income. (These percentages are hypothetical.)

As noted above, the glide path might continue to adjust the fund’s allocation for a few years after the target date, so it’s important to examine the final stages of the glide path. You may want to move your assets from the target fund at the point where the predetermined allocation no longer suits your goals or preferences.

Pros and Cons of Target Date Funds

Like any other type of investment, target date funds have their advantages and disadvantages.

Pros

•   Simplicity. Target funds are designed to be the “one-stop-shopping” option in the investment world. That’s not to say these funds are perfect, but like a good prix fixe menu, they are designed to include the basic staples you want in a retirement portfolio.

•   Diversification. Related to the above, most target funds offer a well-diversified mix of securities.

•   Low maintenance. Since the glide path adjusts the investment mix in these funds automatically, there’s no need to rebalance, buy, sell, or do anything except sit back and keep an eye on things. But they are not “set it and forget it” funds, as some might say. It’s important for investors to decide whether the investment mix and/or related fees remain a good fit over time.

•   Affordability. Generally speaking, target date funds may be less expensive than the combined expenses of a DIY portfolio (although that depends; see below).

Cons

•   Lack of control. Similar to an ordinary mutual fund or exchange-traded fund (ETF), investors cannot choose different securities than the ones available in the fund, and they cannot adjust the mix of securities in a TDF or the asset allocation. This could be frustrating or limiting to investors who would like more control over their portfolio.

•   Costs can vary. Some target date funds are invested in index funds, which are passively managed and typically very low cost. Others may be invested in actively managed funds, which typically charge higher expense ratios. Be sure to check, as investment costs add up over time and can significantly impact returns.

What Are Target Date Funds Good For?

If you’re looking for an uncomplicated long-term investment option, a low-cost target date fund could be a great choice for you. But they may not be right for every investor.

Good For…

Target date funds tend to be a good fit for those who want a hands-off, low-maintenance retirement or long-term investment option.

A target date fund might also be good for someone who has a fairly simple long-term strategy, and just needs a stable portfolio option to fit into their plan.

In a similar vein, target funds can be right for investors who are less experienced in managing their own investment portfolios and prefer a ready-made product.

Not Good For…

Target date funds are likely not a good fit for experienced investors who enjoy being hands on, and who are confident in their ability to manage their investments for the long term.

Target date funds are also not right for investors who are skilled at making short-term trades, and who are interested in sophisticated investment options like day-trading, derivatives, cryptocurrencies, and more.

Investors who like having control over their portfolios and having the ability to make choices based on market opportunities might find target funds too limited.

The Takeaway

Target date funds can be an excellent option for investors who aren’t geared toward day-to-day portfolio management, but who need a solid long-term investment portfolio for retirement — or another long-term goal like saving for college. Target funds offer a predetermined mix of investments, and this portfolio doesn’t require rebalancing because that’s done automatically by the glide path function of the fund itself.

The glide path is basically an asset allocation and rebalancing feature that can be algorithmic, or can be monitored by an investment team — either way it frees up investors who don’t want to make those decisions. Instead, the fund chugs along over the years, maintaining a diversified portfolio of assets until the investor retires and is ready to withdraw the funds.

Target funds are offered by most investment companies, and although they often go by different names, you can generally tell a target date fund because it includes the target date, e.g. 2040, 2050, 2065, etc.

If you’re ready to start investing for your future, you might consider opening an account with SoFi Invest® in order to set up your own portfolio and learn the basics of buying and selling stocks, bonds, exchange-traded funds (ETFs), crypto and more. Note that SoFi members have access to complimentary financial advice from professionals.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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Source: sofi.com

Active vs Passive Investing: Differences Explained

Active vs. passive investing generally refers to the two main approaches to structuring mutual fund and exchange-traded fund (ETF) portfolios. Active investing is a strategy where human portfolio managers pick investments they believe will outperform the market — whereas passive investing relies on a formula to mirror the performance of certain market sectors.

Which approach is better, active vs. passive? There seems to be no end to this debate, but there are factors that investors can consider — especially the difference in cost. Because active investing typically requires a team of analysts and investment managers, these funds are more expensive and come with higher expense ratios. Passive funds, which require little or no involvement from live professionals because they track an index, cost less.

Also, there is a body of research demonstrating that indexing typically performs better than active management. When you add in the impact of cost — i.e. active funds having higher fees — this also lowers the average return of many active funds. Following are a few more factors to consider when choosing active vs. passive strategies.

Active Investing Explained

Active investing is what live portfolio managers do; they analyze and then select investments based on their growth potential. Active strategies have a number of pros and cons to consider when comparing them with passive strategies.

Advantages

•   One potential advantage of having a real person crunching numbers and making investment decisions is that they may be able to spot market opportunities and take advantage of them. A computer algorithm is not designed to pivot the way a human can, which might benefit the performance of an actively managed ETF or mutual fund.

•   Whereas a passive strategy is designed to follow one market sector index (e.g. the performance of large cap U.S. companies via the S&P 500® index), an active manager can be more creative and is not limited to a single sector.

•   The number of actively managed mutual funds in the U.S. stood at about 6,800 as of January 11, 2022 vs. 492 index funds, according to Statista. Given that there are many more active funds than passive funds, investors may be able to select active managers who have the kind of track record they are seeking.

Disadvantages

•   The chief downside of active investing is the cost. Hedge funds and private equity managers are one example, charging enormous fees (sometimes 10%, 15%, 20% of returns) for their investing acumen. But even run-of-the-mill actively managed funds, which may charge 1% or 1.5% or even 2% annually, are far higher than the investment fees of most passive funds, where the annual expense ratio might be only a few basis points.

•   The majority of active strategies don’t generate higher returns over the long haul. According to the well-known SPIVA (S&P Indices vs. Active) scorecard report of 2022, 95% of U.S. active equity funds underperformed their respective S&P indexes over the last two decades, through 2021. So investors who are willing to pay more for the insight and skill of a live manager may not reap the rewards they seek.

•   A professional manager may create more churn in an actively managed fund, which could lead to higher capital gains tax.

Passive Investing Explained

The term “passive investing” may not have a strong positive connotation, yet the funds that follow an indexing strategy typically do well vs. their active counterparts.

Advantages

•   Passive strategies are more transparent. Because index funds simply track an index like the S&P 500 or Russell 2000, there’s really no mystery how the constituents in the fund are selected nor the performance of the fund (both match the index).

•   As noted above, index funds outperformed 79% of active funds, according to the 2022 SPIVA scorecard.

•   Passive strategies are generally much cheaper than active strategies.

•   Passive strategies can be more tax efficient as there is generally much less turnover in these funds.

Disadvantages

•   Because passive funds use an algorithm to track an existing index, there is no opportunity for a live manager to intervene and make a better or more nimble choice. This could lead to lost opportunities.

•   Passive strategies are more vulnerable to market shocks, which can lead to more investment risk.

Main Differences Between Active and Passive Investing

The following table recaps the main differences between passive and active strategies.

Active Funds Passive Funds
Many studies show the vast majority of active strategies underperform the market on average, over time. Most passive strategies outperform active ones over time.
Higher fees can further lower returns. Lower fees don’t impact returns as much.
Human intelligence and skill may capture market upsides. A passive algorithm captures market returns, which are typically higher on average.
Typically not tax efficient. Typically more tax efficient.
Potentially less tied to market volatility. Tied to market volatility and more vulnerable to market shocks.

Which Should You Pick: Active or Passive Investing?

Deciding between active and passive strategies is a highly personal choice. It comes down to whether you believe that the active manager you pick could be among the few hundred who won’t underperform their benchmarks; and that the skill of an active manager is worth paying the higher investment costs these strategies command.

You could also avoid treating the active vs. passive investing debate as a forced dichotomy and select the best funds in either category that suit your goals.

The Takeaway

Active vs. passive investing is an ongoing debate for many investors who can see the advantages and disadvantages of both strategies. Despite the evidence suggesting that passive strategies, which track the performance of an index, tend to outperform human investment managers, the case isn’t closed.

After all, passive investing may be more cost efficient, but it means being tied to a certain market sector — up, down, and sideways. That timing may or may not work in your favor. Active investing costs more, but a professional may be able to seize market opportunities that an indexing algorithm isn’t designed to perceive.

To decide where you stand in regard to active vs. passive investing, it might help to get more experience by opening an account with SoFi Invest®. As a SoFi investor, you can actively trade stocks, or invest in actively or passively managed ETFs. You can also buy and sell IPOs, fractional shares, and cryptocurrencies. The more experience you get, the more insight you’ll gain into which approach makes the most sense for you. Also, SoFi members have access to complimentary financial advice from professionals, who can answer investing questions. Get started today.


Choose how you want to invest.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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Source: sofi.com

The Majority of ESG Funds Are Not Sustainable. Here’s Why.

So, you buy an ESG mutual fund or ETF and you’re excited that you’re going to change the world with your investments. But then you get your annual report and start browsing through the holdings and realize that your ESG fund is simply less bad than your traditional index fund, and reality sets in. This isn’t what you thought it was.

This happens all the time because there is no regulation when it comes to labeling funds as “ESG” or “sustainable” or anything else in the responsible investing realm. It’s the wild, wild West, buyer beware, every red flag you can think of.

Ultimately, the disconnect happens because there isn’t a universal understanding of what ESG (environmental, social, governance) or sustainable investing is. We think that it’s all the same and we want to jump in. And the people marketing ESG funds assume that you’re not going to take the time to look under the hood to see what you really own, and they take advantage of that. But it truly does a disservice to those of us who really care about making a difference in the world and aligning our investments with our values.

Too often these ESG index funds rely on traditional indexes as a base from which to invest. The problem with this is that the traditional indexes are rooted in the old economy, and you can’t invest for the new economy by looking in the rearview mirror.

The Difference Between ESG and a Sustainable Portfolio

ESG is a way of analyzing companies based on the three metrics it’s named for. It is not the be-all, end-all of the investment research process – it’s just a piece and should be considered as one component of comprehensive investment research. However, many index-based fund managers put together portfolios using only ESG metrics and very little common sense. They eliminate the step where a person asks, “Does it make sense that ExxonMobil is in a sustainable or responsible portfolio?”

By contrast, a truly sustainable portfolio is focused on a positive, solutions-based approach. What are the companies that are going to help us adapt and be more resilient to the structural and systemic risks that we are facing? It uses ESG metrics, but also looks at a new, more sustainable economy and the opportunities it presents.

I like to look at it this way: An ESG portfolio that reduces its allocation in ExxonMobil is less bad. A portfolio that eliminates it entirely is better, but a portfolio that buys First Solar (FSLR) in its place is both sustainable and responsible.

To Be Sustainable, You Have to Go the Extra Mile

A sustainable portfolio requires forethought and analysis beyond basic fundamentals and ESG metrics. It includes understanding the new economy and which technologies, sectors and industries are going to be market leaders and changemakers. In some cases, it might be traditional industries that are rapidly adapting, or it might be a technology that didn’t exist five years ago. It could be sustainable real estate and green building technologies or the rapidly expanding world of batteries, electric vehicles and other forms of green transportation. And beyond the obvious like clean energy, opportunities exist in cutting-edge biotechnology to cure disease and help people live longer, healthier lives. A healthier society is a more sustainable society.

If your ESG fund isn’t actively looking at its holdings from a similar solutions mindset, then it isn’t sustainable.

What You Should Do as an Investor

The best way to avoid the greenwashing that is happening in the ESG investing world is to do some basic due diligence. Before you buy a fund, take a look at its holdings – if something doesn’t seem right, it probably isn’t.

 Don’t just trust the label because the reality is that virtually all of the widely distributed ESG indexes aren’t sustainable. Find an investment manager who actively invests in solutions to the world’s greatest problems and avoid the ones who are simply trying to be a less bad version of traditional indexes.

CEO, Earth Equity Advisors

Peter Krull is a well-known leader in the green business community and a longtime advocate for fossil-fuel-free and sustainable, responsible and impact (SRI) investing. Peter was one of the first individuals to earn the Chartered SRI Counselor™ designation from the College for Financial Planning, and has guided Earth Equity Advisors’ rapid growth as well as the firm’s rise to prominence as a five-time Best for the World Certified B Corporation.

Source: kiplinger.com

Copy Trading Defined – Can You Make Money Mirroring a Professional?

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You’ve no doubt heard about people who made it big day trading in financial markets. But the learning curve for new traders can be steep — and potentially quite costly.

But what if beginners could trade like the top traders on the market?

A relatively new form of online trading, known as copy trading or mirror trading, promises to make doing so possible. But is it a good idea to take part in this new strategy?


What Is Copy Trading?

Copy trading, often called mirror trading, is the process of automatically copying the moves of other traders. This style of trading is possible with all assets, whether you’re trading on the stock market or you’re trading forex, contracts for difference (CFDs), or cryptocurrencies like Bitcoin. 


Since 2017, Masterworks has successfully sold three paintings, each realizing a net anualized gain of +30% per work. (This is not an indication of Masterworks’ overall performance and past performance is not indicative of future results.)
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The concept is simple. New traders, known as copiers, assess the performance of experienced traders, called signal providers. Once a new trader finds a signal provider they’re comfortable copying, they set parameters in their trading platform to copy trades that expert makes in real time. 


How Copy Trading Works

This style of trading starts with successful traders who are interested in helping beginners by allowing their portfolio activities to be copied. In some cases, these traders allow their portfolios to be copied simply because they want to help others. In other cases, the pros are paid each time someone makes the decision to copy their moves. 

These traders make their portfolios available, which are usually listed on mirror-trading platforms alongside statistics of the trader’s historical performance. 

From there, beginners search these platforms for portfolios to copy and can mirror their preferred experts’ moves automatically.

Always remember each trader is unique and the one you choose to mirror will make the difference between profits and losses. Carefully choose the trader you’ll follow based on their performance compared to others on the platform.  

Proportional Copying

Professional traders are likely to have a larger portfolio and make larger trades than those who are just getting involved. What if you don’t have enough money in your portfolio to make the same trades the pros are making?

Don’t worry — copy trading is proportional based on the amount of money in both the copy trader’s account and the professional’s account. 

For example, if a professional trader with a $100,000 balance makes a $10,000 trade, a copy trader with $1,000 would make a $100 trade, keeping one profile proportionally equal to the other. 

Forex Copy Trading

The foreign exchange market is highly volatile, making it a hotbed for traders. However, the high levels of volatility make trading forex highly risky. Success takes an intricate knowledge of technical analysis.  

Luckily, copy trading is available in the forex market as well. 

Like with any copy trading, it’s important to pay close attention to the expert you plan on copying. Only copy those with a proven record of success. This is especially important in the volatile forex market, where trades that go badly can go really badly.

Cryptocurrency Copy Trading

Cryptocurrencies like bitcoin are becoming popular among active traders. As with traditional currencies like the U.S. dollar (USD), cryptocurrency is known for experiencing high levels of volatility and creating opportunities for traders. 

Although big swings in value may be exciting, they are also risky. The mix of high volatility and the speculative nature of the asset makes cryptocurrency trading one of the riskiest forms of trading in any financial market. 

Even if you’re copying a pro with a compelling trading history in crypto, never risk too much of your portfolio on trading in this emerging industry. If you’re not comfortable losing it, you shouldn’t be using it for crypto trading. 


Copy Trading Platforms

There are several trading platforms that offer copy trading functionality. However, like any other product, not all trading platforms are equal. Some of the best copy trading platforms online include:

eToro

Founded in 2007, eToro has more than a decade of history providing quality trading services to its customers. The platform’s claim to fame is the technology it uses, and it was one of the first platforms to make copy trading available to the masses. 

eToro is known as one of the best brokers to work with when trading cryptocurrency. It incentivises professionals to share their portfolios by paying them each time their portfolio is copied. As a result, if you’re looking for a way to quickly gain exposure to digital currencies, you’ll find plenty of portfolios to copy with this broker. 

However, crypto isn’t the only arena eToro shines in. The company offers one of the best stock trading platforms and provides access to a wide range of other assets, like commodities and index funds. 

ZuluTrade

ZuluTrade is another pioneer in the copy trading industry. The company supports trading in cryptocurrencies, stocks, commodities, index funds, and forex. It’s one of very few forex brokers that offers traders the ability to copy one another. 

A unique feature of ZuluTrade is its profit-sharing capabilities. The professionals making the trades earn 20% of the profits copiers generate by using their signals. This incentivises smart moves in the market and the sharing of portfolios with other traders. As a result, there’s no shortage of quality traders to copy on the platform. 

ZuluTrade also has a proprietary ranking system, ranking traders who make their portfolios available to copy based on their performance in the market. For beginners, this ranking system can be key to choosing which traders they’ll follow. 

MetaTrader 4 

MetaTrader 4 is one of the most recommended trading platforms for the most active traders. Known as one of the best forex platforms online, MetaTrader 4 gives traders access to state-of-the-art technology, compelling charting capabilities, and other features that give them the upper hand in the market. 

MetaTrader 4 gives traders the ability to build and automate strategies. For beginners, the copy trading capabilities this offers are appealing, to say the least. 

Because it’s known as one of the best platforms online, especially in the forex space, there’s no shortage of traders to follow. 

Coinmatics 

Coinmatics is a platform dedicated to cryptocurrency trading, and more specifically, copy trading in the crypto market. The platform was founded in 2018 by the same experts behind Crunchbase, a popular business investment and funding platform. 

The platform features diversification and risk management capabilities that help ensure you don’t take too much of a hit in the volatile crypto market. The platform is also lightning fast, copying trades in less than two seconds on average — an important factor in a volatile market. 

The best part is that the platform is free. However, if you want prioritized copying, you’ll pay fees of $20 monthly or $180 annually. 


Copy Trading (Mirror Trading) vs. Social Trading

Copy trading and social trading are two ideas often lumped together. Although copy trading is a form of social trading, not all social trading strategies are centered around copying others. 

Essentially, social trading is the use of social media to find and learn about opportunities, whereas copy trading is the use of social tools to mirror the exact trades of another trader. 

In other words, copy trading is the process of directly copying the moves made in the market by other traders. There’s no research, expertise, or analysis required to do so, but copy traders take on the same level of risk as those they copy, which may prove to be uncomfortable in some situations. 

Social trading simply refers to using social media to find solid trading opportunities. Once these opportunities are found, social traders typically do their own research and technical analysis to make sure the trade fits in with their strategy and risk management parameters before making the trade. 


Pros and Cons of a Copy Trading Strategy

Any trading strategy you come across will come with its own list of pros and cons. After all, trading is making an attempt to predict the future, and nobody has a crystal ball. Any trading strategy comes with risk. Here are the benefits and drawbacks of the copy trading strategy. 

Pros of Copy Trading

Copy trading has become a popular method of making money in the market because there are several benefits to using it. Some of the biggest perks include:

Trade Like a Pro Today

Trading is a fast-paced process that requires a detailed understanding of markets and the practical use of technical analysis. This form of analysis can take years to perfect, but once mastered, it has the potential to result in significant gains. 

With copy trading, you don’t have to be a pro with years of experience under your belt to trade like one. All you need to do is find a portfolio that’s performing well and set your platform to duplicate its trades. 

Significant Profit Potential

Whether you’re in stocks, cryptocurrency, or forex, trading has the potential to generate significant returns far above what you would expect to see in the average long-term investor’s portfolio. Countless people trade for a living, earning annual returns that would make the average salaried employee’s jaw drop. 

Copying the trades made by these experts means you have the potential to earn similar returns from your activities in the market. 

Trading Education

Learning how to trade is often time consuming and expensive, whether you learn through an online day trading course or through trial-and-error. However, copy trading makes learning how to trade in financial markets free and easy. 

All you need to do is watch and learn from the trades that are being made in your portfolio while it’s copying an expert. Over time, you’ll find patterns in the winning trades being made. Looking for these patterns in the open market for yourself has the potential to result in even more winning trades. 

Cons of Copy Trading

Yes, there are plenty of benefits to getting involved in the copy trading process, but every rose has its thorns. Here are some of the biggest drawbacks to this style of trading:

Even Expert Traders Get It Wrong Sometimes 

Trading is inherently high risk. Traders make their money by exploiting high levels of volatility in the market, but that comes with higher levels of unpredictability. Even the best traders in the world make losing trades from time to time. 

Before getting involved in trading — whether you do it on your own or copy an expert — it’s important that you understand the risks associated with short-term trading strategies. 

Blind Following

When copy trading, you’ll be blindly following the leader. If the leader was to walk off a figurative cliff, leading to a portfolio freefall, you’ll be jumping off the cliff too. 

It’s generally suggested that investors and traders do their own research so they enter trades with a complete understanding of the potential risks and rewards the trades represent. Copy trading offers no such option.

Costly

In many cases, copy trading services can quickly become costly. Take ZuluTrade for example. Copy traders using the platform pay the expert trader who generated the signal a 20% cut of their profits, and ZuluTrade itself gets another 5% of the profits. In the end, the copy trader only retains 75% of the profits generated through the platform. 

These high costs aren’t a big concern if your portfolio is significantly outpacing the market, but if you’re just barely keeping up with market performance, your returns would be better simply investing in index funds.


Should You Be a Copy Trader?

Copy trading, as with any form of trading, comes with significant levels of risk. Even if the professionals are pulling the strings for you, that risk is present. As such, this method of accessing the market isn’t for everyone. You may want to consider copy trading if you have the following characteristics:

  • You’re Young. Due to the high level of risk associated with trading in general, it’s best for younger traders. Those nearing retirement or with short time horizons should avoid high-risk moves, but young investors with long time horizons have time to recover should something go wrong. 
  • You Have a High Risk Tolerance. Trading is not for the faint of heart. People with a low or moderate risk tolerance should avoid it and spare themselves the emotional roller coaster. However, if you like to ride on the wild side and are OK with taking big risks in return for big reward potential, copy trading might be for you. 
  • You’re Comfortable in the Passenger Seat. As a copy trader, you relinquish control to a professional you believe will make the right moves. However, you can’t grab the wheel if things go wrong. You have to be comfortable with taking a bumpy ride in the passenger seat from time to time. 

How to Start Copy Trading

If you’ve decided you want to start copy trading, here’s how it’s done:

Step #1: Open a Trading Account

You can’t copy trades into your own trading account until you have one set up. Compare brokers that offer copy trading like those listed above, paying close attention to the assets available and the fees they charge. Sign up for the platform you feel fits you best. 

Step #2: Assess Opportunities

Comb through the different traders who give others the ability to copy them. When assessing the traders, there are three key criteria to look for:

  1. Assets Traded. If you’re interested in trading stocks, you don’t want to track a trader who makes the vast majority of their moves in cryptocurrency. Make sure the traders you copy are interested in the same assets you are. 
  2. Track Record. Look into the past performance of each trader you’re interested in. Although past performance isn’t always indicative of the future, a strong historical performance does suggest the trader knows what they’re doing. 
  3. Longevity. How long has the trader been trading and how many trades have been made? A trader with an 80% success rate that only has five trades under their belt is far less impressive than a trader with the same success rate after 500 trades. You want to make sure the trader you follow not only has a strong performance, but that this strong performance has been repeated over time. 

Copy Trading With a Twist

If you’re not comfortable sitting in the passenger seat and you want to have full control over your own portfolio, there is another way to copy professionals. 

Become a social trader. 

When making your trading and investment decisions, take to social media to see what the pros are talking about. Once you find a compelling opportunity, do your own research and execute your own trades based on the parameters in your trading plan.


Final Word

Copy trading is an exciting concept, and many newcomers have quickly generated profits in financial markets taking advantage of it. 

However, not all traders have the same performance. If you plan to ride this vehicle into the markets, make sure to do your research and only copy traders who trade the assets you’re interested in and have a long-term history of compelling market performance. 

Also, when choosing a platform, pay close attention to fees. Fees associated with copy trading vary wildly and can cut deep gashes into your profit potential. 

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Since 2017, Masterworks has successfully sold three paintings, each realizing a net anualized gain of +30% per work. (This is not an indication of Masterworks’ overall performance and past performance is not indicative of future results.)

Masterworks Sidebar 2

Joshua Rodriguez has worked in the finance and investing industry for more than a decade. In 2012, he decided he was ready to break free from the 9 to 5 rat race. By 2013, he became his own boss and hasn’t looked back since. Today, Joshua enjoys sharing his experience and expertise with up and comers to help enrich the financial lives of the masses rather than fuel the ongoing economic divide. When he’s not writing, helping up and comers in the freelance industry, and making his own investments and wise financial decisions, Joshua enjoys spending time with his wife, son, daughter, and eight large breed dogs. See what Joshua is up to by following his Twitter or contact him through his website, CNA Finance.

Source: moneycrashers.com

Opening a Savings Account for a Newborn Baby: What You Need to Know First

Opening a savings account for a baby can seem like a good way to start a child off on a successful financial path. You begin to build a little nest egg for Junior and hopefully, as the little one grows, can teach good savings habits. It’s certainly not the only option available to begin building wealth for a baby, but it is one of the simpler ones. The most important step can be doing some research to figure out which type of account to open and where to keep your baby’s savings — which is something we can help with!

Why Open a Savings Account for a Newborn

There are actually some very good reasons to consider opening a savings account for a baby. You might be wondering why someone would open this kind of account for a newborn. After all, they don’t have any bills or expenses to pay so what would they need to have money in the bank for? Consider how opening an account and saving for a baby can have real benefits:

•   Time is on your side. Compounding interest can help you grow your baby’s savings account over time. The younger your child is when you start saving, the longer that money has to earn compound interest.

•   Plan for specific goals. Opening a savings account for a baby can make it easier to fund long-term goals. For example, you might want to set aside money to help them buy their first car or pay for college when the time comes.

•   Tax advantages. Savings accounts may not be earning a lot of interest right now. Still, the fact that babies usually don’t typically earn enough dough to pay taxes is a bonus.

•   Increase financial literacy. Teaching kids about saving from an early age can help them get into the habit. By opening a savings account for them when they’re young, you can help them learn the money skills they’ll need as adults.

Kids’ savings accounts can also be appealing because they tend to have low initial deposit requirements, low minimum-balance requirements, and low fees. So you don’t need a lot of money to start saving on behalf of your newborn — and you may not have to worry about paying a lot of fees to maintain the account as they grow.

How to Open a Savings Account for a Newborn

Opening a savings account for a baby isn’t a complicated process. To open a savings account for a newborn, you’ll need the following (and we’ll share more details in a minute, too):

•   Information about yourself

•   Information about your baby

•   Required documentation

•   Minimum initial deposit and funding details

You should be able to open a savings account for a baby either online or at a branch of a bricks and mortar bank or credit union. You’ll need to fill out the savings account application and provide the deposit via check, money order, cash or ACH transfer if you’re opening an account with an online bank. The minimum deposit may be as little as $1 or even $0, though some banks may require a larger deposit to open a baby savings account.

Keep in mind that some banks may require you to have an account of your own before you can open a savings account for a child. That could influence where you decide to set up a savings account for a newborn.

Also look into any account maintenance fees that may be assessed monthly. You don’t want fees eating up the principal and interest in the account. Let’s look at this a little more closely next.

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Which Savings Accounts Are Best for Newborns?

The best savings accounts for newborns are ones that allow you to save regularly, earn interest, and avoid high fees. You might look to your current bank first to open a savings account for baby. Consider what type of features or benefits are offered. If you have to pay a monthly service fee, for example, you may be better off considering a savings account for a newborn at an online bank instead.

Online banks can offer the dual advantages of higher interest rates on savings and lower fees. You won’t have branch banking access but that may not be important if you prefer to deposit money via mobile deposit or ACH transfer anyway. And once your child gets a little bigger, you can introduce them to the world of mobile banking and how to manage it on their own.

Also, consider how well a newborn savings account can grow with your kid’s needs. Some questions you might ask: Can you switch the account to a teen savings account or teen checking account down the line? Could you add a prepaid debit card for teens into the mix at some point? Asking these kinds of questions can help you pinpoint the best savings account for a newborn, based on your child’s needs now and in the future. For some people, it can be a benefit to know that the bank has figured out ways to help accounts grow with their youngest customers and coach them along their financial journey.

Requirements for Opening a Bank Account for a Newborn

The requirements for opening a bank account for a newborn are a little different from opening a bank account for yourself. That’s because the bank needs to be able to verify your identity as well as the baby’s.

Generally, the list of things you’ll be required to provide to open a savings account for baby include:

•   Your name and your baby’s name

•   Dates of birth for yourself and the baby

•   A copy of your government-issued photo ID

•   The baby’s birth certificate

•   Your address, phone number, email address, and Social Security number

The bank may ask for the baby’s Social Security number though it’s possible you may not have this yet at the newborn stage. And if you don’t have a Social Security number of your own, you may have to provide a substitute federal ID such as your Individual Taxpayer Identification Number (ITIN).

Alternatives to Newborn Savings Accounts

A savings account at a bank or credit union isn’t the only way to set aside money for a newborn. While these accounts can earn interest, there are other types of savings you might use to fund different goals for your child. Here are some of the other options you might consider when saving money for a baby.

529 College Savings Accounts

Many parents — even brand-new ones! — wonder how to start saving for college. A 529 college savings account is a type of tax-advantaged plan that’s designed to help you save for education expenses. These accounts can be opened by the parent but anyone can make contributions, including grandparents, aunts and uncles, or family friends. All 50 states offer at least one 529 plan.

There are no annual limits on 529 plan contributions and you can open any state’s plan, regardless of which state you live in. Contributions are subject to annual gift tax exclusion limits, which are $16,000 for single filers and $32,000 for married couples filing jointly in 2022.

With a 529 plan, you’re investing money rather than saving it. You can invest the money you contribute in a variety of mutual funds, including index funds and target-date funds. This money grows tax-deferred, and withdrawals are tax-free when used for qualified education expenses, such as tuition and fees, books and room and board.

Coverdell Education Savings Accounts

There are other ways to save for a child’s college tuition. A Coverdell Education Savings Account (ESA) is a type of custodial account that can be set up to save for education expenses. This account grows tax-deferred just like a 529 plan and qualified withdrawals are tax-free. But there are some key differences:

•   Annual contributions are capped at $2,000 and are not tax-deductible

•   Contributions must end once the child reaches age 18 (an exception is made for special-needs beneficiaries)

•   All funds must be distributed by the time the child reaches age 30

If you leave money in a Coverdell ESA past the child’s 30th birthday, the IRS can impose a tax penalty. Any withdrawals of ESA funds that aren’t used for qualified education expenses are subject to income tax.

Custodial Accounts

Custodial accounts are savings accounts that allow minors to hold assets other than savings, such as stocks or other securities. You can set up a custodial account with a brokerage on behalf of your child. As the custodian, you maintain ownership of the account and its assets until your child reaches the age of majority, typically either 18 or 21. At that point, all the money in the account becomes theirs.

Opening a custodial account could make sense if you want to make irrevocable financial gifts to your kids. This could be one of the best strategies for building an investment plan for your child. The biggest drawback, however, is that once they turn 18 (or 21) you no longer have control over the account or how the money inside of it is used. For some parents, relinquishing that control can be hard, but remember: There’s lots of financial literacy that can be gained between your child’s birth and officially entering adulthood.

Let SoFi Show You How to Save

Helping your child be a smart, lifelong saver is a terrific goal. Saving money helps build wealth and finance your dreams. How are you doing on that front? One great place to start saving is with a high yield bank account like SoFi Checking and Savings. Members with direct deposit can earn 1.00% APY on the first $50,000 of their balances. Plus, you won’t be hit with overdraft fees, minimum balance fees — or any monthly fees. So your money can really get growing.

Bank better with SoFi.

FAQ

Can I start a savings account for my baby?

Yes, opening a savings account for a baby is something you can do even if they’re still a newborn. Traditional banks, credit unions, and online banks can offer savings account options for babies and kids. You can also explore savings account alternatives, such as 529 college savings plans or custodial accounts.

What type of savings account should I open for my newborn?

The type of savings account you open for a baby can depend on your financial goals. If you just want to get them started saving early, a basic savings account might work best. On the other hand, you might consider creating an investment plan for your child that includes a 529 savings account if you’re interested in putting aside money for future college expenses.


Photo credit: iStock/michellegibson

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at any time. Rate of 1.00% APY is current as of 12/15/2021. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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Why Bonds Belong in Your Portfolio

Interest rates are rising and stock prices are falling, so investors naturally start thinking about bonds. But be careful.

Peter Lynch, the manager of Fidelity Magellan fund during its spectacular run in the 1980s, once said, “Gentlemen who prefer bonds don’t know what they are missing.” 

Generally, I agree. Dow 36,000, the book I coauthored, made the case that, because history shows that stocks and bonds are equally risky over the long term and that stocks return an average of four to five percentage points more a year, the obvious choice is stocks.

But there are reasons to own bonds. First, in the short term, bonds fluctuate much less than stocks, and you may need a reliable investment because you have a large outlay coming up – a college tuition bill or a down payment on a house, for example.

Second, bonds provide ballast for a portfolio. According to research by Russell Investments, since 1997 the correlation between stock and bond returns has been mainly negative. In other words, when one goes up, the other tends to go down, and vice versa. As a result, you get a smoother ride. Finally, bonds supply reliable income – though recently not much. 

Over the past decade, bonds have been especially unproductive investments. Since 2012, the annual yield on a Treasury bond that matures in 10 years has averaged just 2% per calendar year and has never exceeded 3%.

The Vanguard Intermediate Bond Index Admiral (VBILX), a popular mutual fund that owns both government and corporate bonds and charges expenses of just 0.07%, has returned an annual average of just 3.1% over the past 10 years, including interest payments and gains and losses from selling assets. (Nonetheless, I’m a fan of this fund for the long term.) 

Lately, rates have perked up. Moody’s Seasoned Aaa Corporate Bond yield for the safest debt jumped from 2.5% on Dec. 3 to 3.3% on March 3. That’s still only about half the average of the past 40 years. 

What Are Bonds?

A bond is an IOU, a promise by a business or government to repay an investor for a loan – typically on a specific date (maturity) and at a specific interest rate (coupon, or yield).

Bonds are actively traded, so a 10-year, $10,000 bond issued with a coupon of 3% might trade a few years later at $7,000. Why? First, the borrower might get into financial trouble, and investors doubt they will be repaid. This kind of credit risk applies mainly to corporations or state, local or foreign governments – not, so far, to the U.S. Treasury. Second, interest rates may rise after you buy your bond, so new, similar bonds are issued at higher coupons. Higher rates make your old bond less attractive, so its price on the market falls. 

If you hold your bond to maturity, the lower price in the interim won’t matter; you’ll get the bond’s full face value when it comes due. But if you have to sell sooner, you’ll take a loss. 

Bonds present one other kind of risk: Inflation diminishes the value of the dollar, so that even when you get your $10,000 at maturity, it will have the purchasing power of, say, $6,000. Some decline in value is inevitable, and that expectation is built into the bond’s yield, but inflation may be worse than the market anticipates.

Right now, long-term inflation expectations are extremely low, even though the consumer price index (CPI) soared 7.9% in the 12 months that ended Feb. 28. The St. Louis Federal Reserve Bank extrapolates from TIPS, or Treasury inflation-protected securities, that the annual increase in CPI over the next 10 years will be about 2.7%. 

My view is that intermediate (five- to 10-year) rates will probably rise another two or three points in the next few years, making bond yields much more attractive.

How Do I Invest in Bonds?

The choices are vast, but, for many investors, buying individual bonds at the riskier end of the debt spectrum – high-yield or junk debt, for example, or bonds issued by shaky governments – is just too adventuresome. Unless you spend a lifetime examining the nuances of particular bond issues, you will probably get better returns at much the same risk with stocks. I am not fond of individual municipal bonds, either. Yes, interest is exempt from federal taxes, but munis, accordingly, have lower yields. 

Buying individual government bonds through a broker or directly from the U.S. Treasury is a reasonable option. But owning a bond, or even several, locks you into today’s rates or forces you to take a loss if rates rise. 

The best alternative is a mutual fund, whose assets evolve. For instance, if a bond fund has an average maturity of five years, about one-fifth of its holdings will come due in any 12-month period. The fund manager (or the computer algorithm, in the case of index funds) will then decide to buy new bonds with the cash from its maturing bonds, and, if rates are rising, those bonds will have higher yields.

And a fund manager can shift to higher yields by deploying cash from new investors, who tend to flock to bond funds as rates rise. Some of the best funds leaven their safer holdings with riskier debt to boost yields. 

When looking at specific funds, decide how much volatility you can tolerate by checking out the duration, a figure expressed in years that indicates the sensitivity of a fund’s portfolio to interest rate increases. For example, the Fidelity Long-Term Treasury Bond Index (FNBGX) has a duration of over 18 years, which means if rates rise 1%, the fund’s value will fall about 18%. That’s risky. (The value, of course, will shoot up if rates fall.) 

Although I have been impressed over the years with many active bond fund managers, the expenses they charge can eat up returns when yields are low. For example, one of the largest funds, the Pimco Total Return (PTTAX), which owns a mix of high-quality government and corporate bonds, charges 0.8% and has had an average annual return over the past five years of 3.0%. In the same asset category, I like the Fidelity Investment Grade Bond (FBNDX) better. Expenses are 0.45% for a fund whose average annual return for the past five years is 3.6%. 

By contrast, the Vanguard Long-Term Corporate Bond (VCLT), an exchange-traded fund  based on an index, has an expense ratio of just 0.04%. It’s an excellent fund if you are willing to accept more risk. Holdings are investment grade, but just barely, with 88% of assets rated A or BBB. And the fund has a duration of more than 14, so it’s sensitive to rate swings. But more risk, more reward: The fund has returned an annual average of 5.4% over the past five years. 

Also recommended is the T. Rowe Price Total Return (PTTFX), which has about one-fourth of its assets rated below investment grade. With an expense ratio of 0.46%, the mutual fund has returned a five-year average of 4.0%. Its bonds mature in an average of eight years, so if rates rise, the portfolio’s yield will rise, too.

Another way to protect against rising interest rates is the SPDR Bloomberg Barclays 1-10 Year TIPS (TIPX), an ETF with expenses of 0.15%. TIPS become more valuable as inflation and interest rates increase. Technically, TIPS can have negative yields, as some do now, but the income from the bond gets enhanced when inflation rises by adjustments to the principal. 

If rates do rise, returns may soon reach the 5% range for many bond funds. But higher rates, remember, also have the effect of depressing economic growth, which in turn can force borrowers into default. Bond investing is always a matter of balance: long versus short maturities; risky versus safer credits. No more so than now.

James K. Glassman chairs Glassman Advisory, a public-affairs consulting firm. He does not write about his clients. He owns none of the securities mentioned. His most recent book is Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence. You can reach him at [email protected]

Source: kiplinger.com

Double Your ESG Impact With Funds Tied to Charities

You might have noticed a flurry of new investment products that link sustainably themed funds with donations to nonprofit groups, from the NAACP to the National Wildlife Federation to the Susan G. Komen Foundation.

But before you invest in a mutual fund or exchange-traded fund (ETF) tied to your favorite charity, make sure that it fits within your portfolio, meets your investment goals and truly delivers a benefit to the nonprofit group with which it partners.

When comparing these funds with competitors, “consider the fund donation to be the cherry on top, not the main driver of the decision,” says Jon Hale, global head of sustainability for investment research firm Morningstar. “Don’t be seduced into a fund that doesn’t further your financial goals,” he says.

And look beyond a fund’s donation to measure impact. Start by taking a hard look at its management company. Does it actively partner with the nonprofit group it benefits to bring about change? Is it voting shareholder proxies and filing shareholder resolutions to further the nonprofit’s cause?

“ESG investing alone doesn’t create concrete, real-world impact,” says Leslie Samuelrich, president of Green Century Capital Management. “You need to pick funds that do shareholder advocacy.”

Green Century Balanced Fund

The concept of working hand-in-glove with nonprofits isn’t completely novel. Consider Green Century Balanced Fund (GCBLX), a member of the Kiplinger ESG 20, a list of our favorite stocks and funds with a focus on environmental, social and governance issues. Fund sponsor Green Century is owned by several nonprofit groups around the U.S., and its profits from fees support their environmental and public health goals.

Moreover, Green Century has for years engaged companies by filing shareholder resolutions, speaking with corporate executives and doing policy work. Apple, for example, Balanced Fund’s second-largest holding, announced in November that it would redesign its products to enable consumers and independent shops to repair devices and thereby reduce electronic waste, the fastest-growing global waste stream. Green Century was one of the main drivers of this “right to repair” decision.

All that engagement comes at a cost—the expense ratio for Green Century Balanced is 1.46%. But over the past 10 years, Balanced Fund’s 10.6% annualized return beat 83% of its peers, and it placed in the top 25% of similar funds over the past three-, five- and 10-year periods. (Returns and other data are through January 7.)

Simplify Health Care ETF

Simplify Health Care ETF (PINK, $26) is another fund that has a strong investment thesis and aims to provide a significant boost to a nonprofit group.

The PINK ETF is actively managed by Michael Taylor, a trained virologist as well as a seasoned and highly regarded hedge fund manager. Simplify is donating all of its net profits from managing the fund, or a minimum of $100,000 per year, to the Susan G. Komen Foundation for breast cancer research.

Although the foundation’s reputation was tarnished in the past decade for high CEO pay and overhead, Komen has since improved its leadership, management and transparency, such that it has earned a four-star rating (out of five) from Charity Navigator and a Gold rating from Guidestar.

Simplify Health Care does not apply an ESG screen per se to its stock-selection process; even so, it earns a strong four out of five “globes” ESG rating from Morningstar. Top holdings include UnitedHealth Group and Pfizer. Launched in October 2021, the ETF has gained 4.5% since then, garnering over $30 million in assets. The fund’s 0.50% expense ratio is reasonable, given that it has such strong management.

Another plus for the fund is that healthcare stocks are often resilient in times of inflation. And the long-term demographics of aging societies are working in their favor. For those reasons, this fund could be a solid addition to a portfolio for investors looking to diversify into the healthcare sector.

Impact Shares NAACP Minority Empowerment ETF

Impact Shares, itself a nonprofit organization, manages a suite of sustainable funds in collaboration with leading nonprofits, including the NAACP, the YWCA and others. Impact has partnered with the groups to help design investment criteria and has pledged to donate 100% of net fee profits to them.

In the case of Impact Shares NAACP Minority Empowerment ETF (NACP, $35), which tracks a Morningstar index designed to provide exposure to U.S. companies with strong racial and ethnic diversity policies in place, Impact has absorbed a portion of the management fee, lowering the expense ratio from 0.75% to 0.49%.  

According to Impact Shares CEO Ethan Powell, the fund is almost at breakeven, at which point donations to the NAACP will begin. Although the donations will be important, Powell believes that an even greater benefit to these groups is the opportunity to engage with corporations alongside an institutional investor. In fact, Impact Shares hired a former senior director of the NAACP as chief engagement officer for the fund in 2020, and corporate execs have been reaching out to learn how they can better their racial equity scores so that their companies can be included in the fund.

Unlike many other funds that donate to specific causes, the ETF is not sector-specific. But it recently held a hefty 29% weighting in tech. The portfolio of large-company shares, topped by Apple and Microsoft, is a blend of growth-focused and value-priced stocks. Since its launch in July of 2018, its 19.8% annualized return outpaced the S&P 500’s 17.9%.

Bottom Line

The funds above are far from the only ones partnering with causes you might hold dear.

The investment arm of New York Life Insurance launched a suite of ESG funds in 2021 that will donate the larger amount of 10% of net fees or $30,000 per year to specific causes. These include IQ Cleaner Transportation, which will donate to the National Wildlife Federation, as well as ETF index funds donating similarly to Girls Who Code, the American Heart Association and Oceana, an ocean conservation group.

Although the investment case for some of these funds is intriguing, the track records are still short, and investors who care about making an impact should note that the New York Life funds will not be engaging with companies beyond voting on shareholder proposals.

Expect to see more funds linking up with charities. The bottom line is that with any fund promising to donate fee income to a worthy cause, you will have to do some extra homework to make sure the pledge is more than just a marketing exercise.

Nonetheless, for investors who want to beef up donations to their favorite charities along with their portfolios, these new partnerships are worth watching.

Source: kiplinger.com