(Bloomberg) –As delinquencies on multifamily mortgages pile up, lenders who had bundled those borrowings into securitizations known as commercial real estate collateralized loan obligations are racing to stave off trouble.
To keep the share of bad loans from spiking too high — a development that would cut the issuers off from the fees they collect on the CRE CLOs — they’ve been furiously buying them back. The lenders acquired $520 million of delinquent credit in the first quarter, a 210% increase on the same period last year, according to estimates by JPMorgan Chase.
It’s the latest sign of strain among the $79 billion of loans packaged into CRE CLOs, a market which grew in prominence in recent years as Wall Street financed syndicators who bought up apartment complexes with the intention of renovating them and boosting rents. When interest rates surged, many borrowers whose floating-rate loans were bundled into the securitizations were caught off guard and began falling behind on their payments.
To buy the defaulted loans, some lenders have been borrowing the money from banks and other third parties using what are known as warehouse lines, a type of revolving credit facility. It’s surprising they haven’t had more trouble accessing that debt given how quickly loans seemed to be deteriorating in quality heading into this year, said JPMorgan strategist Chong Sin.
“The reason these managers are engaged in buyouts is to limit delinquencies,” he said. “The wild card here is, how long will financing costs remain low enough for them to do that?”
One reason they have is that risk premiums, or spreads, on commercial real estate loans have tightened materially since last November. As a result, even with a more hawkish tone on the path of rates, the all-in cost of financing is still lower than where it was late last year. Still, there’s no guarantee it will remain that way.
“If the outlook for the Fed shifts materially to hikes or no rate cuts for a while, that might lead to a sharp increase in delinquencies, which can stifle issuers’ ability to buy out loans,” said Anuj Jain, a strategist at Barclays Plc, who expects buyouts to continue as distress increases in the sector.
Market Surge
CRE CLO issuance surged to $45 billion in 2021, a 137% increase from two years earlier, when buyers of apartment blocks sought to profit from the wave of workers moving to the Sun Belt from big cities. Three-year loans would give them time to complete upgrades and refinance, the thinking went.
Fast forward to today and the debt underpinning many of the bonds is coming due for repayment at a time when there’s less appetite for real estate lending, insurance costs have skyrocketed and monetary policy remains tight. Hedges against borrowing cost increases are also expiring and cost significantly more to purchase now.
Those blows helped increase multifamily assets classed as distressed to almost $10 billion at the end of March, a 33% rise since the end of September, according to data compiled by MSCI Real Assets.
“There was so much capital flowing into that space to real estate operators and developers, and that led to a lot of reckless lending,” said Vik Uppal, chief executive officer at commercial real estate lender Mavik Capital Management., who avoided the space.
The pain is now filtering through to the CRE CLO market. The distress rate for loans that were bundled into these bonds rose past 10% at the end of March, according to CRED iQ, compared with 1.7% in July last year.
The firm defines distress as any loan that’s been moved to a special servicer or is 30 days or more delinquent. Some other data providers prefer to wait until payments are 60 days or more overdue before using that classification.
Short Sellers
The outlook for the sector has caused short sellers, who borrow stock and sell it with the intention of buying it back at a lower price, to target lenders who used CRE CLOs. That’s because the issuers own the equity portion of the securities, so take the first losses when loans sour.
Short interest in Arbor Realty Trust stood above 37% on Monday, the highest level on record, according to data compiled by S&P Global Market Intelligence.
“The multifamily CRE CLO market was not prepared for rate volatility,” said Fraser Perring, the founder of Viceroy Research, which is betting against Arbor. “The result is significant distress.”
Arbor Realty declined to comment. Reached by phone on Tuesday, billionaire Leon Cooperman said that Arbor founder Ivan Kaufman has been “a good steward of my capital” and had correctly seen the need to position the company defensively more than a year ago.
CRE CLOs appealed to some investors because the issuers tend to have more skin in the game than issuers of commercial mortgage-backed securities. Critics argue the products contain loans of lower quality than you’d find in a CMBS, where loans are typically fixed rate so are, in theory at least, less exposed to interest rate hikes.
“These vehicles are a way for borrowers that need speculative financing that they often can’t get from elsewhere,” said Andrew Park, an analyst at nonprofit group Americans for Financial Reform. “CRE CLOs package the reject loans from CMBS.”
Credit card debt forgiveness, also known as debt settlement, involves negotiating with creditors to reduce the amount owed on your credit card balances. While it can provide relief from overwhelming debt, it may have significant consequences, including damage to your credit score, tax implications, and potential legal actions from creditors. It’s crucial to fully understand the terms and consequences before pursuing debt forgiveness and to explore other options such as debt management or consolidation.
By the end of 2023, American consumers had more than $1.13 trillion in credit card debt. If you have credit card debt and you’ve been struggling to repay your creditors, don’t panic—you may qualify for some type of credit card debt forgiveness. Here’s what you need to know about this option for managing your finances.
What Is Debt Forgiveness?
Debt forgiveness is when a lender reduces or eliminates the amount you owe. For example, a credit card company may agree to forgive $400 of a $1,000 balance. Credit card debt forgiveness makes it a little easier to manage your finances, as it wipes away some of your debt, leaving you with more money for debt repayment or household expenses.
Debt forgiveness has the following benefits:
When you reduce a credit card balance, you only pay interest on the remaining amount due. As a result, debt forgiveness may help you save hundreds or even thousands of dollars, depending on how much you owe and how long it takes to pay the account in full.
If a creditor forgives your entire debt, you can use the minimum monthly payment to catch up on bills or pay off your other debts faster.
You don’t have to stress about paying back the original balances on your cards.
Ways to Have Your Debt Forgiven
If you’re struggling to make your credit cards on time, you may qualify for one of the following types of debt forgiveness.
Negotiate With Creditors
The easiest way to reduce your account balances is to negotiate with creditors. Depending on how much you owe and how long it’s been since your last payment, a credit card company may be willing to accept a settlement for less than the amount owed. For example, it’s possible to negotiate a settlement of $250 on a balance of $500.
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Before you contact a creditor, calculate how much you can afford to pay. If you only have $300 available, you know you can’t accept a settlement for any more than that. When you’re ready to call, follow these steps:
Explain your financial situation. The information you provide may affect the creditor’s willingness to forgive your debt. For example, if you’re unemployed, a representative may be willing to settle for a lower amount because they know you don’t have any income.
Let the creditor know how much you can afford to pay. Offer a little less than you have available. If the creditor agrees, you’ll have a little cash left over to tackle another debt.
If the creditor agrees to your proposed settlement, ask the company to email you a copy of the agreement. The document should state that the creditor is willing to accept the settlement amount as payment in full.
Pay the agreed-upon amount. If possible, mail a money order so the creditor can’t access your bank account information. Each money order also comes with a detachable receipt, making it easy to keep track of who and how much you’ve paid.
Participate in a Debt Relief Program
If you’re too busy to negotiate or you just don’t feel confident doing it on your own, consider signing up for a debt relief program. This type of program helps reduce the amount of debt you owe, giving you a little more breathing room.
Once you sign up, a program representative contacts each of your creditors and attempts to negotiate a settlement. Just like when you try to negotiate settlements on your own, there’s no guarantee every credit card company will agree to reduce your balance.
Some debt relief providers advise their clients to stop making minimum monthly payments on their credit cards. The reason for this recommendation is that some creditors are more willing to negotiate if you’re already several months behind. However, if you stop making payments, your credit will likely take a hit, as your payment history accounts for 35% of your FICO® scores.
Debt relief may not be the best approach if you want to preserve your credit scores, but if you’re already behind on your credit cards, there’s no additional penalty for signing up.
File for Bankruptcy
Bankruptcy is a legal process that allows you to eliminate some or all of your debts. In a Chapter 7 bankruptcy, also known as a liquidation bankruptcy, a trustee sells some of your assets and uses the proceeds to repay as much of your debt as possible.
To qualify for a Chapter 7 bankruptcy, you must meet one of the following requirements:
Your current monthly income is less than the median income for your state.
You pass a means test designed to determine if an individual is abusing the bankruptcy system.
Under the Chapter 7 bankruptcy rules, you can exempt some of your personal property from the process. For example, there’s a federal exemption of $4,450 for a motor vehicle. If you exempt an asset, the trustee doesn’t sell it.
Chapter 13 is for debtors who don’t meet the requirements to qualify for Chapter 7 relief. If you have regular monthly income, a Chapter 13 bankruptcy allows you to set up a debt repayment plan. The plan lasts three to five years, depending on how much income you earn. Once you complete the payment plan, any remaining debts are discharged.
Filing for bankruptcy has several pros and cons. The biggest advantage is that it gives you a fresh start. Filing triggers an automatic stay, which means creditors must stop their collection attempts while your case is pending.
Bankruptcy also allows you to avoid wage garnishment in the future. Once a debt is discharged, it’s gone forever. The creditor can’t get a judgment against you or start deducting payments from your wages.
The biggest drawback is that filing for bankruptcy hurts your credit. It can also stay on your credit reports for up to seven to 10 years, depending on the type of bankruptcy you file. When you have a bankruptcy on file, it’s more difficult to qualify for loans, credit cards and other types of credit.
Potential Tax Implications of Credit Card Debt Forgiveness
Debt discharged through bankruptcy isn’t considered taxable income. However, if you negotiate a settlement or have a debt relief company negotiate on your behalf, you may owe income tax on the forgiven amount. For example, if a creditor accepts $400 as payment in full for a balance of $1,000, you may have to pay tax on the $600 difference.
You may be able to avoid the federal tax on forgiven debt if you’re insolvent, which is when your total liabilities exceed your total assets. Someone with debts totaling $25,000 and assets totaling $20,000 meets the definition of insolvency.
If you’re insolvent, seek advice from a qualified tax professional. You may need to file Form 982 with your federal tax return. Your state may also impose income tax on forgiven debt.
Alternatives to Debt Forgiveness
Credit card debt forgiveness isn’t right for everyone, but there are a few alternatives.
Debt Consolidation
Debt consolidation allows you to combine several debts into a single loan, making it easier to manage your finances. For example, if you have credit cards with balances of $500, $2,500, and $5,000, you may be able to consolidate them into a loan for $8,000.
Consolidation loans typically have fixed interest rates, so you don’t have to worry about your rate changing from month to month. Additionally, getting a consolidation loan allows you to make just one payment per month, eliminating the need to juggle multiple accounts.
Budgeting
If you don’t have much debt, budgeting may help you pay it off without having to negotiate settlements or sign up for a debt relief program. A budget estimates your monthly income and expenses, making it easier to identify opportunities to save and pay off debt.
Once you create a budget, you may need to reduce your expenses or increase your income. The more you earn and the less you spend, the more money you’ll have available for credit card payments.
Negotiating Interest Rates
Some credit cards come with high interest rates, making it more difficult to pay off the balances. To reduce the amount of interest applied to your balance, contact your credit card companies and ask for lower rates. There’s no guarantee they’ll agree, but it doesn’t hurt to ask.
Balance Transfers
If you have a strong credit history, transferring high-interest credit card debt to a balance transfer card can help you pay off debt faster. Once you transfer your balances, interest doesn’t start accumulating until the promotional period expires, so you can make payments without worrying about how much interest is building up every month.
The no-interest period may expire within as little as six months, so be sure to pay off the balance before the regular APR kicks in.
If you want to make a plan to improve your financial health, get started with your free credit score and credit report card from Credit.com today.
Maybe you’ve recently spoken to a broker or financial adviser about investments, and they suggested exchange-traded funds (ETFs) as a way to diversify your portfolio and boost your earnings.
But, you don’t know how they work or how to go about adding them to your arsenal of investments. Or perhaps you’re just starting out and want to learn more before making an investment decision?
Either way, we’ve got you covered. Read on to learn more.
Key Takeaways
Exchange-traded funds (ETFs) are diversified investment vehicles that allow investors to buy shares in a collection of assets, ranging from stocks and bonds to commodities and currencies, functioning similarly to mutual funds, but trading like stocks on exchanges.
ETFs offer various types, including those focused on specific industries, commodities, or strategies like inverse or leveraged ETFs, catering to a wide range of investment objectives and risk tolerances.
The benefits of ETFs include lower administrative costs compared to mutual funds, flexibility in trading throughout the trading day, tax efficiency in capital gains, and the transparency of holding disclosure, making them an attractive option for both novice and experienced investors.
What are ETFs?
In a nutshell, an exchange-traded fund (ETF) is a basket of assets that can include a medley of the following:
Exchange-traded funds are ideal for individual investors because they allow you to diversify your holdings without purchasing individual shares of each asset. And the profits are generated by the performance of the overall ETF and not individual shares.
Furthermore, ETFs trade like stocks and are easily bought and sold on the stock exchange, making it simple for investors to buy and sell.
How do ETFs work?
Before exchange-traded funds hit the exchange for trading, they must be created by authorized participants or specialized investors. They conduct extensive research and choose the assets that they deem as most suitable for the portfolio.
The pool of assets is then divided into ETF shares and traded on a major stock exchange, like the NYSE or NASDAQ, or through a brokerage firm.
Each exchange-traded fund has a ticker symbol like a stock and intraday price that can be tracked throughout the day. But unlike mutual funds or index funds, prices are constantly fluctuating because ETF shares are issued and redeemed throughout the day.
Mutual funds are priced at the end of the trading day, so all buyers and sellers receive the same price. This is referred to as the NAV (net asset value.)
Individual investors can purchase ETFs, but the way returns are generated differs from what you’d see with stocks or bonds. Profits are not tied to the actual assets in the ETF, but a sum of the profits generated from interest and dividends from the overall ETF. The return is collectively based on your proportion of ownership in the ETF.
Types of ETFs
There’s no shortage of exchange-traded funds as offerings are designed to track various sectors, markets, and indexes both here in the U.S. and abroad. The types of ETFs that are most popular among investors include:
Actively managed ETFs: ETFs that are managed by a professional fund manager and traded on a stock exchange. They aim to outperform a specific benchmark or index by actively selecting and trading the securities in the fund’s portfolio.
Bond ETFs: ETFs that track a basket of bond securities, such as corporate bonds, government bonds, or municipal bonds.
Commodity ETFs: These ETFs track the price of a specific commodity, such as gold, silver, oil, or agricultural products.
Currency ETFs: ETFs that track the value of a specific currency, such as the US dollar, Euro, or Japanese yen.
Foreign market ETFs: The main objective for these ETFs is to track the performance of a specific foreign market, such as a specific country or region.
Inverse ETFs: A type of ETF that aims to produce the opposite return of a specific benchmark or index.
Leveraged ETFs: These ETFs use financial instruments, such as futures contracts and options, to amplify the returns of a specific benchmark or index.
Market ETFs: The main objective is to track a specific index. These include DIA (tracks the Dow Jones Industrial Average), Spider or SPDR (tracks the S&P 500 Index), and QQQ (tracks the Nasdaq 100).
Sector or Industry ETFs: The main objective is to track a sector or industry. Common sector ETFs include XLF (financial companies), OIH (oil companies), FONE (smartphones), and XLE (energy companies).
Stock ETFs: ETFs that track a basket of stocks, such as those in a specific index, sector, or country.
Benefits of ETFs
Diversified Asset Pool
With ETFs, you can invest with minimal effort to fit your taste in securities, risk tolerance, and investment goals. This also means you can choose from various market segments. Furthermore, poor-performing assets can offset those that are performing well.
Hands-off Management
Professional fund managers do all the work for you according to your investment objectives. They also continuously monitor the performance of the ETF. But since these investments are generally passive and track an index, your fund manager won’t have to spend a bulk of their time day in and day out managing the ETF to stay ahead of the curve.
Quick note: The exception to this rule applies when you’re dealing with an actively managed ETF that is designed to beat an index.
Flexible Purchase and Selling Window
Unlike mutual funds, ETFs are available for purchase at any time of the day. There’s also flexibility with orders as you can choose from margin, limit, or stop-loss orders. Even better, there are no minimum holding periods, like you’ll see with some mutual funds, so you’re free to sell at any point after you purchase ETF shares.
This added flexibility is also beneficial to investors because it minimizes the level of risk they’ll have to absorb if the market takes an unexpected turn for the worse. ETFs are much easier to unload in a shorter window than mutual funds, that sometimes have a 30-day holding period before they can be sold.
Tax Efficient
With taxable mutual funds, you must pay taxes on distributions, regardless of whether you keep the cash or use it to invest in more mutual fund shares. However, you will only pay capital gains on ETFs when your investment is sold.
Transparency
As mentioned earlier, the performance of a particular ETF can be tracked throughout the day using the ticker. And the end of each day, the ETF’s holdings are shared with the public. But mutual funds only disclose this information on a monthly or quarterly basis.
Lower Administrative Costs
Unless the ETF is actively managed, your administrative costs will be substantially lower than what you’d find with a portfolio that must have oversight at all times, like a mutual fund. On average, the expense ratio for most ETFs is lower than .20 per year, compared to the 1% or more per year in administrative costs that accompany actively managed mutual funds, according to Nasdaq.
But keep in mind that expense ratios aren’t the same across the board. So, it’s best to speak with the ETF issuer to get a better idea of what you’d expect to pay in administrative costs should you decide to invest in their ETFs.
Drawbacks of ETFs
Before you invest in ETFs, there are some drawbacks you should be mindful of.
Price Fluctuations
Prices often change, so you could be at a disadvantage if you like to buy in small increments. And it’s not always possible to buy low and sell high if the ETF is a slow mover.
Fees from Commissions
Looking to buy ETFs through an online broker? If you select an ETF that’s outside the scope of what they offer, you could incur substantial fees from brokerage commissions.
Sudden Death
If the ETF underperforms and is forced to shut down abruptly, you have no control over the hit you may take, either through a loss on your investment or tax obligation.
Settlement Window
When you sell ETFs, there’s a two-day settlement window that must pass before you can access your cash. This could be to your disadvantage if you need the funds right away to invest in another asset.
How to Invest in ETFs
To invest in exchange-traded funds (ETFs), you’ll need to follow these steps:
Choose a brokerage: First, select a brokerage firm where you will place your trades. Reputable options include well-known online brokers such as Charles Schwab, E*TRADE, Robinhood, and Fidelity. Be sure to compare fees, trading platforms, and other features before making your decision.
Open an account: Once you’ve chosen a brokerage, you’ll need to open a brokerage account and complete any required paperwork. This may include providing personal and financial information, as well as completing any necessary identity verification steps.
Fund your account: To buy ETFs, you’ll have to deposit money into your brokerage account. This can typically be done by linking a bank account or using a credit or debit card.
Select your ETFs: Once your account is funded, you’ll be able to browse and select the ETFs you’d like to purchase. Most brokerage firms offer a wide range of ETFs to choose from, including those that track specific indexes, sectors, or countries.
Place your trade: Once you’ve selected the ETFs you’d like to purchase, you can place your trade by specifying the quantity and price. Your brokerage firm will handle the rest of the process, including executing the trade and holding the ETF shares in your account.
Keep in mind that investing in ETFs carries risks, and it’s important to do your own research and consider your own financial goals and risk tolerance before making any investment decisions. It’s also a good idea to consult a financial professional for personalized advice.
Bottom Line
It’s easy to buy or sell ETFs and make them part of your investment strategy. By gaining a thorough understanding of how they work and working with a broker to analyze how they will impact your investment portfolio, you’ll have the best chance of maximizing your returns.
95% of Parents Saving for Kids’ College Expenses Expect to Cover Over Half the Costs, According to Northwestern Mutual Planning & Progress Study 2 in 3 parents who are helping their kids cover college costs expect their children to pay for part of the educational expenses; 1 in 3 say the parents will pay for … [Read more…]
In early January 2024, I wrote an answer to reader-of-the-blog Vince’s question about his retirement portfolio. A quick summary of that article is:
If Vince’s portfolio is $4.2M and his annual spending needs are $100,000, he’ll be entering retirement following (essentially) a “2.38% Rule.” That’s way more conservative than the classic 4% Rule.
He doesn’t need to expose himself to undo risk. 60% stocks, 55% stocks, 50% stocks…Vince will be successful in any of these portfolios. Since he has “won the game” of career financial success, he can “stop playing the game” by taking some of his chips off the table a.k.a. reducing his exposure to risk assets (stocks).
Vince wrote back! He asked this week:
If the market goes down, should I perform my annual rebalance into stocks, or because we have 20 years of spending in our fixed income portion of our portfolio, should we only rebalance into bonds from now on when our equities get too high. It may come back to living comfortably vs. passing on more money to heirs. (I choose the former).
Vince
Ahh! Rebalancing. Let’s dive in.
Two Sentences on Rebalancing
Rebalancing is the act of adjusting the asset allocation within an investment portfolio (how much in stocks? how much in bonds? etc.) to maintain the desired level of risk and return.
To learn more, here’s a deep dive on the topic of rebalancing.
Vince’s Question, Summarized
This is such an interesting question!
Vince is asking:
Should Vince’s rebalancing go in both directions?
If stocks are up compared to bonds, should Vince sell stocks to buy more bonds?
If stocks are down compared to bonds, should he sell bonds to buy more stocks?
Why does it matter? Because part of Vince’s portfolio approach is that his bond allocation represents 20 years’ worth of spending in his portfolio. He’s not measuring in percentages! He’s measuring in years’ worth of spending.
So, in essence, Vince is asking: should he rebalance, even if doing so results in him having “fewer years of bonds” than he’s comfortable with?
We need to understand two different schools of thought regarding portfolio construction. These two schools are definitely similar but with slight, nuanced differences.
The first is the “bottoms-up, bucket method” described on the blog before. It recommends an investor assign a timeline to every dollar in their portfolio, then align those timelines with appropriate levels of risk in investment assets. The money with a 6-month timeline needs to be in cash or ultra low-risk Treasury notes. The money with a 30-year timeline should be in higher risk assets (like stocks) in search of greater returns.
The other common approach is the “expected risk, expected return” method. This approach uses historical data and the investor’s unique risk appetite (a combination of their age, their cashflow needs, their unique mental approach to losing money, etc.) to hone in on the “right” allocation for them. Younger, riskier investors can stomach more stocks, while older, risk-averse investors should own more bonds, etc.
Ideally, the portfolio’s future “expected returns” are then used to test the validity of the overall financial plan (e.g. via Monte Carlo simulation).
Which Method is “Right?”
Which method is right?
Both methods work. And, in theory, both should lead to very similar outcomes. The two methods differ more in mindset than in “brass tacks.”
I prefer the “bottoms-up, bucket method” because it puts planning first (“give the dollar a job and a timeline”) and then determines appropriate investments. I used that approach in my original response to Vince. He is also using that method in his new question today. Vince feels particularly safe with 20 years’ worth of spending in fixed income. Those dollars have timelines, and he’s built an appropriate cash, CD, and bond ladder for those timelines.
Is It Right to Rebalance?
Should Vince rebalance? Let’s start by using some reasonable numbers to add color to Vince’s question.
Let’s say Vince needs $100,000 per year from his portfolio. And, based on his personal risk tolerance, he wants 20 years of that annual spending in bonds**. Easy math. That’s $2 million in bonds.
**For what it’s worth, most of the time for most investors, their timelines beyond 10 years should not be in bonds. The math simply says otherwise – that money should be in a higher risk asset, like stocks.
But finance is personal. And many retirees are acutely aware of the fact that “this is all the money I have!” Extra caution – aka extra fixed income – is understandable. It’s helps the investor sleep at night…return on sleeplessness!!! And as long as that extra fixed income doesn’t damage the portfolio’s probability of success, I’m ok with it.
Ok. $2 million in bonds, meaning the rest of Vince’s $4.3M portfolio (as of this writing) is in stocks. That’s $2.3M in stocks. That’s a 55% stock, 45% bond allocation.
Next, we need hypothetical returns.
Let’s say over the rest of 2024, bonds provide their expected 5% interest while stocks drop 8%. But Vince withdraws $100,000 (from bonds, because that’s why they’re there) to support his annual expenditures. Vince’s portfolio will shift to $2.1M in stocks, $2.0M in bonds.
That’s a 51% stock, 49% bond portfolio. Should Vince rebalance to 55% / 45%?! Let’s go back to first principles. Why did Vince end up 55/45 in the first place?
Because he wanted 20 years of bonds to cover his next 20 years of expenses, and everything thereafter went to stocks. And because his financial plan appears to be perfectly successful with that portfolio.
We should look through that exact same lens when considering rebalancing.
Does Vince still need 20 years of bonds to sleep at night? Or, with one more year in the rearview mirror, is he comfortable with 19 years of bonds? This is a mental/personal question.
Depending on that answer, does Vince need more/fewer bonds than he has right now?
And finally, does his financial plan’s probability of success change depending on his rebalancing? This is a math/brass tacks question.
Based on Vince’s investing rationale, his rebalancing decision is a function of bond prices.“I said I needed ~20 years of bonds to sleep at night; do I have them?”
The stock portion of his portfolio has little to do with that! If stocks go up 30%, but he still has 20 years of bonds, I don’t think he should rebalance into even more bonds.
Off the Balance Beam
As asset prices move, our portfolio allocations shift like desert sand beneath our feet. Our targeted risk and return can veer off course and our financial plan’s likelihood of success can decay. These are reasons to rebalance.
However, rebalancing isn’t always needed, depending on your portfolio and the unique rationale of your financial plan. As in Vince’s case, some market movements create more rebalancing needs than others.
Thank you for reading! If you enjoyed this article, join 8000+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
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The term “six figures” refers to any annual six-digit salary that falls within the $100,000 to $999,999 range. Securing a post-graduate degree or attaining a highly in-demand position can help you earn six figures over time.
How Much Money Is Six Figures?
A six-figure salary can range anywhere from $100,000 to $999,999 annually. If a person had an annual income of$500,000, here’s what their payments would look like before taxes and deductions:
Salary Breakdown
$500,000 per year
$240
per hour
$9,615
per week
$19,231
every 2 weeks
$41,667
per month
$125,001
per quarter
$250,002
every six months
Please note that this breakdown doesn’t include taxes, which can vary depending on your state and filing status. This breakdown will also vary depending on a person’s exact salary and not what they’re expected to receive.
What Percent of America Makes Six Figures?
When you remove demographics such as infants, students, and stay-at-home spouses and focus only on full-time workers,around 18% of all earners in the US make at least six figures.
Conversely, the median American household income in 2023 was approximately $44,225. This number will fluctuate when one examines factors like the location, education, and health of certain populations.
How Does Education Affect Earning Six Figures?
Having a higher education can create more opportunities to earn a six-figure salary after college. Postgraduate degrees in Science, Technology, Engineering, and Mathematics (STEM) fields are often requirements for high-paying occupations.
Below are their median salaries, according to the Bureau of Labor Statistics. Keep in mind that median salaries don’t reflect the highest or the lowest paying positions:
Higher education is synonymous with increased student debt, but at least five college degrees are worth the money in the long run. Medical degrees, engineering programs, industrial management studies, and computer science degrees fall under this umbrella.
Can You Make Six Figures Without a Degree?
It’s possible to earn $100,000 or more each year without a college degree by pursuing certain occupations. Roles in this category often require preliminary and on-the-job training, as well as multiple certifications.
Choosing this route can also help you avoid some of the most frequent student loan mistakes, such as borrowing more money than you need and slowing down your financial growth.
Commercial Airline Pilot
The median salary for airline and commercial pilots was $148,900 in 2023. Securing a pilot’s license is the first barrier to entry for this role, though it will take years to gain the necessary experience for the most lucrative positions.
Air Traffic Controllers
The high level of responsibility and focus required of air traffic controllers results in a high compensation of about $132,250 annually. An individual’s performance and personal experience can pave the way for higher wages over time.
Air traffic controllers only need an associate degree to get started, though this role requires extensive on-the-job training.
Police Officer or Firefighter
Police officers and detectives, along with firefighters, can earn larger salaries based on their experience and location. For instance, the salary and benefits for police officers in California total around $117,822 annually and include health and dental insurance.
Hard Labor Jobs
Hard labor jobs often pay very well to compensate for the physical risks and immense technical knowledge that these roles demand. In 2022, power plant operators earned a median salary of $97,570. As technology and energy continue to become more important to society, the demand and compensation for these roles will almost certainly rise.
Athletes and Sports Competitors
World-famous athletes and sports competitors like LeBron James, Lionel Messi, and Naomi Osaka earn millions of dollars each year, but many of their contemporaries also earn fantastic salaries without ever needing a degree. Talented athletes with the proper opportunities earned a median salary of $94,270 in 2022.
Real Estate Agent
Real estate brokers and sales agents can earn six-figure salaries without a college degree. Instead, they will need to invest time and money into securing a real estate salesperson license—which, in California, for example, can cost upwards of $500 once all fees are accounted for.
Real estate agents largely earn income from commissions, so they’ll have to gain experience and build up their network of clients to hit that six-figure mark.
Making Six Figures From Your Investment Strategy
A certified financial advisor is best qualified to help you understand how your investments can grow in the future. A strong investment strategy combined with the proper resources and economic conditions can also help someone earn six figures annually.
Potential investment options include:
Pretax retirement savings plans
Stocks, bonds, treasuries, and cryptocurrencies
Real estate and REITs (real estate investment trusts)
Compound interest helps funds grow exponentially based on the amount you’ve deposited and any additional contributions you add. To see this concept in action, you can use our 401(k) calculator and try out multiple scenarios.
Normally, compound interest accounts can generate 5% to 8% interest each year based on your retirement investments. Jobs that provide employees with 401(k) matching contributions can generate hundreds of thousands of dollars by the time you reach retirement age (around 65 years old).
What Are the Best Ways to Start Earning Six Figures?
Keep these strategies in mind if you strive to make at least $100,000 annually:
Consider earning a postgraduate degree. Postgraduate STEM degrees may pave the way for higher-paying roles after graduation.
Avoid student loans to the best of your ability.
Research vocations that don’t require post-graduate degrees.
Consider attending a trade school or a technical college.
How to Increase Your Income in Your Current Role
You have several options to increase your revenue in your current career.
Consider switching companies every few years. Competitors may pay more for experienced workers from other companies.
Pursue promotions within your current organization whenever possible.
Explore entrepreneurship once you’ve gained enough practical experience and saved up a set amount of capital.
2024 Tax Brackets for Single and Joint Filers
As your salary increases, so will your tax obligations for each year. The Internal Revenue Service disclosed the following income tax bracket structure for 2024:
Percentages
Single Filers
Joint Filers
35%
$243,725
$487,450
32%
$191,950
$383,900
24%
$100,525
$201,050
22%
$47,150
$94,300
12%
$11,600
$23,200
Maintain Strong Credit With Credit.com
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WASHINGTON — Rep. French Hill, R-Ark., the vice chairman of the House Financial Services Committee, criticized a range of proposals by Biden administration regulators, notably those related to technology, including bank-fintech partnerships and digital assets, in a speech Tuesday.
Hill, who also serves as the chairman of the House Financial Services subcommittee on digital assets and is in the running to take the top Republican spot on the full committee next Congress, told a room full of community bankers that his and other House Republicans’ focus for the remainder of the Biden administration is pushing back on regulators’ policies, as well as introducing some legislation to “lead us in the right direction.” He spoke at a conference organized by the Independent Community Bankers of America.
In particular, Hill criticized a move by the Federal Reserve in August that outlined how the central bank would oversee “novel activities,” including technology-driven partnerships with nonbanks, and activities that include cryptocurrencies and blockchain technology.
Hill and many other Republicans interpret steps being taken by banking regulators to address fintech and crypto policy as effectively shutting out banks from those businesses.
Hill argued that the Fed’s action in August “basically says that if you want to partner with a fintech company in any aspect of your business, somebody has to get preapproval for that.’
“I told Vice Chairman [Michael] Barr, that’s not the way we work in banking,” he added.
Hill said that regulators should instead look at these partnerships and activities at banks individually through the examination process.
“We have records, we have risk management policies and compliance departments,” he said. “We document all that, then we’ll go over it with an exam. I thought that was a serious overreach.”
Hill said that one of his goals in the next year is to show regulators and Congress that fintech “can benefit banks.” He’s also interested in the use of artificial intelligence in the financial sector.
“We’re bringing in the regulators, asking them how they’re using AI in their own practice and their own services to you, and how they’re looking at AI from a supervisory perspective,” he said.
Hill also referenced an off-the-record session at the ICBA conference the previous day with Consumer Financial Protection Bureau Director Rohit Chopra. Hill, like other congressional Republicans, has repeatedly criticized Chopra’s rulemakings and enforcement actions.
“I don’t think any CFPB director has ever made a small business loan,” Hill said. “You got to hear from one of the slickest guys in town yesterday.”
Hill promised to continue pushing back on the CFPB’s small-business lending data collection rule, which has faced litigation from the banking industry as well as an ultimately unsuccessful Congressional Review Act challenge.
Inside: Uncover the realities of financial aid repayment for students. Learn about FAFSA, loan forgiveness, credit impacts, and strategies for managing your student debt. Find out which types of debt you must pay back.
Financial aid is a beacon of hope for many aspiring students, granting them the financial support they need to access higher education.
Yet, understanding the basics of FAFSA makes applying for financial aid confusing for most students. When considering aid options, it’s crucial to differentiate between the various available types.
Navigating your repayment obligations can seem daunting, but with proactive management, they needn’t be overwhelming.
Take stock of your financial aid package and parse out which portions require repayment.
Understanding these details is the first step towards fulfilling your obligations without compromising your financial well-being.
Remember to read the fine print and don’t hesitate to reach out to your loan servicer for clarification. They are there to help guide you through the repayment process.
This post may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. As an Amazon Associate, I earn from qualifying purchases. Please read the full disclosure here.
Do you have to pay back FAFSA money?
Technically, FAFSA indicates how much financial aid you can qualify for. Whether you need to repay depends on the type of financial aid you received:
Grants and scholarships: These forms of aid do not require repayment.
Work-Study: These funds are earned through part-time work and do not require repayment.
Loans (subsidized, unsubsidized, and Direct Plus Loans): These must be repaid with interest.
It’s important to note that while grants typically don’t have to be paid back, certain circumstances, such as withdrawal from a program or changes in enrollment status, may require you to repay federal grant money.
Start filling out your FASFA properly with these tips.
Do you have to pay scholarships back?
When it comes to scholarships, the name of the game is financial support without the strings of repayment. Generally, scholarships are like gifts—they do not have to be paid back. Perfect for the undergraduate!
Scholarships are awarded for various reasons such as academic excellence, artistic or athletic talent, or involvement in community service, among others. That said, it’s imperative to understand the terms set by the scholarship provider.
Most scholarships are commitment-free, but some may carry conditions such as maintaining a certain GPA, completing a degree in a specified field, or requiring the recipient to follow through with certain obligations. If these conditions are not met, there could be repercussions, including the requirement to repay the funds.
Learn how to pay for college without loans.
Types of Financial Aid That Require Repayment
I’m not going to lie when I was looking at borrowing for financial aid for college I was confused with the names and types of aid offered. Now, I know the best course of action is to get paid to go to school.
Thankfully, there is more information readily available for this type of information rather than relying on your guidance counselor.
So, here is the info you need.
Unraveling Federal Student Loan Repayment
First, you must understand the different types of Federal Student loans to know their repayment requirements.
Each loan type has its own set of rules and repayment schedule, typically beginning after you graduate, leave school, or drop below half-time enrollment.
Federal loans boast flexible repayment options.1
The Standard Repayment Plan for federal loans entails a fixed monthly payment amount, ensuring that the loans are fully repaid within a standard period of 10 years, and extends to 30 years for direct consolidation loans. This plan is often the quickest way to pay off loans, providing a consistent monthly payment over the repayment term.
The Graduated Repayment Plan starts with lower monthly payments that increase every two years, designed to pay off all student loans within 10 years, or 30 years if it’s a direct consolidation loan.
The Extended Repayment Plan offers borrowers with over $30,000 in federal student loans the flexibility of fixed or graduated payments over a 25-year period.
If affordability is a concern, you might settle on an income-driven repayment (IDR) plan, which keys your monthly payments to your earnings and family size. Should your finances take a downward turn, relief is available through programs like deferment or forbearance, allowing you to temporarily suspend payments.
After 20 to 25 years on an IDR plan, you might even be eligible for loan forgiveness for any remaining balance. This doesn’t nullify your entire debt but can relieve a significant financial burden. Teacher Loan Forgiveness and Public Service Loan Forgiveness (PSLF) are two such avenues, provided eligibility requirements are met.
Deciphering Private Student Loan Responsibility
These private loans are offered by non-government entities such as banks, credit unions, and online lenders, and repayment rules can be more stringent. As such, it is best to start with traditional federal loans.
While you typically aren’t required to repay private student loans while you’re in school, interest accrues during this time, increasing your eventual debt. After leaving school, some lenders allow a grace period similar to federal loans, but this isn’t guaranteed. Check with your lender for specifics on repayment commencement and grace periods.
Repayment plans with private loans are usually less flexible and often lack income-driven options. Monthly payments are fixed, and lender offerings on deferment and forbearance can be less generous, with some providing no options for such measures.
This is why it is best to learn how to pay for college without parents’ help.
Scholarship System
The Scholarship System is changing how parents and students look at paying for college.
Learn how real people found real scholarships. Their students have been awarded $12,060,000 in scholarship money (as of October 2023).
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When You Need to Start Paying Back Financial Aid
Federal Loans: Grace Periods and Repayment Plans
Federal student loans, notably, offer a six-month grace period following graduation, leaving school, or dropping below half-time enrollment status. During this period, no payments are due, offering you time to get financially settled and choose a repayment plan.
Repayment plans span the Standard, where you’ll pay a fixed amount each month for a term of usually ten years, to Graduated, where payments start lower and increase over time. Income-Driven Repayment Plans adapt to your income level, ensuring that your student loan payments are manageable relative to your earnings.
Each plan has unique advantages depending on your financial situation and long-term goals. The key is to select one that corresponds with your ability to pay, aligns with your career trajectory, and manages your debt effectively over time.
Always be proactive in contacting your loan servicer to discuss plan options or changes in your financial status.
Private Loans: Lender-Specific Timelines and Terms
Private loans come with lender-specific timelines and terms that can vary widely from one lender to another. Unlike federal loans, private loans don’t come with a standardized grace period, although some lenders may offer a similar post-graduation moratorium on payments.
Borrowers must check their loan agreements to determine when repayment should begin.
The terms of repayment for private loans are also set by the lender and typically don’t offer the same flexibility found in federal programs. Fixed and variable interest rates are based on credit scores, and while some lenders might offer loan modification options in cases of financial hardship, such policies are not universal.
Remember, with private loans, leniency for late or missed payments is not a given.
Consequences of Defaulting on Financial Aid
The Effects on Credit Scores and Future Borrowing
Missing payments, or worse, defaulting on your student loans, are red flags to future creditors that appear on credit reports and can significantly lower your credit score. A lower score can make securing further credit from lenders—whether it’s for a mortgage, a car loan, or a credit card—an uphill battle.
Moreover, the repercussions ripple outward: Not only might you face higher interest rates due to perceived risk, but landlords and employers can reference credit scores during their tenant or employment screening processes.
Maintaining on-time payments is an investment not only in your education but also in your broader financial stability and opportunities.
Legal Repercussions and Wage Garnishment Risks
Wading into the murky waters of default on student loans can unleash legal repercussions that ripple through your financial landscape. The government has tough mechanisms to recoup defaulted federal student loans, ranging from wage garnishment — where a portion of your paycheck is allocated to your debt without your consent — to seizing tax refunds and other federal benefits you may be entitled to receive.
The prospect of wage garnishment adds a level of complication to an already tense situation. In such cases, the government can legally claim up to 15% of your disposable income. This can strain your finances even more, potentially forcing you to make hard choices about your monthly budget.
These same consequences do not typically apply to private student loans, which are subject to state laws. However, private lenders can bring lawsuits against borrowers in default, leading to potential wage garnishment or asset liquidation as decided by a court.
The message is stern yet simple: Stay vigilant with student loan repayments to forestall these severe outcomes.
Options for Managing Repayment Challenges
Loan Forgiveness, Cancellation, and Discharge Opportunities
Navigating the sea of student loan debt isn’t without its lifelines. Loan forgiveness, cancellation, and discharge programs can serve as financial floatation devices, providing necessary relief in an ocean of repayment.
Loan forgiveness is typically occupation-specific. For instance, Public Service Loan Forgiveness (PSLF) absolves remaining federal loan debt after 120 qualifying payments for professionals in government or non-profit sectors.
Cancellation might occur under circumstances like your school closing prematurely or if you’ve been defrauded by the institution.2
Additionally, if you become totally and permanently disabled, you may qualify for a discharge, relieving you from the obligation to repay your federal student loans.
Exploring these opportunities requires patience and diligence, as each comes with strict eligibility criteria. Nonetheless, they can significantly lighten the burden of student debt.
Strategies for Keeping Student Loan Payments Affordable
Crafting a strategy to keep student loan payments within the realm of affordability hinges on exploring all available options and making informed choices. Consider the following ways to ensure your loans remain manageable:
Income-Driven Repayment Plans: Federal loans offer several plans that base your monthly payment on your income, notably capping payments at a fixed percentage of your discretionary income. These plans can significantly decrease your monthly obligations if you’re starting with a lower salary.
Refinancing or Consolidation: You might find a lower interest rate through refinancing, which can reduce your monthly payments and the total cost over the life of the loan. Consolidating multiple federal loans can streamline payment processes, though it may average out to a higher overall interest rate. This is what I did.
Applying for Deferment or Forbearance: In times of financial hardship, job loss, or returning to school, you can apply for a temporary suspension of payments. While interest may still accrue, it can provide short-term relief.
Making Extra Payments: By paying more than the minimum or making bi-weekly payments, you can reduce the principal balance faster and save on interest in the long run.
Setting a Budget and Cutting Expenses: Sometimes, the most effective strategy is tightening your budget. By trimming unnecessary expenses, you may free up funds for your loan payments.
Every borrower’s situation is unique, so consider your financial circumstances and long-term goals when choosing the best strategy for you. Always maintain open communication with your loan servicer to stay abreast of changes or additional assistance programs that may become available.
Should I refinance my Student Loans?
Refinancing your student loans can be a strategic move to manage debt, potentially offering lower interest rates and different repayment terms to suit your financial situation. It involves replacing your current loan with a new one, typically through a private lender, and may provide relief if you’re struggling with high payments.
However, borrowers should carefully consider the loss of federal loan benefits, like loan forgiveness, before proceeding with refinancing their student loans.
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Making Informed Financial Aid Decisions – How to Review and Understand Your Aid Offer
When the much-anticipated financial aid offer lands in your hands, taking the time to thoroughly review and understand it ensures you’re making an informed decision. Here’s how you can break down your aid package:
Identify Free Money: Distinguish between grants and scholarships that don’t require repayment from loans that do. These are the parts of your offer that you’ll want to maximize.
Assess Work-Study Opportunities: If your offer includes federal work-study, understand that these funds must be earned and are not guaranteed. They depend on your finding an eligible job and fulfilling work hours.
Analyze Loan Details: Look closely at the type of loans offered, their interest rates, and repayment terms. Remember, federal loans generally offer more favorable terms than private loans.
Calculate Net Cost: Subtract the total aid package, excluding work-study, from the overall cost of attendance to determine what you’ll need to cover through savings, income, or additional loans.
Consider Cost of Living: Ensure that you take into account living expenses and indirect costs like books and supplies when reviewing your aid offer.
If anything is unclear, don’t hesitate to contact the school’s financial aid office for clarification. The goal is to fully understand your commitments before accepting any part of the aid offer.
Remember Not All Financial Aid Offers Must Be Accepted
Not every portion of the financial aid offered to a student needs to be accepted.
It’s crucial to carefully evaluate the components of the financial aid package, as some elements, such as loans, will need to be repaid with interest. Ultimately, it’s important to make informed decisions about which types of aid to accept based on one’s financial circumstances and long-term educational costs.
Frequently Asked Questions (FAQ)
FAFSA, the Free Application for Federal Student Aid, is a form that determines your eligibility for different types of financial aid, not money in itself.
Some aid offered via FAFSA does not need to be repaid, like grants and scholarships, while other types, such as federal student loans, do require repayment with interest.
If you withdraw from college, your student loans remain in place and need repayment.
Following withdrawal, usually a six-month grace period for federal loans before repayments start. However, interest may accrue during this time, except for subsidized federal loans, which don’t accumulate interest until after the grace period.
Yes, FAFSA loan debt, which generally refers to federal student loans obtained through the FAFSA application process, can be forgiven, canceled, or discharged under certain conditions, such as public service work, teaching in low-income areas, or permanent disability.
However, these options have specific eligibility requirements. So, be careful and read the fine print.
If you don’t pay back financial aid that is in the form of a loan, you risk defaulting, which can lead to wage garnishment, withheld tax refunds, lowered credit score, and other financial consequences.
It can make future borrowing more difficult and become a legal issue. Always seek help before defaulting.
What Happens If You Don’t Pay Back the Financial Aid?
If you don’t pay back financial aid that is in the form of a loan, you risk defaulting, which can lead to wage garnishment, withheld tax refunds, lowered credit score, and other financial consequences.
It can make future borrowing more difficult and become a legal issue. Always seek help before defaulting.
Source
Federal Student Aid. “Federal Student Loan Repayment Plans.” https://studentaid.gov/manage-loans/repayment/plans. April 28, 2024.
Student Loan Borrower Assistance. “Borrower Defense to Repayment.” https://studentloanborrowerassistance.org/for-borrowers/dealing-with-student-loan-debt/loan-cancellation-forgiveness-bankruptcy/cancellation-forgiveness-options/borrower-defense-to-repayment/. April 28, 2024.
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Net asset value (NAV) is an important metric for knowing how much each share of an investment fund, like a mutual fund or ETF, is worth. However, NAV alone cannot tell investors everything they need to know about potential investments.
Calculating NAV is helpful for fund valuation and pricing. Still, there are times when it is more beneficial to look at other aspects of a fund, like total return, to determine investment opportunities. Nonetheless, investors need to know how to calculate NAV, when it makes sense to use it, and why.
What Is Net Asset Value (NAV)?
Net asset value, or NAV, represents the value of an investment fund. NAV, most simply, is calculated by adding up what a fund owns (the assets) and subtracting what it owes (the liabilities).
NAV is typically used to represent the value of the fund per share, however, so the total above is usually divided by the number of outstanding shares. This makes it easier for investors to value and price the shares of a fund. Mutual funds, for example, use per-share NAV to determine their share price.
The NAV will also change daily because an investment fund’s assets and liabilities change daily based on market prices.The assets of an investment fund include the daily market value of the fund’s holdings, which are usually securities like stocks and bonds. The liabilities of a fund are usually debts owed to financial institutions and expenses, like salaries, operating costs, and other fees.
The Securities and Exchange Commission (SEC) requires that mutual funds calculate their NAV at least once each business day. Most mutual funds perform their calculations after the major U.S. securities exchanges close for the day.
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NAV Formula
Net asset value, as mentioned above, is calculated by taking a company or investment fund’s total assets and subtracting its liabilities. This figure is usually divided by the fund’s number of outstanding shares because NAV is generally represented on a per-share basis. The formula looks like this:
NAV = (Total Value of Assets – Total Value of Liabilities) / Number of Shares Outstanding
How NAV Is Used for Investments
NAV can be used for investments, and by investors, in a number of ways, often depending on the specific type of asset an investor is analyzing. It can give investors insight into a fund’s performance, but doesn’t necessarily tell the whole story.
Mutual Funds
Mutual funds are usually open-ended funds, meaning that investors buy and sell shares of the fund from the fund directly and not on an exchange like a stock. Because these funds don’t trade on an exchange for market prices, NAV is used to price the fund’s shares.
Mutual funds calculate their NAV per share daily, usually at the end of the business day, and that is the price an investor will pay to buy or sell shares in the fund. Every mutual fund company has its own cut-off time for buying and selling shares. After that time, investors buying or selling shares will get the fund’s NAV for the day after their transaction order is received.
💡 Recommended: Understanding the Different Types of Mutual Funds
ETFs
Exchange-traded funds (ETFs) and closed-end funds are similar to traditional mutual funds, but one big difference is that investors can buy and sell ETFs throughout the trading day for a market price and not the NAV per share. Investors can make buy and sell orders for traditional mutual funds once per day and only at their published NAVs.
ETFs are still required to calculate the fund’s NAV once per day, like a mutual fund. Additionally, an ETF’s NAV is calculated approximately every 15 seconds over each trading day and published on various financial websites.
Because ETFs tend to trade at a premium or a discount to their NAV, traders often compare market prices and NAV to take advantage of the differences and make investment decisions.
Example of Calculating Mutual Fund NAV
As an example of calculating mutual fund NAV, imagine that mutual fund XYZ has $100 million worth of investments in different securities, based on the day’s closing prices for each security, and $10 million in liabilities and expenses. The NAV for this fund would be $90 million. If the fund has 5 million shares outstanding, the NAV per share for mutual fund XYZ would be $18.
The NAV for mutual fund XYZ can be calculated using the above formula:
NAV = ($100,000,000 – $10,000,000) / 5,000,000 = $18
How to Interpret NAV Results
A fund’s NAV alone doesn’t tell investors much; a high NAV for one fund is not necessarily better than a low NAV in another fund. Similar to stock prices, a high stock price doesn’t necessarily mean the stock is a better investment than a stock with a lower price.
Looking at a fund’s NAV and comparing it to another fund does not provide investors insight into which fund is the better investment. It’s more important for investors to look at NAV alongside other factors, like the fund’s past performance, the allocation of securities within each fund, and how it performs compared to benchmark indices like the S&P 500 Index.
💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.
Why Do NAVs Change?
A mutual fund’s NAV will likely change every trading day because the prices of securities in which the fund invests are likely to change every trading day, affecting the total assets in the fund. It’s also because the number of outstanding shares held by investors often changes daily, as new investors buy shares and existing investors sell.
Other factors can also impact a fund’s NAV. For example, the fund’s management fee and additional fees that add up to the fund’s total expense ratio will come out of the fund’s total assets, thus affecting NAV. In addition to management fees, expenses can include costs related to the administrative, compliance, distribution, management, marketing, shareholder services, and record-keeping of the fund. It’s common practice for mutual funds to assess this debit on the fund’s assets every trading day.
When NAV Isn’t Everything
If a mutual fund invests in dividend-paying stocks or fixed-income assets, these securities’ dividends and interest payments go to the investor. Additionally, a mutual fund may distribute realized capital gains to shareholders. These payouts reduce the fund’s assets and result in a lower NAV. Because these benefits lower a fund’s NAV, it shows that NAV may not be the only figure to pay attention to when analyzing the performance of a fund.
When analyzing the performance of mutual funds, it can make sense to look at metrics other than NAV alone, like investment yield and the funds’ total return. The total return considers capital gains and losses from all of the securities the fund invests in, as well as the dividends and interest earned by the fund, minus the fund’s expenses.
The Takeaway
Net asset value, or NAV, is a daily calculation that can track the value of a mutual fund, ETF, or money market fund. But while this figure can be helpful to gauge a fund’s performance, it isn’t the only metric that investors should consider. Total return, yield, and fees are also important figures when making mutual fund investing decisions.
Remember that NAV itself doesn’t tell an investor everything that they need to know, but is just one metric or data point that can be used along with an array of others to analyze funds.
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FAQ
Is net asset value the same as price?
NAV and share price are two different things. Net asset value is the value of the investments within a fund, or the value of a portion of the fund. The share price of a fund, though it may be related, is different from that value.
Why is net asset value important?
Net asset value is important for investors because it describes the total equity or value of a fund. It can help determine the value a share of a fund has, and can help investors evaluate the overall value of an investment.
Is high NAV good or bad?
NAV on its own doesn’t tell investors a whole lot, so whether NAV is high may not be good or bad. What’s more important is how high a fund’s NAV is relative to other metrics, which may include its market price.
Is it good to invest when NAV is down?
If a fund’s NAV is down, that could be a sign that the fund’s performance is suffering. But it doesn’t necessarily mean that it’s a good time to invest in that fund, or a bad time to do so – other metrics must be considered along with NAV, at any given time, to determine whether an investor wants to alter their position.
What is an example of a NAV?
An example of NAV could be $18, and that would be calculated looking at a fund’s underlying securities. You’d need to rope in assets and liabilities, and calculate accordingly to find NAV. Again, $18 is just an example, as NAV could be any dollar figure as it relates to the fund’s assets and liabilities.
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Intercontinental Exchange (ICE) introduced MSP Digital Experience (MSP DX), a conversational user interface designed to interact with the company’s leading mortgage servicing system, MSP.
MSP DX provides servicing professionals with an intuitive, dynamic and conversational approach to working within MSP. The new interface is poised to streamline workflows, enhance efficiencies and simplify the training process for servicing team members.
The introduction of MSP DX is particularly significant as ICE launches it with a focus on escrow management, which is traditionally one of the most complex and costly aspects of mortgage servicing. This functionality was recently previewed at the ICE Experience 2024 conference in Las Vegas, where it received widespread acclaim from industry leaders.
“Mortgage escrow is inherently complex, and the technology lift to handle the many moving parts is significant,” Tim Bowler, president of ICE Mortgage Technology, said in a statement. “But with the introduction of MSP DX we are helping servicers manage the escrow process more efficiently. This will enhance workflow management for servicers and improve the household experience.”
MSP DX empowers servicing professionals to interact with the system using everyday language, simplifying tasks and enhancing the user experience.
“MSP DX represents a significant leap forward for the industry and serves up what users need, when they need it,” Bowler said. “It automates routine tasks so users can focus on more strategic and meaningful work. While we started with escrow, we will continue to make further investments to enhance workflow and flatten learning curves throughout the mortgage servicing process.”
In the past few months, ICE launched other products, including a mortgage insurance center on its Encompass loan origination system to improve management functionality and enhance rate-quote comparisons. It also unveiled two new tools, Validate ROV and Validate Selector, that were added to its growing suite of property valuation solutions.