Although fourth quarter mortgage originations were flat year-over-year, nonbank lenders that could provide products through multiple means were able to grow their business during that tough period, a Morningstar DBRS recap found.
“In addition to affordability challenges, seasonality and competition also impacted volumes and pricing,” the report from Shaima Ahmadi, assistant vice president, North American financial institution ratings, said. “However, on an individual company basis, those with omnichannel organization models continued to grow originations in [the fourth quarter] as they were able to capture a higher share of the market versus those with less diverse channels and refi heavy models.”
The top mortgage lenders benefited by undertaking business restructuring and making strategic shifts in order to capture more purchase business, Ahmadi said.
A shift underway that might not be going well is taking place at Finance of America, which had been at one point a multi-channel forward lender. After several previous strategy shifts, the company elected to focus on reverse mortgages. As part of that strategy, it bought American Advisors Group, which helped to drive FOA to a 40% market share in that segment.
“Despite market share gains, when excluding forward organizations in 4Q22, FOA’s reverse mortgage origination volume was down a significant 56% YoY in 4Q23,” Ahmadi pointed out.
“Meanwhile, Rithm Capital Corp. has made a number of acquisitions of mortgage servicing and alternative asset management businesses over recent years as part of the company’s strategic shift to become a real estate asset manager. Companies also continue to diversify their basket of mortgage loan offerings with added complementary services.”
The Mortgage Bankers Association’s fourth quarter industry profitability survey found that independent mortgage bankers and bank mortgage subsidiaries, both public and privately held, lost an average of $2,109 on every loan produced.
Furthermore, servicing was a net financial loss for the group of $24 per loan, while operating income for this function, which excludes amortization, gains/loss in the valuation of servicing rights net of hedging gains/losses, and gains/losses on bulk sales, was $108 per loan.
Mortgage servicing rights proved to be a double-edge sword in the fourth quarter. Companies reported fair-value losses on their MSR portfolios — a requirement of mark-to-market accounting that is tied to potential prepayments — but servicing fee income was up.
The publicly traded nonbank lenders tracked in the Morningstar DBRS report had a 6% increase year-over-year in their portfolios. But that ranged from a 14% gain at Mr. Cooper, which was active in the bulk purchase market, to declines of 5% at Rocket and 4% at United Wholesale Mortgage; UWM has been a strategic seller of servicing rights as part of its risk management strategy, executives noted on its fourth quarter earnings call.
FOA actually had a larger percentage increase at 38%, but that was primarily reverse servicing picked up in the AAG deal, and among the nine companies listed, it has by far the smallest portfolio.
Even though its portfolio is now smaller, Rocket bought MSRs originated with high rates for the potential refinancing opportunity.
“Given where mortgage rates currently are, borrowers have little incentive to refinance,” Ahmadi said. “However, some companies indicated that they expect a meaningful rebound in refinance activity when rates fall below 6%.” While the MBA thinks rates will sink under that mark, Fannie Mae’s latest forecast calls for them to just get to that level by the end of next year.
For the group losses narrowed as improved gain on sales margins were partially offset by lower origination volume.
Gross gain on sales margins, inclusive of fee income, net secondary marketing income and warehouse spread, was 334 basis points in the fourth quarter, up from 329 basis points three months prior, the MBA survey reported.
“We would expect margins to remain under pressure in 1Q given the negative impact seasonality typically has on both 4Q and 1Q,” Bose George, an analyst with Keefe, Bruyette & Woods said in an April 1 note on the survey. “Industry profitability is likely to be flat to down in 1Q as volumes should once again be low due to the seasonality associated with the quarter and the elevated average mortgage rate.”
Several public companies also reported major one-off expenses, including Pennymac Financial Services, which recorded $158.4 million in expenses from an arbitration ruling in favor of Black Knight (now part of Intercontinental Exchange) over mortgage servicing technology including allegations of breach of contract and misappropriation of trade secrets.
Meanwhile, Mr. Cooper’s November 2023 cybersecurity incident hit its results to the tune of $27 million.
Ahmadi also noted that the nonbanks had higher leverage ratios year-over-year for the fourth quarter, as debt levels increased slightly but was primarily caused by financial losses eroding company equity.
“During [the fourth quarter], nonbank mortgage companies were active in the high yield market, raising unsecured funding, which was partially used to pay down upcoming maturities in 2025, which we view positively for their credit profiles,” Ahmadi said. “Indeed, unsecured debt issuances increase nonbank mortgage companies’ financial flexibility by decreasing balance sheet encumbrance.”
Both Rocket and Pennymac Mortgage Trust were able to reduce their leverage ratios. But FOA’s debt-to-equity ratio increased to 97.8x compared with 49.7x one year prior, while Ocwen’s was at 27.2x, versus 22.9x over the same period.
The U.S. 15-year mortgage rate is at the lowest level in two months, industry group says
The numbers: The U.S. housing market is feeling a chill once again as home buyers pull back on applying for mortgages with rates staying near 7%.
Yet some buyers are finding rates in the low 6% range by turning to 15-year fixed-rate mortgages instead of the traditional 30-year loan.
Nevertheless, weakening demand overall pushed the market composite index – a measure of mortgage application volume – down in the last week, according to the Mortgage Bankers Association (MBA) on Wednesday.
The market index fell 0.6% to 195.6 for the week ending March 29 from a week ago. A year ago, the index stood at 217.9.
Key details: The purchase index – which measures mortgage applications for the purchase of a home – fell 0.1% from a week ago.
The refinance index fell 1.6%.
The average contract rate for the 30-year mortgage for homes sold for $766,550 or less was 6.91% for the week ending March 29. That’s down from 6.93% from the week before.
The rate for jumbo loans, or the 30-year mortgage for homes sold for over $766,550, was 7.06%, down from 7.14% a week ago.
The average rate for a 30-year mortgage backed by the Federal Housing Administration was 6.74%, down from 6.75% a week ago.
The 15-year fell to 6.35% from 6.46% from the previous week. The 15-year fixed was at the lowest level in two months, the MBA said.
The rate for adjustable-rate mortgages was up to 6.37%, from 6.27% last week.
The big picture: Home buyers are putting off buying a home due to elevated mortgage rates straining how much they can afford.
Even though for-sale inventory has shown signs of rising in recent weeks, demand isn’t picking up, which means that sales activity will not pick up as quickly.
To be sure, the data does not fully capture buyer demand as some are buying homes without mortgages. A third of home buyers paid for their home purchases with cash in February, as real-estate brokerage Redfin notes.
What the MBA said: “Elevated mortgage rates continued to weigh down on home buying,” Joel Kan, vice president and deputy chief economist at the MBA, said in a statement. “Purchase applications were unchanged overall, although [Federal Housing Administration] purchases did pick up slightly over the week.”
-Aarthi Swaminathan
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
Ellington Financial, the parent company of reverse mortgage industry lender and servicer Longbridge Financial, announced the successful closing of a new securitization backed by a pool of proprietary reverse mortgages initially originated by Longbridge.
The securitization was valued at $208 million and Longbridge will continue to act as the servicer of the underlying assets, according to a company announcement.
Longbridge maintains its own suite of proprietary reverse mortgage offerings under the product name “Platinum,” with fixed-rate variations available in 27 states and the District of Columbia. Line-of-credit versions are available in 18 states and D.C. The loans are available to borrowers as young as 55 in all but eight states, with a limit of up to $4 million depending on the home’s value.
“The debt tranches issued in the securitization were rated by Morningstar DBRS, with the senior most tranches receiving AAA(sf) ratings,” the announcement stated. “The company retained certain tranches of the securitization in compliance with credit risk retention rules, and also retained the option to call the securitization at any time following the optional redemption date.”
Late last month, Ellington presented its fourth-quarter and full year 2023 financial results. The data showed that while reverse mortgage originations at Longbridge have slowed, the company is in the process of regaining profitability. Some of the lagging performance attributed to the reverse division is tied to seasonal realities and the ongoing interest rate environment, according to Ellington CEO Laurence Penn.
In response to a question from an investor during a recent earnings call, Penn said that the company remains strongly committed to Longbridge and the reverse mortgage business.
“It’s a business that we absolutely believe in long term,” Penn said in the February earnings call. “Since we started many years ago, and even since late 2022 when we bought the other half of it … Longbridge has been growing market share quite a bit. It’s been a tough business. Longbridge has actually, I think, done great relative to the competition.”
He added that servicing adds additional value to the company, and that there is a large degree of unrealized growth potential due to the demographic trends of the wider reverse mortgage business working in its favor.
Greece continues to have the worst performance in household credit, registering a consistently negative rate, which was -1.7% in January against a 0.3% increase in the eurozone, according to a report published on Thursday by DBRS Morningstar, focusing on the “slow production of new mortgage loans.”
The rise in interest rates and high inflation have made the growth rate of loans in the eurozone shrink, as it plunged from 4.5% in the first half of 2022 to a marginally positive rate in 2023. This contrasts with a steady contraction in Greece, due to large repayments exceeding new disbursements.
The aversion to borrowing by households is observed despite the fact that the vast majority of new mortgage disbursements in Greece are at fixed interest rates, which, through successive reductions made by Greek banks recently, have fallen to historic lows.
Fixed term rates start at 3% for a 3-year term, while last week Eurobank further reduced the 10-year fixed rate and above by 0.30 points, which starts at 4.10% and reaches 4.30% for periods of 15, 20, 25 and 30 years.
As DBRS observes, the high interest income of Greek banks, which increased by 51% year-on-year, is mainly linked to the strengthening of the portfolio of business loans, which grew by 5.1% in 2023, against an average increase of just 0.2% in the eurozone, despite stricter lending criteria, high interest rates and high repayments.
Interest income amounted to 8.1 billion euros at the end of 2023 compared to €5.4 billion in 2022 and according to DBRS this is mainly due to the overall better performance of the Greek economy, as well as the disbursement of loans linked to the country’s growth and the Recovery Fund funds, which “will continue to support the growth of the loan portfolio combined with some recovery foreseen for new mortgages.”
Fee income in 2023 was €1.8 billion compared to €1.7 billion in 2022, up 7%, driven by increased trading income, grant activity and sales growth activity investment and bancassurance products.
There are more than 20,000 U.S.-listed stocks available to investors. You don’t need to buy all of them, but to build a diversified portfolio, you need exposure to a lot of them.
If you don’t want to spend hundreds of hours researching individual stocks, another option is to buy index funds — baskets of stocks that track broad-market indexes like the S&P 500.
Below, we’re looking at some of the best index funds that track the S&P 500 and Nasdaq-100 indexes.
5 of the best index funds tracking the S&P 500
Index funds work by tracking specific market indices. So you’ll need to know which market index you want your index fund to track before you start investing.
Here are some of the best index funds pegged to the S&P 500.
Index fund
Minimum investment
Expense ratio
Vanguard 500 Index Fund – Admiral Shares (VFIAX)
Schwab S&P 500 Index Fund (SWPPX)
No minimum.
Fidelity 500 Index Fund (FXAIX)
No minimum.
Fidelity Zero Large Cap Index (FNILX)
No minimum.
T. Rowe Price Equity Index 500 Fund (PREIX)
Data current as of market close on January 31, 2024. For informational purposes only.
Vanguard 500 Index Fund Admiral Shares (VFIAX)
This fund is also known as the Vanguard S&P 500 Index fund. It was founded in 1976 and is the granddaddy of all index funds. Like the other S&P 500 funds on this list, this fund gives exposure to 500 of the largest U.S. companies, which make up about 75% of the U.S. stock market’s total value.
Schwab S&P 500 Index Fund (SWPPX)
As research firm Morningstar notes, this is one of the cheapest S&P 500-tracking funds out there. Launched in 1997, this Schwab fund charges a scant 0.02% expense ratio and requires no minimum investment. That makes it attractive for investors concerned about costs.
Fidelity 500 Index Fund (FXAIX)
Founded in 1988 (formerly known as Institutional Premium Class fund), Fidelity removed this fund’s investment minimum so investors with any budget size can get into the low-cost index fund action.
Fidelity Zero Large Cap Index (FNILX)
In the race for the lowest of the low-cost index funds, this Fidelity fund made news by being among the first to charge no annual expenses. That means investors can keep all their cash invested for the long run.
T. Rowe Price Equity Index 500 Fund (PREIX)
Founded in 1990, the fund’s expense ratio is competitive with other providers. However, the $2,500 minimum may be steep for beginning investors.
Top 3 index funds for the Nasdaq-100
Here are some of the best index funds pegged to the Nasdaq-100 index.
Index fund
Minimum investment
Expense ratio
Invesco NASDAQ 100 ETF (QQQM)
No minimum
Invesco QQQ (QQQ)
No minimum
Fidelity NASDAQ Composite Index Fund (FNCMX)
No minimum
Data current as of Feb. 9, 2024. For informational purposes only.
Invesco NASDAQ 100 ETF (QQQM)
QQQM includes 100 of the biggest nonfinancial companies listed on the Nasdaq. It also includes at least 90% of the assets on the NASDAQ-100 index and is rebalanced quarterly.
QQQM has an expense ratio of 0.15%. For every $1,000 invested, you’d pay a $1.50 fee annually.
Invesco QQQ (QQQ)
QQQ holds 101 companies, tracks the NASDAQ-100, and has $151.51 billion in assets under management.
QQQ has an expense ratio of 0.20%. For every $1,000 invested, you’d pay a $2 fee annually.
Fidelity NASDAQ Composite Index Fund (FNCMX)
FNCMX aims to mirror the performance of the Nasdaq Composite index. The fund usually holds 80% of stocks included in the index. In addition to the typical sectors represented by a Nasdaq index fund (such as IT, consumer services and health care), FNCMX also includes the real estate and material sectors.
FNCMX has an expense ratio of 0.37%. For every $1,000 invested, you’d pay a $3.70 fee annually.
Frequently asked questions
What are some of the advantages of index funds?
Exposure to hundreds of stocks with a single purchase.
You can build a balanced, diversified portfolio with just a few index funds.
May be cheaper to buy and easier to research than individual stocks.
What are some of the disadvantages of index funds?
Distributions may generate income tax liability.
Some index mutual funds have large investment minimums.
Index funds can’t beat the market — they deliver the market return.
The author owned shares of Invesco QQQ at the time of publication.
You’re likely familiar with the story of Robinhood, the outlaw who stole money from the rich and gave it to the poor. Well, you’ll find a similar principle behind the investing app, Robinhood.
The founders of Robinhood aren’t stealing anything, but they do believe that the current financial system doesn’t benefit every American. For that reason, they make it easy for non-traditional investors to get started.
When you sign up for Robinhood, you get access to commission-free trades, a cash management account, and a lot more. Keep reading to learn more about the pros and cons of signing up for Robinhood, as well as whom the app is best for.
Introduction to Robinhood
Robinhood is a popular investing app that allows users to trade stocks, options, exchange-traded funds (ETFs), and even cryptocurrencies without paying any commission fees. It was founded in 2013 and has since grown to over 22 million users, disrupting the financial industry.
The app is designed to cater to non-traditional investors and make the financial system more accessible to everyone. In this Robinhood review, we’ll explore its features, pros and cons, and determine who it’s best suited for.
How does Robinhood work?
When you sign up for a Robinhood account, you’ll get your first stock for free, even if you don’t deposit any funds. Signing up for an account is easy. All you have to do is enter your name, email address, and create a password.
From there, you’ll be prompted to enter more personal information, like your address and Social Security Number. Robinhood is required by federal law to request this information.
After you’ve set up your brokerage account, you’ll outline your investing experience thus far. And to go forward, you will need to fund your account at this point. However, there’s no minimum deposit required to fund the account, so you can always start small and invest more later.
You can connect your bank account to the Robinhood app to make funding your account easier. And there are no fees for transferring money in and out of your account.
Get started with Robinhood
on Robinhood’s secure website
Robinhood’s User Interface and Ease of Use
User-friendly interface: One of the key selling points of Robinhood is its simple, user-friendly interface. Both the web and mobile versions of the app have been designed to make it easy for users to navigate and trade. The intuitive design allows users to quickly understand their account, monitor their investments, and execute trades with minimal hassle.
Account setup and verification: Setting up an account with Robinhood is a straightforward process. Users can sign up with just their name, email address, and a password. Further personal information, such as address and Social Security number, is required due to federal law. Once the account is set up, users can outline their investing experience and link their bank account for easy funding.
Diving Deeper into Robinhood’s Features
Robinhood offers several features that make it stand out from other investing apps:
Zero commissions: As mentioned earlier, Robinhood has been a pioneer in offering commission-free trading on stocks, options, ETFs, and cryptocurrencies. This feature has helped democratize investing and lower the barriers to entry for non-traditional investors.
Cryptocurrency trading: Robinhood is among the few investing apps that support cryptocurrency trading. Users can trade popular cryptocurrencies like Bitcoin, Ethereum, Litecoin, and Dogecoin. This added functionality allows users to diversify their investments within a single platform.
Mobile app: Robinhood’s mobile app is highly regarded for its ease of use and clean design. Users can quickly view their portfolio, monitor market news, and execute trades on the go.
Account notifications: Users can customize their notification settings to receive alerts about their account performance, significant price movements, and other relevant information.
Daily market updates: Robinhood’s news feed provides users with daily updates on market trends, economic news, and other developments that can impact their investments. This helps users stay informed and make better investment decisions.
Exploring Additional Robinhood Features and Aspects
In addition to the features already discussed, Robinhood offers various other aspects that make it an attractive choice for investors. Let’s dive into some of these additional features and see how they can benefit users.
Extended-hours trading
Robinhood allows users to participate in extended-hours trading, which includes pre-market and after-hours trading sessions. This feature gives investors the opportunity to act on news and events that happen outside of standard market hours, potentially capitalizing on price movements before the broader market reacts.
Options trading
Robinhood offers options trading, which involves buying and selling contracts that give investors the right, but not the obligation, to buy or sell a stock at a specific price within a specified period. This feature enables users to implement more sophisticated trading strategies and potentially profit from market volatility, while also providing the flexibility to manage risk according to their preferences.
Dividend Reinvestment Program (DRIP)
Robinhood supports a Dividend Reinvestment Program, allowing users to automatically reinvest their dividends back into the underlying stocks or ETFs. This feature can help investors grow their portfolios more efficiently over time by harnessing the power of compounding returns, allowing them to maximize their potential earnings.
Fractional share dividend reinvestment
In addition to allowing fractional share purchases, Robinhood also enables users to reinvest dividends as fractional shares. This functionality ensures that users can continue to grow their investments, even if they don’t have enough dividends to purchase a full share, making it a valuable tool for long-term wealth accumulation.
Instant deposits
Robinhood offers instant deposits for its users, allowing them to access their transferred funds more quickly (up to $1,000). This feature ensures that users can take advantage of investment opportunities without waiting for their funds to settle, providing a more seamless investing experience.
Security and account protection
Robinhood prioritizes the security of its users’ accounts and personal information. The platform uses industry-standard encryption and security measures to protect user data. Additionally, Robinhood accounts are insured by the Securities Investor Protection Corporation (SIPC) for up to $500,000, including a $250,000 limit for cash. This protection offers users peace of mind as they navigate the world of investing.
Educational resources
Robinhood offers various educational resources, including articles and guides, to help users improve their investment knowledge and make more informed decisions. These resources can be especially beneficial for new investors looking to learn more about the world of investing, equipping them with the knowledge needed to navigate the markets confidently.
Social aspect and community
Robinhood’s platform has a social component, allowing users to follow friends, family members, or other investors and view their portfolios. This feature can create a sense of community and motivate users to learn from one another’s investment strategies, fostering collaboration and the sharing of ideas.
Benefits of Robinhood
There are several advantages to using Robinhood as your investing app of choice:
No account minimum: Robinhood requires no minimum deposit to start trading, making it accessible to users with limited funds.
Free trading: Commission-free trades on stocks, options, ETFs, and cryptocurrencies helps users save on trading costs.
Cash management account: Robinhood offers a cash management account with a 1.50% APY on uninvested cash, no hidden fees, and a debit card issued by Sutton Bank.
Fractional shares: Users can invest in fractional shares of thousands of stocks, allowing them to build a diversified portfolio with minimal investment.
Drawbacks of Robinhood
Despite its numerous benefits, there are a few drawbacks to using Robinhood:
Limited account types: Robinhood only supports individual taxable accounts, so users looking to open other types of brokerage accounts will need to explore other platforms.
Limited trading tools: Robinhood’s research and trading tools are relatively basic compared to those offered by other online brokers.
Minimal customer support: Customer support is primarily available through a chatbot and FAQ page, which may not be sufficient for users with more complex queries.
Get started with Robinhood
on Robinhood’s secure website
Robinhood Gold: Premium Features for Advanced Investors
Robinhood Gold is a subscription-based premium service that offers a suite of advanced features designed for more experienced investors. By upgrading to Robinhood Gold, users can access the following benefits:
Bigger Instant Deposits
While standard Robinhood users can access instant deposits of up to $1,000, Robinhood Gold subscribers receive instant deposits depending on their account balance. This feature allows users to invest larger amounts immediately, without waiting for their funds to settle.
Level II Market Data
Gain access to Level II market data provided by Nasdaq TotalView, which shows real-time bids and asks for stocks. This advanced market data can help users make more informed trading decisions by providing greater transparency into market activity.
Margin Trading
Robinhood Gold allows users to trade on margin, providing them with access to additional buying power by borrowing funds from Robinhood. With margin trading, users can potentially amplify their gains, but should be aware that it also increases the risk of losses. It’s essential to carefully consider the potential risks and rewards before engaging in margin trading.
Research Reports
Subscribers receive access to research reports from Morningstar, a leading provider of independent investment research. These reports can help users make more informed decisions by offering in-depth analyses of individual stocks and industries.
Access to Investing in IPOs
Robinhood Gold users have the opportunity to invest in initial public offerings (IPOs) before the stocks are listed on public exchanges. This feature allows users to potentially profit from the early stages of a company’s growth, as well as gain exposure to new and innovative industries.
The cost of Robinhood Gold is $5 per month, which includes access to all the premium features mentioned above. It’s important to note that margin trading also comes with additional fees based on the amount borrowed, so users should carefully consider the costs before utilizing this feature.
Robinhood: Ideal for New and Casual Investors
Robinhood is best suited for new investors who want an easy-to-use platform to start trading with minimal barriers to entry. It’s also an excellent choice for casual investors who prefer a more hands-off approach, as the app’s features and design make it easy to monitor investments and stay informed on market trends.
For those interested in margin trading, Robinhood Gold is an option worth considering. This premium service costs $5 per month and provides access to additional margin, ranging from $5,000 to $50,000, depending on the user’s deposit amount.
However, Robinhood may not be the best fit for individuals focused on long-term retirement savings, as it doesn’t offer retirement accounts or investment options like bonds and mutual funds. Additionally, more experienced investors seeking advanced research tools and a wider range of account types may find Robinhood’s offerings somewhat limited.
Other Considerations and Alternatives to Robinhood
While Robinhood is a popular choice for many investors, it’s essential to consider other factors and alternatives before deciding on an investing platform.
Tax implications: Investing through Robinhood’s individual taxable account means that any capital gains or dividends received will be subject to taxation. Users should be aware of the tax implications of their investments and consider seeking professional tax advice.
Risk management: Investing always carries a degree of risk, and Robinhood is no exception. It’s crucial for users to assess their risk tolerance, diversify their investments, and develop a long-term investment strategy to minimize potential losses.
Alternatives to Robinhood: There are several other investing apps and platforms available that cater to different types of investors. Some popular alternatives include:
Fidelity: A full-service brokerage offering a wide range of account types, investment options, and advanced research tools. Fidelity is ideal for more experienced investors or those looking for a more comprehensive investment platform.
M1 Finance: A robo-advisor and brokerage platform that allows users to create custom portfolios or choose from expert-curated portfolios. M1 Finance is suitable for investors who prefer a more automated approach to investing.
Acorns: A micro-investing app that rounds up users’ everyday purchases and invests the spare change into a diversified portfolio. Acorns is perfect for beginners who want to dip their toes into investing with minimal commitment.
Bottom Line
Final Thoughts on Robinhood
Robinhood is a solid option for new investors looking to explore the world of trading without paying commission fees. The user-friendly interface, zero-commission trades, and various features make it an attractive choice for casual investors or those just starting. However, more experienced investors or those with specific account needs may need to consider other brokerage platforms.
By weighing the pros and cons, potential users can decide if Robinhood is the right fit for their investment goals and preferences. With no commitment required and a free stock upon sign-up, there’s little risk in giving Robinhood a try and determining if it meets your investing needs.
When you look at your investment portfolio, does Rube Goldberg come to mind? Goldberg was a Pulitzer Price winning cartoonist famous for drawing complicated contraptions designed to perform simple tasks. In fact, Webster’s New World Dictionary defines a “Rube Goldberg” as a “comically involved, complicated invention, laboriously contrived to perform a simple operation.”
Investing should be simple. It’s not necessary to have a dozen or more mutual funds covering a wide range of asset classes. Such “diversity” complicates the management of your investments and isn’t likely to increase your returns or lower your risk.
Rube Goldberg came to mind when I recently read an email from a reader named Jason:
This is a great email on an important topic. Are we going to invest to mimic the overall market, or are we going to collect a dozen or more holdings? What’s the right approach?
I addressed Jason’s question about “value” funds in the podcast. In short, an index is designed to determine value versus growth based on math. They use ratios such as the p/e (price to earnings), p/b (price to book), and other objective measures of value.
But let’s get back to Jason’s main question – how complicated should investing be? The starting point is the 3-Fund Portfolio.
1. Three-Fund Portfolio
There’s a group loosely referred to as the Bogleheads (named after Vanguard founder, John Bogle)who advocate the Three-Fund Portfolio. The three-funds cover the three main asset classes (I’ve included Vanguard ETFs one could use to build a 3-fund portfolio, but mutual funds and investments from other companies could be used, too):
Total Market US Equities (Example: VTI)
Total Market Intl EquitiesExample: VGTXS)
Total Bond Market (Example: VBMFX)
With those three ETFs, you’d have the investment markets covered, but only three funds to manage, allocate and rebalance. This is the direction I’m heading as I simplify my investing. Note that you could simplify this even further with a target-date retirement fund. Vanguard’s target-date funds, for example, use the above three investment types along with an international bond fund.
2. Slice and Dice
Many investors aren’t satisfied with the above 3-Fund portfolio. They look to further diversify their investments into sub-asset classes. Frankly, I’ve taken the slice and dice approach for more than two decades.
While there is no one way that one can construct a portfolio that goes beyond the core asset classes, here are five common sub-asset classes that many investors want more exposure:
Small-Cap – Smaller companies historically have produced higher returns, but also come with more volatility.
Value Funds – These funds seek to invest in undervalued companies, and historically have outperformed growth companies (although there is some debate on the relative performance between value and growth).
Emerging Markets: As with small caps, emerging markets historically have generated higher returns in exchange for greater volatility.
REITs – real estate investment trusts offer stock-like returns with some measure of diversity.
Commodities – While the returns aren’t as rich, many believe commodities offer valuable diversity to a portfolio.
I have positions in all of these sectors, although as I mentioned I’m working to simplify my portfolio.
3. Diversity Has Nothing to Do With the Number of Mutual Funds in a Portfolio
It’s critical to understand that even a 3-Fund Portfolio has exposure to each of these asset classes. As an example, a total U.S. equity fund has exposure to small caps, value, REITs, and even commodities. Simply by owning multi-national companies gives exposure to many asset classes.
In the case of VTI, one gets exposure to the following according to Morningstar:
Micro-cap: 2.62%
Small-cap: 6.47%
Mid-cap: 29.02%
Real Estate: 3.72%
Further, VTI gives equal weighting to value and growth stocks.
Similarly, a totally international market will have exposure to emerging markets. VGTXS, for example, has 14.52% in emerging markets. The point: Most investors will get little if any benefit from seeking additional exposure to these sub-asset classes beyond what a total market fund provides.
4. Why slice and dice
Having said all of that, there are times when exposure to sub-asset classes is justified. The first is that an investor’s personality is drawn to this type of investing. While this may surprise some, the behavioral side of investing should never be ignored. Those that like to dabble in more complex asset allocation plans won’t hurt themselves, so long as they keep costs low and stick to their plan.
Second, a good argument can be made for additional exposure to real estate. REITs enjoy stock-like returns and add diversity to a portfolio.
5. Problems with slice and dice
There are some realities to a complicated portfolio that should be considered:
There’s absolutely no guarantee that it will improve your returns or lower your risk compared to a basic three-fund portfolio. Just because small caps outperformed the general market in the past doesn’t mean they will in the future. In his book Don’t Count on It!: Reflections on Investment Illusions, Capitalism, “Mutual” Funds, Indexing, Entrepreneurship, Idealism, and Heroes, John Bogle says that small caps have outperformed the general market mainly because there were a couple of years where they did very well compared to the overall market. There’s no guarantee such performance will repeat itself.
Each additional investment added to a portfolio increases the portfolio’s complexity. Additional funds add to the burden of monitoring investments and rebalancing them. It often requires one to allocate across multiple account types, which further complicates the whole affair. (See the Rube Goldberg image above for more details.)
My own feeling is both the three-fund portfolio and the slice and dice portfolio will work, but complication is the real difference. And for what it’s worth, robo advisors like Betterment use somewhat complicated portfolios. The difference is that they handle all of the rebalancing for you.
6. My Own 401(k) plan
Portfolio allocations can be more complicated with 401(k) plans. Unlike an IRA, we have limited investment options, many of which are expensive. Nevertheless, I’ve worked hard to simplify my own 401(k) portfolio by investing in just three funds. In the process, I’ve tried to create a standalone portfolio that doesn’t require additional allocations from non-retirement assets or other retirement plans. The plan will be fully diversified on its own.
Here are the three funds I use in my plan:
Dodge and Cox International Stock Fund (DODFX) – 40%
Fidelity S&P Index Fund (FXSIX) – 40%
Vanguard Total Bond Fund (VBTLX) – 20%
The Dodge and Cox fund is an actively managed fund with an expense ratio of – .64%. It’s a great fund in my opinion, and the fee is actually not high for actively managed funds. My total cost for keeping all three funds is .29%, even with the Dodge and Cox fund. With just three funds, rebalancing is easy. I don’t feel that slicing and dicing into a variety of funds will have a material effect on the long-term performance of my 401(k).
I’m not entirely closed to the idea of adding some additional asset classes to my plan, particularly REITs. Whatever you choose, however, work hard to keep it simple.
Rob Berger is the founder of Dough Roller and the Dough Roller Money Podcast. A former securities law attorney and Forbes deputy editor, Rob is the author of the book Retire Before Mom and Dad. He educates independent investors on his YouTube channel and at RobBerger.com.
The internet has done wonders in the world of Investment Tracking. With websites like Mint and now Power Wallet, tracking your finances for free online is a snap. But one thing that’s been missing is a robust tool to automatically track your investments.
Best Investment Tracking App
Sites like Mint do allow you to link your investment accounts. But they don’t help you understand your asset allocation or investing expenses in any meaningful way. And that brings me to a site I’ve recently starting using called Empower.
Empower is the best investment tracking tool that I’ve ever used. It solves several problems for me:
It automatically links to my investment accounts, keeping my holdings updated throughout the trading day;
It tracks the fees I’m paying for each mutual fund and ETF I own;
It provides detailed asset allocation data for my investments, much like the X-Ray feature of Morningstar;
It alerts me when my asset allocation is over or under-weighted as compared to a target asset allocation model determined based on my age and tolerance for risk; and
It offers retirement income calculations and projections based on your investments, projected social security, pensions, annuities, and other retirement income sources.
I’ve enjoyed the tool so much, that I thought a detailed review was in order.
Getting Started
Empower is a free tool. To get started, you simply create an account with your email address and password. Once you have access to the site, you can connect just about all of your bank and investment accounts into Empower.
I had no trouble connecting accounts from Citi, Capital One 360, Scottrade and Fidelity. And once all of your accounts are connected, the fun begins.
The Dashboard
The Dashboard is the one place you’ll find high level information about all your finances. While I use Empower primarily for my investments, you can also track your checking and savings accounts. In fact, they offer what is called a Cash Manager that lets you see all of your spending in one place.
Investment Tracking
Empower does a great job of tracking investments real-time. And just as importantly, the layout of the site and the way in which information about your investments is displayed is the best I’ve seen (note, the image is not of my personal investments):
What you can’t see from the above screen shot is what happens as you roll the cursor over parts of the screen. On the graph at the top left, you’ll see your investment balance by date. And as you roll the cursor over the colored ring top right, you’ll see details about each of your investment accounts.
And what’s really cool is when you click on an individual account in the list at the bottom. As you can see from the screenshot above, the graph highlights the portion of your total attributed to that account, and the colored ring breaks out the portion of the circle related to the selected account.
Now the truth is that while the above is really cool, it’s just information. It doesn’t really give you any analysis that you can actually use. But the next few features do.
Mutual Fund and ETF Expenses
As I’ve said many times, keeping investment expenses low is one of the most important factors for successful investing. And Empower gives you two tools to help you. The first is a breakdown of your investment costs by mutual fund or ETF.
In my case, total investment costs are a real eye-opener. Empower breaks down the cost by fund or ETF, so that you can focus your analysis and determine whether you need to make any changes. Through using the tool, it became clear to me that there are a couple of funds I need to dump for less expensive alternatives.
Cryptocurrency
Empower now offers the ability to track your cryptocurrency within the dashboard. Since last year, Empower saw its users increase the value of linked accounts by about 28% – so they’ve decided to start including the ability to track crypto now, too.
Since more people are starting to invest in things like Bitcoin, it only makes sense that you’d be able to track your tokens. Currently, you have the ability to track thousands of tokens across hundreds of different cryptocurrency exchanges. This is, of course, in addition to the loads of other benefits you’ll get from Empower.
401(k) Fee Analyzer
The second tool to help fight the high cost of investing is revolutionary. It’s called the 401k Fee Analyzer.
The first time you run this tool, it will base its analysis on data not specific to your retirement funds. But you can get additional data on 401k expenses from your employer or broker to get more accurate results.
What’s so great about the analyzer is that it doesn’t stop with just the expense ratios of the funds and ETFs you own. That part’s easy. It also looks at the costs funds charge you for trading, which aren’t reflected in the expense ratio. And it looks at administrative costs charged to run the 401k, which are often passed down to employees.
If you have a 401k, this tool by itself makes it worth checking out Empower. And it’s a good reminder as to why most folks should transfer their 401k to a rollover IRA when they leave their employer.
Asset Allocation Tools
The next handy tool is its asset allocation feature. The first thing it does is breaks down all of your investments by their asset class. And if a single fund or ETF contains investments that span more than one asset class, as most do, Empower slices and dices the fund to apportion your account into each relevant asset class.
You can click on each investment in the box chart at the top or the list at the bottom to get details of your asset classes. This is extremely helpful when it comes to rebalancing your portfolio.
Investment Checkup
With the click of a button Empower will analyze your investments. It compares your actual asset allocation with your target allocation, and flags asset classes in which you are over or under-weighted. It’s an easy way to see if you need to rebalance.
Note that in the above screenshot heading is a reference to my “target allocation.” You can set this by entering your name, how many years to retirement, and your investing style (e.g., aggressive, conservative). It takes all of 10 seconds, and Empower then generates a target allocation for you.
Robust Retirement Calculator
Finally, Empower offers a free retirement calculator. The tool takes into account your current investments, age, projected social security, projected savings, and just about any other information you want to include. Using monte carlo analysis, it then determines whether you are on track to retire.
As you can see from the screenshot, the retirement planner displays the results in easy to understand graphs. It also makes change the assumptions (e.g., inflation, social security) very easy.
So what’s not to like?
Frankly, not much. One thing I haven’t mentioned is that an advisor is available for a call or a live chat. When you log into your account, you’ll see a picture of your advisor, his or her name, and telephone number. And even better, they don’t hound you. I’ve not heard from my advisor, and that’s how I want it. If I need to speak to him, I’ll give him a call. But it’s good to know that’s an option.
Empower also has mobile versions of its site for iPhone, iPad and Android. I use the iPad app and have had no issues. I’ve not had any issues with linking accounts. Occasionally I have to provide or confirm my login credentials for certain accounts. But that’s it.
But there are three things that could be improved:
You can’t enter your own target asset allocation model. Empower creates one for you based on your age, time to retirement, and investing style. This is probably fine for the majority of investors, but a custom option would be nice.
The daily updates on stock and bond prices is a bit slow. As compared to Wikinvest, another tool I’ve used before, Empower could be faster
It does not include the cost basis of your investments, which would be nice.
So there you have it. Its an excellent tool. If you want to give it a try, visit the Empower website.
Check It Out: Empower Review
Learn More: The Best Stock Tracking Apps
Empower Personal Wealth, LLC (“EPW”) compensates Webpals Systems S. C LTD for new leads. Webpals Systems S. C LTD is not an investment client of Personal Capital Advisors Corporation or Empower Advisory Group, LLC
Rob Berger is the founder of Dough Roller and the Dough Roller Money Podcast. A former securities law attorney and Forbes deputy editor, Rob is the author of the book Retire Before Mom and Dad. He educates independent investors on his YouTube channel and at RobBerger.com.
Home prices will drop next year, but so will inventory, the real-estate site says in its 2024 housing forecast
The 30-year mortgage rate will fall below 7% by April 2024, Realtor.com says in its housing forecast for next year.
The average mortgage rate in 2024 is expected to be 6.8%, and the 30-year may fall to as low as 6.5% by the end of the year, according to Realtor.com’s report.
“We’re gonna to start to see some relief for buyers who have been priced out,” Danielle Hale, chief economist at Realtor.com, told MarketWatch.
“It’s still expensive to buy a house, but instead of getting more expensive, we’ve turned the corner,” she added. “We’re starting to see housing get less expensive.”
Realtor.com sees mortgage rates falling to 6.5% by the end of 2024
A weakening U.S. economy will be the key driver pushing down mortgage rates in 2024, Hale said.
“We expect unemployment to begin to gradually tick up – but we don’t expect to see a huge surge – and the labor market to begin to soften,” she said.
But “more importantly,” Hale added, “we expect inflation to improve.”
The economy has begun showing indications of cooling off. In October, inflation was flat, thanks to cheaper gasoline prices. The job market is also showing some signs of weakness, and the unemployment rate edged up that month to a 21-month high of 3.9%.
Mortgage rates have already begun to fall, Hale noted. They are no longer hovering at the 8% range, thanks to weaker economic data. The 30-year mortgage was averaging 7.29% as of Nov. 22, according to Freddie Mac.
But don’t expect to see rates fall much lower. Even though Realtor.com noted that the historical average for the 30-year mortgage rate between 2013 and 2019 was 4%, home buyers should consider those days long gone.
That period “was not quite a normal housing market,” Hale said. “It seems unlikely that we’ll see mortgage rates get back to that range in the foreseeable future.” Between 2013 and 2019, inflation stayed below 2.5%, according to data from the St. Louis Fed.
“The Fed was constantly worried about inflation that was too low” back then, Hale said.
Below are Realtor.com’s predictions for the housing markets that will see the most and least home price appreciation in 2024.
Home prices to fall 1.7% in 2024
Realtor.com also expects home prices to fall 1.7% over 2024. Sale prices took a dip over the spring and summer this year, but they may stay flat or rise over the rest of 2023, Hale said.
But starting in May 2024, home prices overall may drop. That’s partly because home sellers may cut prices, but it could also be due to a further pullback in homeowners listing their homes. Realtor.com expects existing-home inventory to fall sharply by 14% over 2024, which is steeper than the 5.7% drop in 2023.
That means that the typical monthly cost for a median-priced home could drop to $2,200 in 2024, which would be down from $2,240 in 2023.
The Realtor.com report also suggested strong home price growth in the Midwest and the Northeast. The company expects home prices to grow on an annual basis in 2024 by 10.9% in the Detroit-Warren-Dearborn, Mich., metro area, 10.4% in Rochester, N.Y., and 9.9% in the Des Moines-West Des Moines, Iowa, metro area.
On the other hand, the data indicates a sharp slowdown in home price growth out west. Home prices are expected to fall the most in 2024 in Austin-Round Rock, Texas, by 12.2%, as compared to 2023. Other metros at the bottom of the home price growth list include St. Louis, Mo.-Ill., and Spokane-Spokane Valley, Wash., where prices are expected to fall by 11.7% and 10.2% respectively.
Demand is also expected to be lower, because rates will continue to stay relatively elevated, Hale said.
But lower rates could also convince homeowners who bought with a 3% rate to consider selling, easing the so-called lock-in effect, which could increase inventory.
Realtor.com is operated by News Corp subsidiary Move Inc., and MarketWatch publisher Dow Jones is also a of News Corp unit.
-Aarthi Swaminathan
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
Redwood Trust and home equity fintech lender Point have closed on a $139 million bond secured by 1,577 home equity investment (HEI) contracts.
The two companies issued the first-ever securitization backed entirely by HEIs in 2021, a bet that rising home-price appreciation can benefit consumers in the short-term and investors in the long-term.
Point closed on its first bond issuance rated by DBRS Morningstar on Oct. 31. One $117 million tranche of the bonds has a single-A rating while the other at $22 million has a triple-B-minus rating.
“The financing of HEIs through the development of a liquid and efficient market for rated HEI bond issuance will prove to be a pivotal moment in housing finance, one that will bolster both homeownership and overall financial health in this country,” Eddie Lim, co-founder and CEO of Point, said in a statement.
Meanwhile, Eoin Matthews, co-founder of Point, told The Wall Street Journal that the firm expects to complete several bond deals per year.
In October, Unlock Technologies, another home-equity investment firm, and Saluda Grade, a private real estate investment firm, completed the first-ever securitization rated by DBRS Morningstar.
The rating agency, which was the first to provide a rating for the asset class, published a new methodology for HEIs in July 2023. Unison, another HEI firm, is working on its first deal, too, The Wall Street Journal reported.
The rating of those securities is supposed to attract new pools of capital to the HEI asset class, such as insurance companies and money managers who are restricted to investing in rated investment-grade securities.
Redwood sees this securitization as a major milestone to provide more liquidity to the space, allowing HEI companies to assist more homebuyers. While Americans sit on approximately $32 trillion in home equity, only 50% of homeowners can tap into that wealth.
Nomura Securities International Inc. was the sole-structuring agent for the issuance.