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Apache is functioning normally

September 12, 2023 by Brett Tams

While it’s impossible to predict the future when it comes to financial markets, it’s usually possible to identify the events that have higher potential to cause bigger swings. Other times, volatility strikes on days when it wasn’t entirely expected.

That’s how this past week began.  After Monday’s holiday closure, rates jumped higher on Tuesday morning without warning.  What would a “warning” have looked like?  It could be as simple as the presence of a scheduled economic report with a history of causing a volatile market response.  Tuesday had none of those, but it did have a legitimate market mover pulling the strings behind the scenes.

The puppet master in question is a bit esoteric without a quick refresher:

  • Interest rates are based on bonds.
  • The Fed sets a target for the shortest-term bonds, but the market trades it out from there.
  • There are all kinds of bonds. US Treasuries are government bonds.  Mortgage backed securities (MBS) are bonds tied to mortgage cash flows.  Municipal bonds finance local government operations.  Corporate bonds finance various spending/investment needs for large companies.
  • All these bonds are slightly different in their risk and reward, but they are all part of the same asset class in the eyes of investors.  Specifically, bonds are a “fixed income” investment that allow investors to receive a fixed schedule of repayment with interest.  

With all that out of the way, the following will hopefully make more sense.  Tuesday was the 5th biggest day ever for new corporate bonds being offered for sale.  The top 4 days all benefited from extremely large individual bonds from one company.  All 4 had at least one offering of $25 billion or more.  That made Tuesday all the more notable in that the largest bond was “only” $4.75 billion.

In other words, there was a deluge of new bonds competing for investors’ attention.  That means relatively lower demand for other bonds such as MBS.  When demand for a bond falls, it results in lower prices, and lower prices mean higher rates.  

The market knew that this week would be a healthy one for new corporate bonds, but reality exceeded expectations.  The bottom line is that the excess supply caused a bit of weakness across the entire bond market, including the part that dictates mortgage rates.

We also had some good, old-fashioned economic data hit the market on Wednesday, but it didn’t do us any favors either.  The ISM Non-Manufacturing Index showed the services sector growing more than expected in August.  This includes a separate index that showed higher prices as well.  In addition to rising more than expected, both indices give the impression they’re in the process of bouncing after correcting from the “too hot” levels in early 2022.

Stronger economic data and higher prices are two of the biggest enemies of rates.  It made Wednesday the worst day of the week for the average mortgage lender.  10yr Treasury yields provide a benchmark for interest rate movement this week and allow us to see more granular detail.

Things calmed down heading into the weekend with rates staying safely below the highs seen at the end of August, but that wasn’t much of a consolation in the bigger picture. 

The week ahead brings some high stakes economic data in the form of August’s Consumer Price Index (CPI).  This broad inflation metric has been one of the most important sources of influence for the market on any given month over the past few years and this one could be one of the more notable examples.

CPI has been falling in general, but the decline runs the risk of being misleading due to the broad decline in fuel prices that ended 2 months ago.  Last month’s data began to show the effects of that fuel price reversal and some analysts think it will be more apparent in next week’s report.  This has resulted in a wider range of forecasts than normal and that tends to result in a more volatile market response. 

Note the small bounce in “headline” inflation, which includes fuel prices versus “core” inflation which excludes fuel.  Like with the ISM data above, some market watchers think the economy has merely corrected from overly hot conditions and that growth/inflation could continue to be more resilient than expected.

To make matters more consequential, it is the “blackout week” for the Fed where members refrain from commenting on monetary policy in the 12 days leading up to a rate announcement.  That means the market’s imagination can run a bit wilder than normal when it comes to interpreting the CPI results.  

At the end of the day, everyone is trying to get to the same answer: is inflation truly defeated or does policy need to stay tighter to keep inflation from bouncing.  The following chart of monthly core inflation shows that we’ve only recently returned to target levels.  The market keeps waiting for the Fed to say that the return is sustainable and the Fed keeps saying “we’re not sure yet.” 

Source: mortgagenewsdaily.com

Posted in: Refinance, Renting Tagged: 2, 2022, All, Announcement, asset, average, bond, bonds, cash, companies, company, conditions, Consumer Price Index, corporate bonds, data, Economy, events, expectations, fed, Finance, financial, Financial Wize, FinancialWize, fixed, fixed income, Forecasts, future, General, good, government, growth, healthy, history, holiday, hot, in, Income, index, Inflation, interest, interest rate, interest rates, investment, investors, lender, Local, LOWER, Make, manufacturing, market, markets, MBS, Monetary policy, More, Mortgage, mortgage backed securities, mortgage lender, Mortgage Rates, municipal bonds, needs, new, Operations, or, Other, potential, price, Prices, rate, Rates, repayment, report, return, reward, rising, risk, risk and reward, sale, sector, securities, simple, Spending, sustainable, target, The Economy, the fed, Treasury, US, versus, volatility, weekend, will

Apache is functioning normally

August 31, 2023 by Brett Tams

You probably have things you want to do with your money down the road: buy a house, save for retirement, fund college for your kids, maybe even go on a big trip or do a major remodel. And you may be wondering if investing can help you achieve those goals.

It’s never too early or too late to start investing. There are a number of different ways you can put your money to work, including choosing different investment types.

Different Types of Investments for Diversification

Before deciding on your investments, ask yourself what your financial goals are. Then try to build a portfolio that achieves those goals, balancing risk with return and maintaining a diverse mix of assets.

Having different types of investments, as well as short term vs long term investments can help you achieve portfolio diversification.

Bond Investments

Bonds are essentially loans you make to a company or a government — federal or local — for a fixed period of time. In return for loaning them money, they promise to pay it back to you in the future and pay you interest in the meantime.

When it comes to bonds vs. stocks, the former are typically backed by the full faith and credit of the government or large companies. Because of this, they’re often considered lower risk than stocks.

However, the risk varies, and bonds are rated for their quality and credit-worthiness. Because the U.S. government is less likely to go bankrupt than an individual company, Treasury bonds are considered to be some of the least risky investments. However, they also tend to have lower returns.

Different Types of Bonds

Treasurys: These are bonds issued by the U.S. government. Treasurys can have maturities that range from one-month to 30-years, but the 10-year note is considered a benchmark for the bond market as a whole.

Municipal bonds: Local governments or agencies can also issue their own bonds. For example, a school district or water agency might take out a bond to pay for improvements or construction and then pay it off, with interest, at whatever terms they’ve established.

Corporate bonds: Corporations also issue bonds. These are typically given a credit rating, with AAA being the highest. High-yield bonds, also known as junk bonds, tend to have higher yields but lower credit ratings.

Mortgage and asset-backed bonds: Sometimes financial institutions bundle mortgages or other assets, like student loans and car loans, and then issue bonds backed by those loans and pass on the interest.

Zero-coupon bonds: Zero coupon bonds may be issued by the U.S. Treasury, corporations, and state and local government agencies. These bonds don’t pay interest. Instead, investors buy them at a great discount from their face value, and when a bond matures, the investor receives the face value of the bond.

Pros and Cons of Bonds

If you’re thinking about investing in bonds, these are some of the benefits and drawbacks to consider:

Pros:

•   Bonds offer regular interest payments.

•   Bonds tend to be lower risk than stocks.

•   Treasurys are considered to be safe investments.

•   High-yield bonds tend to pay higher returns and they have more consistent rates.

Cons:

•   The rate of returns with bonds tends to be much lower than it is with stocks.

•   Bond trading is not as fluid as stock trading. That means bonds may be more difficult to sell.

•   Bonds can decrease in value during periods of high interest rates.

•   High-yield bonds are riskier and have a higher risk of default, and investors could potentially lose all the money they’ve invested in them.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

Stock Investments

When you think of investing and investment types, you probably think of the stock market. They are, essentially, investment fund basics. A stock gives an investor fractional ownership of a public company in units known as shares.

Only public companies trade on the stock market; private companies are privately owned. They can sometimes still be invested in, though the process isn’t always as easy and open to as many investors.

A stock makes money in two ways: It could pay dividends if the company decides to pay out part of its profits to its shareholders, or an investor could sell the stock for more than they bought it.

Some investors are looking for steady streams of income and therefore pick stocks because of their dividend payments. Others may look at value or growth stocks, companies that are trading below their true worth or those that are experiencing revenue or earnings gains at a faster pace.

Pros and Cons of Stock Investments

Stocks have advantages and disadvantages to be aware of before investing in them. These include:

Pros:

•   If the stock goes up, you can sell it for a profit.

•   Some stocks pay dividends to investors.

•   Stocks tend to offer higher potential returns than bonds.

•   Stocks are considered liquid assets, so you can typically sell them quickly if necessary.

Cons:

•   There are no guaranteed returns. For instance, the market could suddenly go down.

•   The stock market can be volatile. Returns can vary widely from year to year.

•   You typically need to hang onto stocks for many years to achieve the highest potential returns.

•   You can lose a lot of money or get in over your head if you don’t do your research before investing.

Alternative Investments

Although stocks and bonds are the more traditional assets to invest in, there are other types of investments known under the broad category of “alternatives.” These different investment options are not necessarily tied to the stock or bond market, so they can provide some diversification potential. Below is a guide to alternative investments and how they work.

Real Estate

Owning real estate, either directly or as part of real estate investment trust (REIT) investing or limited partnerships, gives you a tangible asset that may increase in value over time.

If you become invested in real estate outside of your own home, rent payments can be a regular source of income. However, real estate can also be risky and labor-intensive.

Pros and Cons of Real Estate

Before you invest in real estate, be sure to consider the pros and cons, including:

Pros:

•   Real estate is a tangible asset that tends to appreciate in value.

•   There are typically tax deductions and benefits, depending on what you own.

•   Investing in real estate with a REIT can help diversify your portfolio.

•   By law, REITs must pay 90% of their income in dividends.

•   REITs offer more liquidity than owning rental property you need to sell.

•   REITs don’t require the work that maintaining a rental property does.

Cons:

•   Real estate is not liquid. You may have a tough time selling it quickly.

•   There are constant ongoing expenses to maintain a property.

•   Owning rental property is a lot of work. You have to handle managing it, cleaning it, and making repairs.

•   With a REIT, dividends are taxed at a rate that’s usually higher than the rate for many other investments.

•   REITs are generally very sensitive to changes in interest rates, especially rising rates.

•   REITs can be a risky short-term investment and investors should plan to hold onto them for the long term.

Commodities

A commodity is a raw material — such as oil, gold, corn or coffee. Trading commodities has a reputation for being risky and volatile. That’s because they’re heavily driven by supply and demand forces. Say for instance, there’s a bad harvest of coffee beans one year. That might help push up prices. But on the other hand, if a country discovers a major oil field, that could dramatically depress prices of the fuel.

Investors have several ways they can gain exposure to commodities. They can directly hold the physical commodity, although this option is very rare for individual investors (Imagine having to store barrels and barrels of oil).

So many investors wager on commodity markets via derivatives — financial contracts whose prices are tied to the underlying raw material. For instance, instead of buying physical bars of precious metals to invest in them, a trader might use futures contracts to make speculative bets on gold or silver. Another way that retail investors may get exposure to commodities is through exchanged-traded funds (ETFs) that track prices of raw materials.

Pros and Cons of Commodities

These are the benefits and drawbacks of commodities for prospective investors to consider, such as:

Pros:

•   Commodities can diversify an investor’s portfolio.

•   Commodities tend to be more protected from the volatility of the stock market than stocks and bonds.

•   Prices of commodities are driven by supply and demand instead of the market, which can make them more resilient.

•   Investing in commodities can help hedge against inflation because commodities prices rise when consumer prices do.

Cons:

•   Commodities are considered high-risk investments because the commodities market can fluctuate based on factors like the weather. Prices could plummet suddenly.

•   Commodities trading is often best left to investors experienced in trading in them.

•   Commodities offer no dividends.

•   An investor could end up having to take physical possession of a commodity if they don’t close out the position, and/or having to sell it.

Private Companies

Only public companies sell shares of stock, however private companies do also look for investment at times — it typically comes in the form of private rounds of direct funding. If the company you invest in ends up increasing in value, that can pay off, but it can also be risky.

Pros and Cons of Private Companies

Investing in private companies could have the following benefits and drawbacks:

Pros:

•   Potential for good returns on your investment.

•   Lets investors get in early with promising startups and/or innovative technology or products.

•   Investing in private companies can help diversify your portfolio.

Cons:

•   You could lose your money if the company fails.

•   The value of your shares in the company could be reduced if the company issues new shares or chooses to raise additional capital. Your shares may then be worth less (this is known as dilution).

•   Investing in a private company is illiquid, and it can be very difficult to sell your assets.

•   Dividends are rarely paid by private companies.

•   There could be potential for fraud since private company investment tends to be less regulated than other investments.

Cryptocurrency

A cryptocurrency is a kind of digital currency that uses encryption and coding techniques for security. These currencies are independent and separate from fiat currencies-like the U.S. dollar or euro — which are examples of money issued by a government or central bank.

There are a number of different cryptocurrencies out there: Bitcoin was the first digital currency and is the most well-known. However, cryptocurrency prices have historically been very volatile, and the market is therefore considered to be a risky type of investment.

Pros and Cons of Cryptocurrency

These are some of the pros and cons of cryptocurrency to consider before investing in them:

Pros:

•   Possible potential to make money quickly. For instance, some cryptocurrencies have had short periods of significant gains (though then their value often fell).

•   Investments in cryptocurrency are transparent because data is recorded on an open, public ledger powered by blockchain technology.

Cons:

•   Investing in cryptocurrency is extremely risky.

•   Cryptocurrency prices are notoriously volatile.

•   Cryptocurrency can lose its value very quickly.

•   Cryptocurrency is generally not formally regulated at the moment.

•   Cryptocurrency is digital. If you lose your key to your digital wallet (aka the “place” where your crypto is stored), you lose access to your investment.

Overview of Investment Products

Mutual Funds

A mutual fund is an investment managed by a professional. Funds typically focus on an asset class, industry or region, and investors pay fees to the fund manager to choose investments and buy and sell them at favorable prices.

Pros and Cons of Mutual Funds

If you’re thinking about investing in mutual funds, these are some pros and cons to be aware of:

Pros:

•   Mutual funds are easy and convenient to buy.

•   They ate more diversified than stocks and bonds so they carry less risk.

•   A professional manager chooses the investments for you.

•   You earn money when the assets in the mutual fund rise in value.

•   There is dividend reinvestment, meaning dividends can be used to buy additional shares in the fund, which could help your investment grow.

Cons:

•   There is typically a minimum investment you need to make.

•   Mutual funds typically require an annual fee called an expense ratio and some funds may also have sales charges.

•   Trades are executed only once per day at the close of the market, which means you can’t buy or sell mutual funds in real time.

•   The management team could be poor or make bad decisions.

•   You will generally owe taxes on distributions from the fund.

ETF

Exchange traded funds can appear to be similar to a mutual fund, but the main difference is that ETFs can be traded on a stock exchange, giving investors the flexibility to buy and sell throughout the day. They also come in a range of asset mixes.

Pros and Cons of ETFs

Investing in ETFs has advantages and disadvantages, including:

Pros:

•   ETFs are easy to buy and sell on the stock market.

•   They often have lower annual expense ratios (annual fees) than mutual funds.

•   ETFs can help diversify your portfolio.

•   They are more liquid than mutual funds.

Cons:

•   The ease of trading ETFs might tempt an investor to sell an investment they should hold onto.

•   A brokerage may charge commission for ETF trades.This could be in addition to fund management fees.

•   May provide a lower yield on asset gains (as opposed to investing directly in the asset).

Annuities

An annuity is an insurance contract that an individual pays upfront and, in turn, receives set payments.

There are fixed annuities, which guarantee a set payment, and variable annuities, which put people’s payments into investment options and pay out down the road at set intervals. There are also immediate annuities that begin making regular payments to investors right away.

Pros and Cons of Annuities

Before investing in annuities, it’s wise to understand the pros and cons.

Pros:

•   Annuities are generally low risk investments.

•   They offer regular payments.

•   Some types offer guaranteed rates of return.

•   Can be a good supplement investment for retirement.

Cons:

•   Annuities typically offer lower returns compared to stocks and bonds.

•   They typically have high fees.

•   Annuities are complex and difficult to understand.

•   It can be challenging to get out of an annuities contract

Derivatives

There are several types of derivatives but two popular ones are futures and options. Futures contracts are agreements to buy or sell something (a security or a commodity) at a fixed price in the future.

Meanwhile, in options trading, buyers have the right, but not the obligation, to buy an asset at a set price.

A derivatives trading guide can be helpful to learn more about how these investments work.

Pros and Cons of Derivatives

There are a number of advantages and disadvantages to weigh when it comes to investing in derivatives.

Pros:

•   Derivatives allow investors to lock in a price on a security or commodity.

•   They can be helpful for mitigating risk with certain assets.

•   They provide income when an investor sells them.

Cons:

•   Derivatives can be very risky and are best left to traders who have experience with them.

•   Trading derivatives is very complex.

•   Because they expire on a certain date, the timing might not work in your favor.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Investment Account Options

An investor can put money into different types of investment accounts, each with their own benefits. The type of account can impact what kinds of returns an investor sees, as well as when and how they can withdraw their money.

401(k)

A 401(k) plan is a retirement account provided by your employer. You can often put money into a 401(k) account via a simple payroll deduction, and in a traditional 401(k), your contribution isn’t taxed as income. Many employers will also match your contributions to a certain point. The IRS puts caps on how much you can contribute to a 401(k) annually.

Pros and Cons of 401(k)s

These are the pros and cons of investing in a 401(k):

Pros:

•   Contributions you make to a 401(k) can reduce your taxable income. The money is not taxed until you withdraw it when you retire.

•   Contributions can be automatically deducted from your paycheck.

•   Your employer may provide matching funds up to a certain limit.

•   You can roll over a 401(k) if you leave your job.

Cons:

•   There is a cap on how much you can contribute each year.

•   Most withdrawals before age 59 ½ will incur a 10% penalty.

•   You must take required minimum distributions from the plan (RMDs) when you reach a certain age.

•   You may have limited investment options.

IRA

IRA stands for “individual retirement account” — so it isn’t tied to an employer. There are IRS guidelines for IRAs, but, essentially, they’re retirement accounts for individuals. IRAs allow people to set aside money pre-tax for retirement without needing an employer-backed 401(k).

Pros and Cons of IRAs

The advantages and disadvantages of IRAs include:

Pros:

•   Contributions are tax deferred. You don’t pay taxes until you withdraw the funds.

•   You can choose how the money is invested, giving you more control.

•   Those aged 50 and over can contribute an extra $1,000 in catch-up contributions.

Cons:

•   Low contribution limits ($6,500 in 2023).

•   There is a 10% penalty for most early withdrawals before age 59 ½.

Roth vs Traditional

Both 401(k) plans and IRAs come in two forms: Roth or traditional. A traditional account typically means contributions are tax-deductible and future withdrawals are taxed as ordinary income.

A Roth account essentially allows you to make qualified withdrawals down the road without paying tax on them, but all contributions now are made with post-tax income.

Brokerage Accounts

A brokerage account is a taxed account through which you can buy most of the investments discussed here: stocks, bonds, ETFs. Some brokerage firms charge fees on the trades you make, while others offer free trading but send your orders to third parties to execute — a practice known as payment for order flow. Investors can be taxed on any realized gains.

You might also consider enlisting the help of a wealth manager or financial advisor who can provide financial planning and advice, and then manage your portfolio and wealth. Typically, these advisors are paid a fee based on the assets they manage.

There are even a number of investment options out there not listed here — like buying into a venture capital firm if you’re a high-net-worth individual or putting funding into your own business.

Pros and Cons of Brokerage Accounts

There are benefits and drawbacks to brokerage accounts, such as:

Pros:

•   Offer flexibility to invest in a wide range of assets.

•   Brokerage accounts provide the potential for growth, depending on your investments. However, all investments come with risks that include the potential for loss.

•   You can contribute as much as you like to a brokerage account.

Cons:

•   You must pay taxes on your investment income and capital gains in the year they are received.

•   Investments in brokerage accounts are not tax deductible.

•   There is a risk that you could lose the money you invested.

Investing With SoFi

It might still seem overwhelming to figure out what kinds of investments will help you achieve your goals. There are different investment strategies and finding the right one can depend on where you are in your career, what your financial goals are and how far away retirement is.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What is the most common investment type?

Stocks are one of the most common and well-known types of investments. A stock gives an investor fractional ownership of a public company in units known as shares.

How do I decide when to invest?

Some prime times to start investing include when you have a retirement fund at work that you can contribute to and that your employer may contribute matching funds to (up to a certain amount); you have an emergency fund of three to six months’ worth of money already set aside and you have additional money to invest for your future; there are financial goals you’re ready to save up for, such as buying a house, saving for your kids’ college funds, or investing for retirement. Please remember you need to consider your investment objectives and risk tolerance when deciding the “right” time to start investing.

Should I use multiple investment types?

Yes. It’s wise to diversify your portfolio. That way, you’ll have different types of assets which will increase the chances that some of them will do well even when others don’t. This will also help reduce your risk of losing money on one single type of investment. In short, having a diverse mix of assets helps you balance risk with return. However, diversification does not eliminate all risk.


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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Apache is functioning normally

August 31, 2023 by Brett Tams

You probably have things you want to do with your money down the road: buy a house, save for retirement, fund college for your kids, maybe even go on a big trip or do a major remodel. And you may be wondering if investing can help you achieve those goals.

It’s never too early or too late to start investing. There are a number of different ways you can put your money to work, including choosing different investment types.

Different Types of Investments for Diversification

Before deciding on your investments, ask yourself what your financial goals are. Then try to build a portfolio that achieves those goals, balancing risk with return and maintaining a diverse mix of assets.

Having different types of investments, as well as short term vs long term investments can help you achieve portfolio diversification.

Bond Investments

Bonds are essentially loans you make to a company or a government — federal or local — for a fixed period of time. In return for loaning them money, they promise to pay it back to you in the future and pay you interest in the meantime.

When it comes to bonds vs. stocks, the former are typically backed by the full faith and credit of the government or large companies. Because of this, they’re often considered lower risk than stocks.

However, the risk varies, and bonds are rated for their quality and credit-worthiness. Because the U.S. government is less likely to go bankrupt than an individual company, Treasury bonds are considered to be some of the least risky investments. However, they also tend to have lower returns.

Different Types of Bonds

Treasurys: These are bonds issued by the U.S. government. Treasurys can have maturities that range from one-month to 30-years, but the 10-year note is considered a benchmark for the bond market as a whole.

Municipal bonds: Local governments or agencies can also issue their own bonds. For example, a school district or water agency might take out a bond to pay for improvements or construction and then pay it off, with interest, at whatever terms they’ve established.

Corporate bonds: Corporations also issue bonds. These are typically given a credit rating, with AAA being the highest. High-yield bonds, also known as junk bonds, tend to have higher yields but lower credit ratings.

Mortgage and asset-backed bonds: Sometimes financial institutions bundle mortgages or other assets, like student loans and car loans, and then issue bonds backed by those loans and pass on the interest.

Zero-coupon bonds: Zero coupon bonds may be issued by the U.S. Treasury, corporations, and state and local government agencies. These bonds don’t pay interest. Instead, investors buy them at a great discount from their face value, and when a bond matures, the investor receives the face value of the bond.

Pros and Cons of Bonds

If you’re thinking about investing in bonds, these are some of the benefits and drawbacks to consider:

Pros:

•   Bonds offer regular interest payments.

•   Bonds tend to be lower risk than stocks.

•   Treasurys are considered to be safe investments.

•   High-yield bonds tend to pay higher returns and they have more consistent rates.

Cons:

•   The rate of returns with bonds tends to be much lower than it is with stocks.

•   Bond trading is not as fluid as stock trading. That means bonds may be more difficult to sell.

•   Bonds can decrease in value during periods of high interest rates.

•   High-yield bonds are riskier and have a higher risk of default, and investors could potentially lose all the money they’ve invested in them.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

Stock Investments

When you think of investing and investment types, you probably think of the stock market. They are, essentially, investment fund basics. A stock gives an investor fractional ownership of a public company in units known as shares.

Only public companies trade on the stock market; private companies are privately owned. They can sometimes still be invested in, though the process isn’t always as easy and open to as many investors.

A stock makes money in two ways: It could pay dividends if the company decides to pay out part of its profits to its shareholders, or an investor could sell the stock for more than they bought it.

Some investors are looking for steady streams of income and therefore pick stocks because of their dividend payments. Others may look at value or growth stocks, companies that are trading below their true worth or those that are experiencing revenue or earnings gains at a faster pace.

Pros and Cons of Stock Investments

Stocks have advantages and disadvantages to be aware of before investing in them. These include:

Pros:

•   If the stock goes up, you can sell it for a profit.

•   Some stocks pay dividends to investors.

•   Stocks tend to offer higher potential returns than bonds.

•   Stocks are considered liquid assets, so you can typically sell them quickly if necessary.

Cons:

•   There are no guaranteed returns. For instance, the market could suddenly go down.

•   The stock market can be volatile. Returns can vary widely from year to year.

•   You typically need to hang onto stocks for many years to achieve the highest potential returns.

•   You can lose a lot of money or get in over your head if you don’t do your research before investing.

Alternative Investments

Although stocks and bonds are the more traditional assets to invest in, there are other types of investments known under the broad category of “alternatives.” These different investment options are not necessarily tied to the stock or bond market, so they can provide some diversification potential. Below is a guide to alternative investments and how they work.

Real Estate

Owning real estate, either directly or as part of real estate investment trust (REIT) investing or limited partnerships, gives you a tangible asset that may increase in value over time.

If you become invested in real estate outside of your own home, rent payments can be a regular source of income. However, real estate can also be risky and labor-intensive.

Pros and Cons of Real Estate

Before you invest in real estate, be sure to consider the pros and cons, including:

Pros:

•   Real estate is a tangible asset that tends to appreciate in value.

•   There are typically tax deductions and benefits, depending on what you own.

•   Investing in real estate with a REIT can help diversify your portfolio.

•   By law, REITs must pay 90% of their income in dividends.

•   REITs offer more liquidity than owning rental property you need to sell.

•   REITs don’t require the work that maintaining a rental property does.

Cons:

•   Real estate is not liquid. You may have a tough time selling it quickly.

•   There are constant ongoing expenses to maintain a property.

•   Owning rental property is a lot of work. You have to handle managing it, cleaning it, and making repairs.

•   With a REIT, dividends are taxed at a rate that’s usually higher than the rate for many other investments.

•   REITs are generally very sensitive to changes in interest rates, especially rising rates.

•   REITs can be a risky short-term investment and investors should plan to hold onto them for the long term.

Commodities

A commodity is a raw material — such as oil, gold, corn or coffee. Trading commodities has a reputation for being risky and volatile. That’s because they’re heavily driven by supply and demand forces. Say for instance, there’s a bad harvest of coffee beans one year. That might help push up prices. But on the other hand, if a country discovers a major oil field, that could dramatically depress prices of the fuel.

Investors have several ways they can gain exposure to commodities. They can directly hold the physical commodity, although this option is very rare for individual investors (Imagine having to store barrels and barrels of oil).

So many investors wager on commodity markets via derivatives — financial contracts whose prices are tied to the underlying raw material. For instance, instead of buying physical bars of precious metals to invest in them, a trader might use futures contracts to make speculative bets on gold or silver. Another way that retail investors may get exposure to commodities is through exchanged-traded funds (ETFs) that track prices of raw materials.

Pros and Cons of Commodities

These are the benefits and drawbacks of commodities for prospective investors to consider, such as:

Pros:

•   Commodities can diversify an investor’s portfolio.

•   Commodities tend to be more protected from the volatility of the stock market than stocks and bonds.

•   Prices of commodities are driven by supply and demand instead of the market, which can make them more resilient.

•   Investing in commodities can help hedge against inflation because commodities prices rise when consumer prices do.

Cons:

•   Commodities are considered high-risk investments because the commodities market can fluctuate based on factors like the weather. Prices could plummet suddenly.

•   Commodities trading is often best left to investors experienced in trading in them.

•   Commodities offer no dividends.

•   An investor could end up having to take physical possession of a commodity if they don’t close out the position, and/or having to sell it.

Private Companies

Only public companies sell shares of stock, however private companies do also look for investment at times — it typically comes in the form of private rounds of direct funding. If the company you invest in ends up increasing in value, that can pay off, but it can also be risky.

Pros and Cons of Private Companies

Investing in private companies could have the following benefits and drawbacks:

Pros:

•   Potential for good returns on your investment.

•   Lets investors get in early with promising startups and/or innovative technology or products.

•   Investing in private companies can help diversify your portfolio.

Cons:

•   You could lose your money if the company fails.

•   The value of your shares in the company could be reduced if the company issues new shares or chooses to raise additional capital. Your shares may then be worth less (this is known as dilution).

•   Investing in a private company is illiquid, and it can be very difficult to sell your assets.

•   Dividends are rarely paid by private companies.

•   There could be potential for fraud since private company investment tends to be less regulated than other investments.

Cryptocurrency

A cryptocurrency is a kind of digital currency that uses encryption and coding techniques for security. These currencies are independent and separate from fiat currencies-like the U.S. dollar or euro — which are examples of money issued by a government or central bank.

There are a number of different cryptocurrencies out there: Bitcoin was the first digital currency and is the most well-known. However, cryptocurrency prices have historically been very volatile, and the market is therefore considered to be a risky type of investment.

Pros and Cons of Cryptocurrency

These are some of the pros and cons of cryptocurrency to consider before investing in them:

Pros:

•   Possible potential to make money quickly. For instance, some cryptocurrencies have had short periods of significant gains (though then their value often fell).

•   Investments in cryptocurrency are transparent because data is recorded on an open, public ledger powered by blockchain technology.

Cons:

•   Investing in cryptocurrency is extremely risky.

•   Cryptocurrency prices are notoriously volatile.

•   Cryptocurrency can lose its value very quickly.

•   Cryptocurrency is generally not formally regulated at the moment.

•   Cryptocurrency is digital. If you lose your key to your digital wallet (aka the “place” where your crypto is stored), you lose access to your investment.

Overview of Investment Products

Mutual Funds

A mutual fund is an investment managed by a professional. Funds typically focus on an asset class, industry or region, and investors pay fees to the fund manager to choose investments and buy and sell them at favorable prices.

Pros and Cons of Mutual Funds

If you’re thinking about investing in mutual funds, these are some pros and cons to be aware of:

Pros:

•   Mutual funds are easy and convenient to buy.

•   They ate more diversified than stocks and bonds so they carry less risk.

•   A professional manager chooses the investments for you.

•   You earn money when the assets in the mutual fund rise in value.

•   There is dividend reinvestment, meaning dividends can be used to buy additional shares in the fund, which could help your investment grow.

Cons:

•   There is typically a minimum investment you need to make.

•   Mutual funds typically require an annual fee called an expense ratio and some funds may also have sales charges.

•   Trades are executed only once per day at the close of the market, which means you can’t buy or sell mutual funds in real time.

•   The management team could be poor or make bad decisions.

•   You will generally owe taxes on distributions from the fund.

ETF

Exchange traded funds can appear to be similar to a mutual fund, but the main difference is that ETFs can be traded on a stock exchange, giving investors the flexibility to buy and sell throughout the day. They also come in a range of asset mixes.

Pros and Cons of ETFs

Investing in ETFs has advantages and disadvantages, including:

Pros:

•   ETFs are easy to buy and sell on the stock market.

•   They often have lower annual expense ratios (annual fees) than mutual funds.

•   ETFs can help diversify your portfolio.

•   They are more liquid than mutual funds.

Cons:

•   The ease of trading ETFs might tempt an investor to sell an investment they should hold onto.

•   A brokerage may charge commission for ETF trades.This could be in addition to fund management fees.

•   May provide a lower yield on asset gains (as opposed to investing directly in the asset).

Annuities

An annuity is an insurance contract that an individual pays upfront and, in turn, receives set payments.

There are fixed annuities, which guarantee a set payment, and variable annuities, which put people’s payments into investment options and pay out down the road at set intervals. There are also immediate annuities that begin making regular payments to investors right away.

Pros and Cons of Annuities

Before investing in annuities, it’s wise to understand the pros and cons.

Pros:

•   Annuities are generally low risk investments.

•   They offer regular payments.

•   Some types offer guaranteed rates of return.

•   Can be a good supplement investment for retirement.

Cons:

•   Annuities typically offer lower returns compared to stocks and bonds.

•   They typically have high fees.

•   Annuities are complex and difficult to understand.

•   It can be challenging to get out of an annuities contract

Derivatives

There are several types of derivatives but two popular ones are futures and options. Futures contracts are agreements to buy or sell something (a security or a commodity) at a fixed price in the future.

Meanwhile, in options trading, buyers have the right, but not the obligation, to buy an asset at a set price.

A derivatives trading guide can be helpful to learn more about how these investments work.

Pros and Cons of Derivatives

There are a number of advantages and disadvantages to weigh when it comes to investing in derivatives.

Pros:

•   Derivatives allow investors to lock in a price on a security or commodity.

•   They can be helpful for mitigating risk with certain assets.

•   They provide income when an investor sells them.

Cons:

•   Derivatives can be very risky and are best left to traders who have experience with them.

•   Trading derivatives is very complex.

•   Because they expire on a certain date, the timing might not work in your favor.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Investment Account Options

An investor can put money into different types of investment accounts, each with their own benefits. The type of account can impact what kinds of returns an investor sees, as well as when and how they can withdraw their money.

401(k)

A 401(k) plan is a retirement account provided by your employer. You can often put money into a 401(k) account via a simple payroll deduction, and in a traditional 401(k), your contribution isn’t taxed as income. Many employers will also match your contributions to a certain point. The IRS puts caps on how much you can contribute to a 401(k) annually.

Pros and Cons of 401(k)s

These are the pros and cons of investing in a 401(k):

Pros:

•   Contributions you make to a 401(k) can reduce your taxable income. The money is not taxed until you withdraw it when you retire.

•   Contributions can be automatically deducted from your paycheck.

•   Your employer may provide matching funds up to a certain limit.

•   You can roll over a 401(k) if you leave your job.

Cons:

•   There is a cap on how much you can contribute each year.

•   Most withdrawals before age 59 ½ will incur a 10% penalty.

•   You must take required minimum distributions from the plan (RMDs) when you reach a certain age.

•   You may have limited investment options.

IRA

IRA stands for “individual retirement account” — so it isn’t tied to an employer. There are IRS guidelines for IRAs, but, essentially, they’re retirement accounts for individuals. IRAs allow people to set aside money pre-tax for retirement without needing an employer-backed 401(k).

Pros and Cons of IRAs

The advantages and disadvantages of IRAs include:

Pros:

•   Contributions are tax deferred. You don’t pay taxes until you withdraw the funds.

•   You can choose how the money is invested, giving you more control.

•   Those aged 50 and over can contribute an extra $1,000 in catch-up contributions.

Cons:

•   Low contribution limits ($6,500 in 2023).

•   There is a 10% penalty for most early withdrawals before age 59 ½.

Roth vs Traditional

Both 401(k) plans and IRAs come in two forms: Roth or traditional. A traditional account typically means contributions are tax-deductible and future withdrawals are taxed as ordinary income.

A Roth account essentially allows you to make qualified withdrawals down the road without paying tax on them, but all contributions now are made with post-tax income.

Brokerage Accounts

A brokerage account is a taxed account through which you can buy most of the investments discussed here: stocks, bonds, ETFs. Some brokerage firms charge fees on the trades you make, while others offer free trading but send your orders to third parties to execute — a practice known as payment for order flow. Investors can be taxed on any realized gains.

You might also consider enlisting the help of a wealth manager or financial advisor who can provide financial planning and advice, and then manage your portfolio and wealth. Typically, these advisors are paid a fee based on the assets they manage.

There are even a number of investment options out there not listed here — like buying into a venture capital firm if you’re a high-net-worth individual or putting funding into your own business.

Pros and Cons of Brokerage Accounts

There are benefits and drawbacks to brokerage accounts, such as:

Pros:

•   Offer flexibility to invest in a wide range of assets.

•   Brokerage accounts provide the potential for growth, depending on your investments. However, all investments come with risks that include the potential for loss.

•   You can contribute as much as you like to a brokerage account.

Cons:

•   You must pay taxes on your investment income and capital gains in the year they are received.

•   Investments in brokerage accounts are not tax deductible.

•   There is a risk that you could lose the money you invested.

Investing With SoFi

It might still seem overwhelming to figure out what kinds of investments will help you achieve your goals. There are different investment strategies and finding the right one can depend on where you are in your career, what your financial goals are and how far away retirement is.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What is the most common investment type?

Stocks are one of the most common and well-known types of investments. A stock gives an investor fractional ownership of a public company in units known as shares.

How do I decide when to invest?

Some prime times to start investing include when you have a retirement fund at work that you can contribute to and that your employer may contribute matching funds to (up to a certain amount); you have an emergency fund of three to six months’ worth of money already set aside and you have additional money to invest for your future; there are financial goals you’re ready to save up for, such as buying a house, saving for your kids’ college funds, or investing for retirement. Please remember you need to consider your investment objectives and risk tolerance when deciding the “right” time to start investing.

Should I use multiple investment types?

Yes. It’s wise to diversify your portfolio. That way, you’ll have different types of assets which will increase the chances that some of them will do well even when others don’t. This will also help reduce your risk of losing money on one single type of investment. In short, having a diverse mix of assets helps you balance risk with return. However, diversification does not eliminate all risk.


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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
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Apache is functioning normally

August 27, 2023 by Brett Tams

If you find yourself with $100,000 to invest your first job is to decide what you need from this money – income or growth. You will also need to determine your risk tolerance, time horizon, and the level of involvement you want to have with your investment.

If you want long-term growth with little to no involvement, then index funds or mutual funds might be your speed.

If you are looking for income then you might consider bonds or real estate, depending on how much involvement you want to have.

But no matter what you decide, make sure that your financial house is in order before you start and ensure that you are well diversified as you invest.

Before You Start Investing

If you’ve received a $100,000 windfall you’ll want to make sure your financial house is in order before you begin investing it. First, ensure that you have an emergency fund in place. The last thing you want is to invest this money and then need to sell an investment because you have an emergency. Next, you’ll want to consider paying off any debts you have.

Emergency Fund

Having an emergency fund is an important part of a solid financial plan. It can provide a safety net during difficult times and help you stay on track to achieve your long-term financial goals. If you don’t already, you’ll want to have six months of living expenses saved up. Having to dip into your investments unexpectedly can disrupt your plans to save for the future and may result in penalties, taxes, or just poor investment timing.

You’ll want this money in a safe and easy-to-access place. A high interest savings account is likely your best option.

Here are our favorite high yield savings accounts.

Pay off debt

Before you start investing consider paying off your debts. The interest rates on most consumer debts, such as credit cards and personal loans, are typically higher than the returns you can expect to earn from most investments. By paying off high-interest debt first, you are effectively earning a guaranteed return on your money equal to the interest rate on the debt.

Paying off debt also reduces risk and frees up cash flow, which can put you in a better position to invest for the long term, as it makes it less likely you will need to access your investments for emergencies.

Determine Your Investment Needs and Risk Tolerance

The best way for you to invest $100k will be different than how someone else should invest $100k. What you want to use the money for, how soon you’ll need it, and your risk tolerance are all factors in determining the best way to invest.

What are Your Investment Goals

You’ll first want to determine your investment goals. Ask yourself what you want to achieve with your investments. For example, do you want to save for retirement, build a college fund for your children, or save for a down payment on a house?

Each of these goals would require different investment vehicles. Also, keep in mind that you don’t need to use all the money for one thing. You can work towards several goals at once.

If your goal is to use the money to provide income, you would consider different investments than you would if your goal was to grow the balance of the account.

What is Your Risk Tolerance?

How much risk you are willing to take? This really means – how comfortable are you with the potential for losing money.

In general, the more risk you are willing to take the more potential growth there is. For example, if you have a very high risk tolerance you could consider investing in emerging markets. If your tolerance for risk is low, you’ll want to consider more stable investments such as bonds or real estate.

The longer your time horizon the more risk you can take since you will have longer for the markets to recover before you need the money. This is why you’ll want to have a robust emergency fund – so you don’t need to access the funds before it’s time.

When Will You Need the Money?

Consider the time frame you have to achieve your financial goals. Are they short-term goals that you want to achieve within the next few years, or are they long-term goals that you want to achieve over the next several decades?

If you are investing for the long term (over 5 years) then depending on your risk tolerance you can afford to be more aggressive, consider a portfolio of well-diversified stocks and bonds. If you are saving for retirement you’ll want to consider a tax-advantaged account such as an IRA.

If you are saving for a short-term goal (less than 5 years) such as a down payment on a house, you’ll want something with less risk and easier access, such as a CD.

How to Invest $100k

Stocks

If you have $100,000 to invest, stocks will likely be a part of your portfolio. You have several options on how to buy stocks.

Index funds

If you are new to investing in stocks, or just don’t have a lot of time to research and manage a portfolio, then index funds, mutual funds, and ETFs are great options. These investments are mostly hands-off, yet allow you to get access to a diversified portfolio.

Index funds aim to match a particular index that tracks the market. For example, you could invest in a fund that tracks the S&P500 or the Dow. You could even buy a fund that tracks the stock market as a whole.

The benefits of index funds are that it’s easy to get a lot of diversification and they often have very low fees as they require very minimal human research and management.

The drawbacks of index funds are that they aim to match the returns of the index they track, so you will never outperform the index – however, they also aren’t likely to underperform.

Also, with index funds you can become over-invested in a particular sector without realizing it as there can be an overlap of companies across different indices.

Mutual funds

Mutual funds are similar to index funds in that they pool together funds from multiple investors to buy a collection of stocks. The difference is that they are run by professional managers who follow the investment objectives of the fund, rather than following a specific index.

The benefits of mutual funds are good diversification and professional management. Unlike index funds, mutual funds are not limited to a set selection of investments. As long as the investments follow the stated objectives of the fund the manager is allowed to invest as she thinks best based on her knowledge of the markets and investment experience.

The drawbacks of mutual funds are fees and the possibility of underperformance. Since mutual funds are managed by a real person they have higher expenses than index funds, which are managed by a computer. This will reduce your returns.

Mutual funds also have the potential to underperform the market. While index funds aim to track a sector of the market they typically won’t under or overperform. Mutual funds have a lot more flexibility, so while they may overperform some years, they also risk underperforming as well.

ETFs

Exchange-Traded Funds, are a type of investment vehicle that allows investors to buy and sell a diversified portfolio of stocks or bonds in a single transaction, similar to an index fund. However, ETFs are traded on stock exchanges like individual stocks, and their prices fluctuate throughout the day as investors buy and sell shares.

ETFs are designed to track the performance of a specific index or benchmark, such as the S&P 500, and their holdings are usually disclosed on a daily basis. This allows investors to gain exposure to a broad market or sector with a single investment.

The benefits of ETFs are low expenses and diversification. Because they are managed by computers, like index funds, they tend to have very low expense ratios. They also allow you access to a broad range of investments.

The drawbacks of exchange traded funds are trading costs and the potential for underperformance. ETFs have the potential to be actively traded – if you partake in this activity you will likely have fees when you buy and sell shares. Also, if you actively trade shares you have the potential to underperform (or overperform if you are luck) the market.

Individual Stocks

Rather than buy collections of stocks via a mutual fund or ETF you could invest in individual stocks, if you have the time, knowledge, and inclination to do so.

Investing in individual stocks has more risks due to the fact that it’s difficult to build a diversified portfolio. Plus, you are also limited by your own knowledge and research abilities.

However, some people love to research stocks and investing strategies. If that’s you, and your risk tolerance is high enough you may find a lot of satisfaction in choosing your own investments. You could potentially beat the market – although you could also underperform the market as well.

Even if this appeals to you, I recommend investing in individual stocks with only a small percentage of your portfolio, while the bulk of your money remains in index funds or mutual funds.

Here are our favorite stock trading apps.

Dividend Stocks

If income is your goal you may want to consider dividend stocks. These are stocks that pay out a portion of their earnings to shareholders in the form of dividends. Dividends are typically paid out quarterly, and the amount of the dividend can vary depending on the company’s earnings and dividend policy.

Dividend stocks are typically issued by established, mature companies that have a history of stable earnings and strong cash flow. These companies may not offer high growth potential, but they are often viewed as more stable and less volatile than growth stocks.

The benefits are that they can provide investors with a regular stream of income and lower volatility than growth stocks.

The drawbacks are they have limited growth potential and can make dividend cuts at any time.

Here is how to find the best dividend paying stocks.

Real Estate

If you are looking to invest $100k you’ve probably thought of real estate. You have a lot of options when it comes to owning property. You could buy an individual property to rent or you could be more hands off with REITs or crowdfunding.

Buying Rental Property

Buying individual rental properties can be an attractive investment option for individuals seeking to generate passive income and build long-term wealth through real estate.

The benefits of real estate is passive income and appreciation potential. When you have a rental property you get rent each month from your tenants and the value of the property will likely go up over time. If the rent is high enough to cover all your expenses you could have a fairly passive income stream.

The drawbacks of real estate are that there are high upfront costs as well as ongoing costs. There is also market risk and tenant risk.

Plus, real estate is illiquid. If you want to sell it will take weeks, even in a strong market. If the market is weak at the time of the sale it could potentially take years to find a buyer and make a sale.

REITs

REIT stands for Real Estate Investment Trust, which is a company that owns or operates income-producing real estate properties, such as apartments, shopping centers, office buildings, hotels, and warehouses.

REITs allow individual investors to invest in real estate without having to purchase, manage, or finance the properties themselves. Instead, investors can buy shares of a REIT, which represent ownership in the underlying real estate portfolio.

This eliminates many of the drawbacks of individual real estate. You can participate in the rental income and price appreciation of a property without having to deal with tenants or broken hot water heaters.

They are also more liquid than individual properties. Shares of Real Estate Investment Trusts are traded like stocks, so if you want to sell a portion of your holdings you can easily do so.

REITs are the only way to get in and out of real estate quickly.

Real Estate Crowdfunding

Real estate crowdfunding is a relatively new form of investment that allows multiple real estate investors to pool their money together to invest in real estate projects. Crowdfunding platforms provide a digital marketplace where investors can browse and select from a range of real estate investment opportunities, typically offered by developers, sponsors, or real estate companies.

Crowdfunding is like a cross between buying an individual property and REITs. Like REITs, it allows you to invest in real estate for a lower entry amount and avoid having to be a landlord.

However, unlike REITs (and more like owning an individual property) your money is invested in a particular property, rather than in a fund that has multiple properties. The rent you receive and property appreciation is linked to your specific property.

Also, crowdfunding is typically not very liquid. Crowdfunding platforms usually have a set amount of time, often five years or more, before you are allowed to draw your funds out of the investment.

Here’s more information on real estate crowdfunding.

Bonds

Bonds are a type of fixed-income security that represents a loan made by an investor to a government, corporation, or other entity. In essence, an investor who buys a bond is lending money to the bond issuer in exchange for regular interest payments and the promise of a the return of their principal investment at the bond’s maturity date.

If your goal is to generate income, then bonds are worth considering. They can provide a regular stream of income in the form of interest payments, which can be particularly attractive for investors who are looking for steady, predictable income.

Bonds can provide diversification in an investment portfolio, as they tend to have a lower correlation with stocks and other assets. This can help to reduce overall portfolio risk and volatility.

However, bond prices and yields are inversely related, meaning that when interest rates rise, bond prices tend to fall. This can result in capital losses for bond investors. Also, bond issuers may default on their payments, which can result in capital losses for investors. You can lessen credit risk by only buying bonds from governments and large stable companies.

Here’s how to invest in bonds.

Certificates of Deposit

Certificates of Deposit similar to a savings account except that your money is locked away for a set period of time in exchange for a higher interest rate. They are good investments when your primary goal is safety of principal but don’t need access to the money for a fixed period of time.

The benefits of CDs are that they are very low risk. Your money is insured and not invested in any market so you have no risk of losing your principal. They also offer CDs offer a fixed rate of return, which is nice if you are looking for a predictable source of income.

However, they also have fairly low returns. Depending on the interest rate environment the returns may not even keep up with inflation – so you may even be actually losing purchasing power over the long term.

Here are the best CD rates.

Taxes

Investing means dealing with taxes – even investing in a retirement account will have some sort of tax implications.

Capital Gains Tax

If you are investing outside of retirement accounts you will want to consider capital gains taxes. Capital gains occur anytime you sell an investment for more than you paid. If you’ve held the asset for less than a year when you sell, then you will be taxed at your ordinary income tax rate.

However, if you’ve held the asset for more than year you will be taxed at your capital gains rate, which is likely 15% (and likely lower than your ordinary income tax rate).

Capital losses can also occur. If you sell at a loss you can use your losses to offset any other capital gains you had that year. If your losses exceed your gains you can carry them over indefinitely.

Income

If you are receiving income from your investments, for example, rent, dividends, or interest payments you will likely pay your ordinary income tax rate on this income.

An exception is some dividends are tax advantaged. Dividends can be “qualified” or “non-qualified” which will affect their tax status. Here is some information from the TurboTax on this.

Also income from government issued bonds may be tax advantaged as well. Income payments from municipal bonds are exempt from federal taxes and state taxes if the issuing state is also the state where you live.

Income from federal bonds are exempt from state taxes and local taxes.

Retirement Accounts

If you are investing for retirement then using a tax advantaged retirement account is your best bet.

Common accounts are Traditional and Roth IRAs. Both are individual retirement accounts but they are taxed differently.

Traditional IRAs give you a tax break when you contribute to the account but withdrawals in retirement are considered taxable income and you’ll pay taxes as your ordinary income tax rate.

Roth IRAs do not receive a tax break when you contribute but withdrawals in retirement are tax free. Meaning the growth is actually never taxed.

IRAs have annual contribution limits. You can find out more about that here.

Diversify

As you start investing, keep in mind that you don’t have to invest your money all in one place. If you like the idea of long-term growth but feel nervous about putting it all in the stock market, that’s ok. You can split it up between an index fund and a real estate investment trust.

Maybe you sock most away in a well-diversified index fund but want to keep a little bit set aside to trade in individual stocks and try your hand at individual stocks.

It’s your money and ultimately you get to decide what to do.

Hire a Financial Advisor

If you don’t feel confident enough to invest $100k on your own you can always ask for help from a financial advisor. They typically have expertise in various areas of finance, such as investments, retirement planning, tax planning, and estate planning.

Financial advisors get paid in a few different ways:

  • Commission-based: Some earn commissions on the products they sell, such as mutual funds, insurance policies, or annuities. This model can create a conflict of interest, as advisors may be incentivized to recommend products that may not be in the client’s best interest.
  • Fee-only: Fee-only advisors charge clients a fee for their services, typically based on a percentage of the assets they manage. This model eliminates the potential conflict of interest associated with commissions, as advisors are not incentivized to recommend specific products.
  • Fee-based: Fee-based advisors charge both a fee for their services and may also receive commissions for the products they sell. This model can also create a conflict of interest, as advisors may be incentivized to recommend products that generate higher commissions.
  • Hourly or project-based: Some financial advisors charge clients an hourly rate or a flat fee for specific projects or services, such as creating a financial plan or reviewing investment portfolios.

It’s essential to understand how a financial planner is compensated before working with them, as their compensation structure can influence the advice they provide. Fee-only financial advisors are often considered the most transparent and unbiased, as they are not incentivized to recommend specific products.

It’s important to find an investment advisor that you trust. They will be helping you make some of the most important financial decisions of your life.

How to find a financial advisor.

Summary of How to Invest $100k

Investing $100,000 can be an overwhelming task, but with the right approach and mindset, it can be a fruitful one. The first step is to create an emergency fund/ savings account and pay off high-interest debt to ensure financial stability.

Ultimately, the key to successful investing is to develop a diversified portfolio that aligns with your investment goals, risk tolerance, and financial objectives. With the right strategy and mindset, investing $100,000 can be a smart move towards securing a better financial future.

Source: doughroller.net

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Apache is functioning normally

August 25, 2023 by Brett Tams

One of the most powerful financial combinations is the ability to invest and bank through the same financial institution. But J.P. Morgan isn’t just any financial institution. It’s the largest bank in the U.S., and it also offers the ability to engage in self-directed trading–commission-free. There are many brokerage firms you can invest with, but this is the only one with the power of J.P. Morgan behind it!

If you’re already a J.P. Morgan customer or client–either with a deposit account or through one of their many top-of-the-line credit cards–you should know that you can also invest through the company. J.P. Morgan Self-Directed Investing offers commission-free trades for self-directed investors, as well as a low-cost managed portfolio option. You can open an account with no money, and handle all your trading and account monitoring through the mobile app. And if you’re not already a J.P. Morgan customer or client, you may be interested in investing through the largest banking organization in the U.S., with all the advantages and benefits that provides.

What is J. P. Morgan Self-Directed Investing?

J.P. Morgan is the largest bank in the United States and the sixth-largest bank in the world, with assets of nearly $2.7 trillion. Founded all the way back in 1799, the bank currently has more than 5,000 branches operating in 36 states. J.P. Morgan is also one of the leading providers of credit cards.

But while the company is best known as a bank, it’s also one of the largest asset managers in the world. J.P. Morgan’s asset management arm has nearly $3 trillion in assets under management (AUM), while its investment and corporate banking arm has more than $25 trillion in AUM.

Given the company’s experience in managing investments for individual and business clients, as well as its massive banking footprint across the U.S., it’s only natural that J.P. Morgan would eventually roll out a retail brokerage platform for individual investors. That platform is J.P. Morgan Self-Directed Investing. Originally launched as You Invest in 2018, J.P. Morgan Self-Directed Investing is already showing plenty of promise with innovative investment options.

J. P. Morgan Self-Directed Investing Product Features

J. P. Morgan Self-Directed Investing offers two different investment programs. Self-Directed Investing (SDI) is a self-directed investment platform, while SDI portfolios offers several fully managed investment plans for those who want to turn the investing job over to the professionals.

Self-Directed Investing

This is the trading account offered by J. P. Morgan. There is no minimum initial investment required to open an account. Available accounts include individual and joint taxable brokerage accounts, and traditional and Roth IRA accounts. There, you can trade individual stocks, exchange-traded funds (ETFs), options, fixed income securities, and mutual funds.

Self-Directed Investing offers commission-free trades in thousands of securities. You can manage your portfolio online or on the go from your mobile device.

The platform also has resource pages that can help with basic investing, investing strategies, planning, and market insights.

Portfolio Builder

This tool helps create an asset allocation based on your investment goals, time horizon, and risk tolerance. This tool requires a minimum account balance of $500. It can be used to select securities within the designated portfolio allocations, and even places trades for you.

Self-Directed Investing Portfolios

If you prefer to have your investment portfolio professionally managed–or if you want to add managed portfolios to your self-directed investing–you can take advantage of SDI Portfolios.

You’ll need a minimum of $500 to open an account, and the account will be managed for a single annual percentage fee, regardless of account size (see J.P. Morgan Self-Directed Investing Pricing & Fees below).

The specific mix in your portfolio will depend on your investor profile, which may be Conservative, Moderate, Growth, or Aggressive. A Conservative portfolio will be more heavily invested in fixed income and cash investments, while Growth and Aggressive will be slanted towards stocks. The Moderate portfolio will use an equal mix of both.

After you open an account, you’ll determine your asset allocation and your portfolio is put in place–it will be rebalanced as necessary. At that point, all you’ll need to do is fund your account, and all aspects of your portfolio will be fully managed for you.

If self-directed investing isn’t for you, you can work with a J.P. Morgan advisor, or schedule a check-up to see if you’re on track to meeting your investment goals.

Self-Directed Investing Portfolios Glide Path

Your portfolio allocation doesn’t remain static. SDI Portfolios employs a Glide Path, adjusting your portfolio as you age. Your portfolio will be gradually reallocated toward a more conservative mix as you approach retirement and have less time available to recover from losses that may occur in a down market.

J. P. Morgan Self-Directed Investing Pricing & Fees

Self-Directed Investing Trade

There are no fees to open and maintain a SDI Trade account. Trading commissions are as follows:

Stocks and ETFs: You’ll have unlimited commission-free trading online with stocks and ETFs. However, if you make representative-assisted trades there is a fee of $25 per trade.

Option: Also commission-free, but there is a charge of $0.65 per contract. And similarly, there will be a $25 commission for any representative-assisted trade.

Mutual funds: Commission-free for online trades, with a $20 per transaction commission if representative-assisted.

Fixed income/bonds: There are no commissions or fees charged for trades of U.S. Treasury bills, notes and bonds, or new issues of corporate bonds, municipal bonds, government agency bonds or brokered certificates of deposit.

However, trading of secondary market corporate bonds, municipal bonds, government agency bonds and brokered CDs have the following fees:

  • Online – $10 per trade, plus $1 per bond over 10 bonds, up to a maximum of $250.
  • Representative-assisted – $30 per trade, plus $1 per bond over 10 bonds, up to a maximum of $270.

Self-Directed Investing Portfolios

SDI Portfolios come with a low percentage annual advisory fee of 0.35% of your account balance, paid monthly. There are no other fees involved in the management of your account.

J. P. Morgan Self-Directed Investing Sign-up Bonus

J.P. Morgan is currently offering a bonus of between $50 and $700 if you open an account with at least $5,000. The bonus is structured as follows:

  • $700 when you fund with $250,000 or more
  • $325 when you fund with $100,000-$249,999
  • $150 when you fund with $25,000-$99,999
  • $50 when you fund with $5,000-$24,999

(All accounts must be funded at these levels in the first 45 days and remain in the account for at least 90 days)

Disclosure: INVESTMENT AND INSURANCE PRODUCTS ARE: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE

How to Sign Up with J. P. Morgan Self-Directed Investing

To open a SDI account you must be at least 18 years old, have a valid Social Security number, and a U.S. home address. You’ll be asked to provide a valid driver’s license or state-issued ID for identity verification purposes.

You can open the account from YouInvest.com. There you can choose a Self-Directed Investing Trade or Self-Directed Investing Portfolios option, either as a taxable brokerage account or an IRA. If you choose to open a SDI Portfolios account, you’ll need to complete a questionnaire that will help determine your investment goals, time horizon, and risk tolerance.

If you are an existing Chase account holder, much of your application information will be transferred over from in-house records.

When completing the application, you’ll first be asked if you are an existing Chase customer. If you are, you can simply enter your username and password, and your application will be populated from information already on file with Chase.

If you are not an existing Chase customer, you’ll need to complete the online application. You’ll then need to manually supply the following information:

  • Your full name
  • Country or citizenship
  • Date of birth
  • Social Security number
  • The type of ID (driver’s license or state-issued ID), as well as the ID number, expiration date, and the issuing state
  • Your home address
  • Your email and phone number

Funding your account

You can fund your account either through an existing Chase account or from an external financial institution. If you already have a Chase account, you can transfer funds into your Self-Directed Investing Account by choosing Pay & transfer, then Transfer money.

If you are linking an external account, you can simply choose “Add new external account”, then enter the routing number and personal account number from your institution. You can set up either a one-time transfer or recurring transfers.

J. P. Morgan Self-Directed Investing Security

All investment accounts are protected against broker failure by the Securities Investor Protection Corporation (SIPC). Your account is covered for up to $500,000 in cash and securities, including up to $250,000 in cash.

J. P. Morgan Self-Directed Investing Mobile App

You can invest with SDI using the Chase Mobile App, which is available at The App Store for iOS devices, 11.0 and later. The app is compatible with iPhone, iPad, and iPod touch. Its also available at Google Play for Android devices, 6.0 and up.

You can use the mobile app to manage all your accounts with J.P. Morgan including your Self-Directed Investment accounts. That includes trading securities and funds and taking advantage of all the tools and research information available on the platform.

J. P. Morgan Customer Service

Customer service is available by phone Monday through Friday, from 8:00 am to 7:00 pm, Eastern time. However, you can place online trades anytime between 6:00 am and 2:00 am Eastern time.

FAQ

Do I need to be an existing Chase account holder to open a Self-Directed Investing account?

No. There is no requirement for you to be a current Chase account to participate in the service, nor is there a requirement for you to open a Chase bank or credit card account as a condition of your SDI account.

Can I open a Self-Directed Investing account in the name of my business?

No. SDI accounts are only available to individuals and joint personal account holders. The platform is not designed for business customers.

I like that Self-Directed Investing offers commission-free trades on stocks, options, and ETFs. But why do they charge such high fees for representative-assisted trades?

The practice of charging fees for trading with live assistance is common in the brokerage industry, even now that most brokers have eliminated commissions for online trades. Self-Directed Investing representative-assisted trade fees are consistent with those charged by other brokerage firms. A major reason brokerage firms are able to offer commission-free trades is because they don’t require assistance from broker employees. Fewer assisted trades means lower payroll costs for the brokerage firm, enabling them to charge no fees for online trades.

If I use the Portfolio Builder, what kind of investments can I hold?

The Portfolio Builder tool enables you to invest through ETFs and stocks. This includes both U.S. and international equities, as well as core fixed income and commodities. However, the tool does not allow mutual funds in the portfolio.

  • Open to non-Chase customers — Self-Directed Investing is available to both Chase and non-Chase customers and investors.

  • Commission-free trades — This applies to stocks, ETFs, and options (though like most brokers, there is a per contract fee with options).

  • Generous sign-up bonus — These range from $50 to $700.

  • Both self-directed investing or professionally managed — Ability to choose either self-directed investing through Self-Directed Investing Trade or a professionally managed option through SDI Portfolios – or you can use a combination of both.

  • Tools to help create and manage a portfolio — The Portfolio Builder tool helps create and manage your portfolio, even as a self-directed investor.


  • Investment options are a bit limited — The platform doesn’t allow you to invest in real estate investment trusts (REITs) or penny stocks (stocks that either aren’t listed on a major exchange and have a price of less than $5).

  • Limited customer service hours — J.P. Morgan’s customer service live support is limited to business days until 7:00 pm. This is substantially less than the 24/7 customer support available with most major competitors.

  • High Advisory fee — The advisory fee of 0.35% on SDI Portfolios is higher than the industry average of 0.25% for robo-advisors.

Alternatives to J. P. Morgan Self-Directed Investing

The investment brokerage field is a crowded one, and some of the alternatives you may want to consider include the following:

E*TRADE

E*Trade operates similarly to J.P. Morgan Self-Directed Investing in that it has both commission-free self-directed trading, as well as managed portfolio options. But the platform offers a more comprehensive suite of investment tools, and also a wider range of investment options. For example, you can also trade futures and FOREX.

Ally Invest

Ally Invest, with both self-directed investing and a managed portfolio option. And just as is the case with J.P. Morgan Self-Directed Investing, you can also take advantage of the banking services and high-yield savings accounts and CDs offered through Ally Bank. Much like E*TRADE, Ally Invest also offers more diverse investment options than J.P. Morgan Self-Directed Investing.

TD Ameritrade

Tied in with TD Bank, TD Ameritrade also enables you to invest where you bank. They similarly offer no commission trading on stocks, ETFs, and options. And like most brokerage firms, they also offer managed portfolio options. Once again, TD Ameritrade offers something that J.P. Morgan Self-Directed Investing doesn’t, and that’s commission-free mutual fund trades. In fact, they offer more than 4,000 no transaction fee mutual funds to choose from.

Is J.P. Morgan Self-Directed Investing for You?

J.P. Morgan Self-Directed Investment will work best for existing customers and clients of J.P. Morgan. If you already have a banking relationship and/or a credit card through the company, investing with them will be a natural choice.

If you’re not an existing J.P. Morgan customer client, or even if you are, you should be aware that this is strictly for self-directed investors. It doesn’t have quite as many investment tools and resources as other major brokerage platforms. For that reason, it’s best suited to self-directed investors who have their own investment resources and tools.

However, the platform was launched less than two years ago and is still evolving. With J.P. Morgan behind it, we can expect better things to come.

If you’re not a self-directed investor, you can still invest through Automated Investing. This is a robo-advisor, and provides all the benefits that come with low-cost, professional investment management. However, the annual advisory fee of 0.35% is higher than the industry standard fee of 0.25%. Those are the fee levels you can expect from popular competitors, like Betterment and Wealthfront.

But if you’re looking to combine investing with banking, there’s no better place to do it than with J.P. Morgan. As the largest bank in the U.S., operating in 36 states–and determined to enter the remaining 14–they offer something for everyone.

Bottom Line

J.P. Morgan Self-Directed Investing is a solid investment platform for self-directed investors who have access to a reliable source of investment tools and research. The platform may expand those tools and resources going forward, but they’re not quite there yet. In the meantime, they offer commission-free trades, as well as a managed portfolio option if you’re not quite ready for self-directed trading.

Disclosure: INVESTMENT AND INSURANCE PRODUCTS ARE: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE

Source: doughroller.net

Posted in: Investing, Money Basics Tagged: 2, advisor, age, All, AllY, Alternatives, android, app, ARM, asset, asset allocation, assets, average, balance, Bank, Banking, basic, Benefits, best, betterment, bills, bond, bonds, bonus, Broker, brokerage, brokerage account, brokerage firms, brokers, builder, business, cash, CDs, certificates of deposit, chase, choice, commission, commissions, commodities, company, corporate bonds, cost, costs, country, Credit, credit card, credit card account, credit cards, customer service, deposit, disclosure, equities, estate, ETFs, existing, experience, faq, FDIC, FDIC insured, Features, Fees, financial, Financial Wize, FinancialWize, first, fixed, fixed income, Free, fund, funding, funds, futures, glide, goals, Google, government, growth, hold, home, hours, house, How To, id, in, Income, industry, Insights, Insurance, international, Invest, invest in real estate, Investing, investing strategies, investment, investment portfolio, investments, Investor, investors, iOS, iPhone, IRA, job, Live, low, LOWER, Make, manage, market, Market Insights, mobile, Mobile App, money, More, municipal bonds, mutual funds, natural, new, offer, offers, or, organization, Other, password, penny, penny stocks, Personal, place, Planning, plans, play, Popular, portfolio, portfolios, price, products, Professionals, programs, protection, ready, Real Estate, real estate investment, REITs, Research, retirement, Review, risk, robo-advisor, robo-advisors, roth, Roth IRA, routing number, savings, Savings Accounts, Secondary, secondary market, securities, securities investor protection corporation, security, single, SIPC, social, social security, states, stocks, Strategies, suite, taxable, taxable brokerage account, td bank, time, time horizon, tools, trading, traditional, Transaction, transfer money, Treasury, treasury bills, trusts, U.S. Treasury, under, united, united states, value, wealthfront, will, work

Apache is functioning normally

August 25, 2023 by Brett Tams

Betterment and Betterment are not only two of the most popular robo advisors in the industry, but they may very well be the most innovative in the field. Though they represent two of the first robo advisors, both have built out their platforms and now offer robust portfolio options and other services to their clients.

Though they each have their own nuances–and specializations–you really can’t go wrong with either platform. Each will take complete control of your portfolio, managing every aspect of it for a very low annual fee. When you sign up with either service, your only responsibility will be to fund your account on a regular basis.

But what if you’re either new to robo advisors or you’re considering a switch from another one? If you’re researching robo advisors, the information will inevitably lead to Betterment and Wealthfront. So let’s take a look at the two heavyweights in the robo advisor space and see which might be a better fit for your portfolio. Listen to the Podcast of this Article

About Betterment

Betterment is not only the original robo advisor, but its also the largest independent robo (along with Wealthfront), with $21 billion in assets under management. The company is based in New York City and began operations in 2008.

As a robo advisor, Betterment is an automated, online investment platform that handles all aspects of investment management for you. When you sign up for the service, you complete a questionnaire that will help determine your investment goals, time horizon, and investment risk tolerance. From that information, Betterment creates a portfolio of stocks and bonds to meet your investor profile.

They dont actually invest your money in individual securities, but instead through exchange-traded funds (ETFs), each representing a specific asset class. They can build an entire portfolio for you through about a dozen funds that will give you exposure to the entire global financial markets.

All this is done for a low annual management fee. Your only responsibility will be to fund that your account on a regular basis and let Betterment handle all the management details for you.

Better Business Bureau rates Betterment as A+, which is the highest rating in a range from A+ to F. The company also scores 4.8 stars out of 5 by more than 20,000 users on the App Store, and 4.5 stars out of 5 by more than 4,500 users on Google Play.

About Wealthfront

Wealthfront is, with Betterment, the largest independent robo advisor, and Betterment’s primary competitor. In fact, with over $24 billion in assets under management, its now slightly larger than Betterment. The company is based in Redwood City, California, and launched operations in 2011.

As a robo advisor, it works much the same as Betterment, creating a portfolio for you based on your answers to a questionnaire when you open your account. Wealthfront will also manage your account using a small number of ETFs spread across various asset classes. But on larger accounts, they’ll also add individual stocks to get greater benefit from tax-loss harvesting.

Like Betterment and virtually all robo advisors, Wealthfronts basic investment strategy is based on Modern Portfolio Theory (MPT), which emphasizes asset allocation over individual security selection.

Similar to Betterment, and really all robo advisors, your account will receive full investment management for a very low annual fee. Your only responsibility will be to fund your account on a regular basis.

Unfortunately, Wealthfront has a Better Business Bureau rating of F, due to unanswered complaints. However, the company gets 4.9 stars out of 5 from more than 9,000 users on the App Store, and 4.8 stars out of 5 by more than 2,700 users on Google Play.

Investment Strategies Betterment vs Wealthfront

Betterment Investment Strategy

Betterment offers two plan levels, Digital and Premium. Premium is available for minimum account balances of $100,000, while Digital is open to all account balances. Like many robo advisors, Betterment has evolved past building and managing a basic portfolio comprised of a mix of stocks and bonds.

For example, if you choose the Premium Plan, you’ll have access to live financial advisors. But there are many other services and plans to choose from.

Read More: Betterment Promotions

Basic portfolio mix

Your portfolio will be invested in as many as six stock asset classes/ETFs and eight bond asset classes/EFTs.

Stocks:

  • US Total Stock Market
  • US Value Stocks Large Cap
  • US Value Stocks Mid Cap
  • US Value Stocks Small Cap
  • International Developed Markets Stocks
  • International Emerging Markets Stocks

Bonds:

  • US High-quality Bonds
  • US Municipal Bonds
  • US Inflation-Protected Bonds
  • US High-Yield Corporate Bonds
  • US Short-term Treasury Bonds
  • US Short-term Investment-Grade Bonds
  • International Developed Markets Bonds
  • International Emerging Markets Bonds

Use of value stocks

Notice that three of the six stock asset classes involve value stocks. This is a specialization of Betterment and represents a time-honored stock market investment strategy. Value stocks are investments in companies with stock prices that are low in relation to their competitors by various standard measurements. But the companies are deemed to be fundamentally sound, and therefore likely to outperform the general market once the investment community realizes the true value of the stocks.

In this way, Betterment makes an attempt to outperform the general market, such as the S&P 500 or even some broader indices.

Smart Beta

This is another investment strategy Betterment uses with the potential to outperform the general market. This specific portfolio is managed by Goldman Sachs. Smart Beta is a form of active portfolio management, which seeks high-quality companies with low volatility, strong momentum, and good value.

Since its a higher risk/high reward type of investing, it requires a minimum portfolio of $100,000.

Socially responsible investing (SRI)

This is an investment option increasingly being offered by robo advisors. However, with Betterment only a portion of your portfolio will be invested in SRI. They replace the ETFs in the International Emerging Market Stocks and US Value Stocks Large Cap with ETFs that specialize in socially responsible investing in those sectors.

Learn More: The Pros and Cons of Socially Responsible Investing

Flexible Portfolios

If you want more control over your investment portfolio, you can choose this option. It allows you to adjust the individual asset class weights in your portfolio allocation. Its also designed for more advanced investors and gives you an opportunity to increase allocations in asset classes you believe are likely to outperform the market.

BlackRock Target Income

For investors looking for income and safety of principal, Betterment offers this portfolio, which consists of 100% of bonds. There is some risk of principal in this portfolio but it’s designed to be minimal. You can even choose the level of risk and return you want. It won’t provide the type of long-term gains you’ll get from a stock portfolio, but it will offer the kind of steady income that will work especially well for retirees.

Tax-loss Harvesting

Tax-loss harvesting is a year-end strategy in which asset classes with losses are sold (and later replaced with comparable ones) to offset gains in winning asset classes. The strategy helps to defer taxable capital gains on growing asset classes.

Betterment makes this strategy available on all account balances. However, it’s only offered on taxable accounts since it’s completely unnecessary for tax-sheltered retirement plans.

Betterment Everyday Cash Reserve

If you’re looking to add a cash option to your investment portfolio, you can do it through Betterment Cash Reserve. The account is eligible for FDIC insurance up to $1 million. The minimum deposit is $10, and offers unlimited transfers, both in and out of your account.

Betterment Checking

The Betterment Checking account gives you the flexibility to manage your money in a way that best fits your financial goals. You’ll get this account with a debit card and you can use it to pay in person or online. You’ll also get FDIC insurance on your money.

The Betterment Checking account is an innovative way to manage your money. It’s faster, more secure, and requires zero minimum balance requirements. You can now deposit checks using their streamlined mobile app. Just take a picture and deposit checks will be there for you on the other side.

Wealthfront Investment Strategy

Unlike Betterment, Wealthfront has a single plan for all investors, with an annual management fee of 0.25% on all account balances. And like Betterment, Wealthfront has expanded its investment options menu in many different directions.

Basic Portfolio Mix

Wealthfront uses 11 asset classes in the construction of its portfolios, including four stock funds, five bond funds, plus real estate and natural resources.

The allocation looks like this:

Stocks:

  • US Stocks
  • Foreign Stocks
  • Emerging Market Stocks
  • Dividend Stocks

Bonds:

  • Treasury Inflation-Protected Securities (TIPS)
  • Municipal Bonds (on taxable investment accounts only)
  • Corporate Bonds
  • U.S. Government Bonds
  • Emerging Market Bonds

Alternatives:

  • Real Estate
  • Natural Resources

Use of Alternative Investments

Wealthfront includes real estate and natural resources in its portfolio composition. The real estate sector invests in companies that provide exposure to commercial property, apartment complexes, and retail space. Natural resources are held in ETFs representing that sector.

The combination of the two offers a stronger diversification away from a portfolio comprised entirely of stocks and bonds, largely because they offer protection in an inflationary environment. It’s possible for these sectors to perform well when the general financial markets are not.

Smart Beta

The Smart Beta option attempts to outperform the general financial markets. The strategy deemphasizes market capitalization in the creation of a portfolio. For example, rather than using the capitalization allocations of certain companies within the S&P 500, the strategy might increase some allocations and decrease others. It’s more of an active investment strategy and requires a minimum investment portfolio of $500,000.

Wealthfront Risk Parity

This is another investment strategy for investors with larger accounts and a greater appetite for risk. Its been shown to provide higher long-term returns, but it may use leverage to increase those returns.

Stock-level Tax-loss Harvesting

Tax-loss harvesting is available on all taxable investment accounts. But Stock-level Tax-loss Harvesting is available to larger accounts to provide more aggressive tax deferral.

This is a fairly complex investment strategy, but it involves the use of individual stocks to take greater advantage of tax-loss harvesting. The use of individual stocks will make it easier to buy and sell securities to minimize capital gains taxes. Depending on the specific plan, the required minimum investment ranges between $100,000 and $500,000.

Wealthfront Path

This is a software-based financial advisory, providing you with financial planning tools. They can help you plan for retirement or saving for the down payment on a house or a college education for one or more of your children. The apps run what-if scenarios, that can make projections based on various savings levels for each of your specific goals.

Though it doesn’t offer live financial advice, the service is free to use.

Wealthfront Cash

You can open an interest-bearing cash account with Wealthfront Cash Account with just $1. There’s no market risk, no fees, unlimited free transfers, and your account is FDIC insured for up to $5 million. The account currently pays 4.30% APY and provides a safe, cash investment to go with your stock portfolios.

And now, Wealthfront Cash allows you to get your paycheck up to two days early when you set up a direct deposit. They’ve also implemented the ability for you to invest directly into the market within minutes, straight from your Wealthfront Cash account. That means you can get paid early and immediately invest – giving you about extra days of investing each year.

Read more: Wealthfront Cash Account review

Wealthfront Portfolio Line of Credit

Much like a home equity line of credit, the Wealthfront Portfolio Line of Credit is secured by your investment account. You can borrow up to 30% of the value of your account for any purpose. There’s no prequalification since the line of credit is completely secured by your investment account.

The line of credit is automatic if you have a non-retirement account balance of at least $25,000. You can request funds against the line on your smartphone and receive them in as little as one business day.

Current interest rates paid on the line range between 2.45% and 3.70% APR, depending on the size of your account.

Retirement Planning Betterment vs. Wealthfront

One of the most common uses of robo advisors is the management of retirement accounts. Both Betterment and Wealthfront can manage all types of IRA accounts, similar to the way they do with taxable accounts. But each also offers some level of retirement planning.

Read More: Best Robo Advisors Find out which one matches your investment needs.

Betterment Retirement Planning

Betterment is strong in this category because in addition to their regular portfolios, they also offer income-specific investment options, like their BlackRock Target Income and Everyday Cash Reserve. The Target Income option in particular focuses on maximizing interest income, which is exactly what most people are looking for in retirement.

One of the advantages Betterment offers is that you can connect your 401(k) with your investment account. Betterment cant manage the 401(k) (unless chosen to do so by your employer through their 401(k) management plan), but they can coordinate your Betterment retirement account(s) with the activity in your employer plan.

And of course, if you have at least $100,000 in your Betterment account, you can enroll in the Premium plan and have access to live financial advisors.

But Betterment also offers its Retirement Savings Calculator to help you know if you’re on track for your retirement. By answering just four questions, they’ll be able to determine if your current retirement plan will provide the income you’ll need in retirement, taking your projected Social Security income into consideration. If it isn’t, it’ll let you know how much more you need to invest on a regular basis.

Wealthfront Retirement Planning

You can take advantage of Wealthfront Path to help you with retirement planning. You’ll start by linking your financial accounts so the program can get a better understanding of your finances. Recommendations to help you reach your goals are made based on the amount of regular contributions you’re making and the income you will need in retirement.

Path will analyze your spending patterns, your average annual savings rate, the interest you’re earning on those savings, as well as your investment and retirement contributions. It will also analyze the fees you’re paying on your investment and retirement accounts. Loan accounts are analyzed as well.

The information is assembled, and future projections are made. You’ll be given advice on any needed increases in savings for retirement contributions, as well as asset allocations. And perhaps best of all, since all your financial accounts are linked to the service, it will provide continuous updates on your progress toward your retirement goals.

Betterment Pros & Cons

  • No minimum initial investment or account balance requirement.

  • Reduced fee structure on larger account balances.

  • Use of value stocks seeks to outperform the general market.

  • Unlimited access to certified financial planners on account balances over $100,000.

  • Comprehensive retirement planning package.


  • Limited investment diversification, excluding alternative asset classes, like real estate and natural resources.

  • The annual management fee rises from 0.25% to 0.40% if you select the Premium plan.

  • The reduced fee structure on large account balances doesn’t kick in until you reach a minimum of $2 million.

Wealthfront Pros & Cons

  • Your account includes alternative investments, like real estate and natural resources. This offers greater diversification than a portfolio invested only in stocks and bonds.

  • The minimum initial investment is just $500. That’s not zero, but it’s an amount most small investors can comfortably start with.

  • Flat-rate fee of 0.25% on all account balances.

  • Larger accounts get the benefit of more efficient tax-loss harvesting strategies through Wealthfront Risk Parity.

  • The Wealthfront Portfolio Line of Credit lets you borrow up to 30% of the value of your non-retirement accounts at very low interest and with no credit check.


  • There’s no reduced management fee for larger account balances.

  • The retirement planning tool (Path) is an automated system and does not provide advice from live financial advisors.

  • Poor rating from the Better Business Bureau.

Bottom Line

We’ve covered a lot of territory and details in this side-by-side comparison of Betterment vs Wealthfront. The summary table below should help you to be able to compare the various services each offers with a quick glance.

Category Betterment Wealthfront
Minimum initial investment Digital: $0
Premium: $100,000
$500
Promotions Up To 1 Year Free First $5,000 Managed Free
Management fees Digital: 0.25% up to $2 million, then 0.15% above Premium: 0.40% to $2 million, then 0.30% 0.25%
Available accounts Individual and joint taxable accounts; traditional, Roth, rollover and SEP IRAs; trusts and nonprofit accounts Individual and joint taxable accounts; traditional, Roth, rollover and SEP IRAs; trusts and 529 accounts
Rebalancing Yes Yes
Dividend reinvestment Yes Yes
Tax-loss harvesting – on taxable accounts only Yes Yes
Socially-responsible investing Yes Available through Smart Beta ($500,000 minimum) and Stock-level Tax-Loss Harvesting ($100,000 minimum)
Smart Beta investing Yes Yes, minimum $500,000
Interest bearing cash account Yes Yes
Line of credit No Yes
Financial advice Yes, on Premium Plan only Automated only
Mobile app Yes Yes
Customer service Phone and email, Monday through Friday, 9:00 am to 6:00 pm Eastern time Phone and email, Monday through Friday, 10:00 am to 8:00 pm Eastern time

You’ve probably already guessed were not declaring a winner between these two popular roboadvisors. Both are first rate and you can’t go wrong with either. More than anything, your decision will likely come down to specific details–what features and benefits one offers that better suits your own personal preferences and investment style.

But one advantage that’s undeniable with both Betterment and Wealthfront is that not only is each a first-rate service, but they provide enough investment options and related services that they can accommodate your growing financial capabilities and needs well into the future.

For example, while you may start out with a basic managed portfolio, you’ll eventually want to get into higher risk/higher reward options as your wealth grows. As well, you’ll like the flexibility of having high-interest cash investment options, as well as low-cost or free financial or retirement advice.

We like both these services and are certain you can’t go wrong with whichever one you choose.

Betterment Cash Reserve Disclosure – Betterment Cash Reserve (“Cash Reserve”) is offered by Betterment LLC. Clients of Betterment LLC participate in Cash Reserve through their brokerage account held at Betterment Securities. Neither Betterment LLC nor any of its affiliates is a bank. Through Cash Reserve, clients’ funds are deposited into one or more banks (“Program Banks“) where the funds earn a variable interest rate and are eligible for FDIC insurance. Cash Reserve provides Betterment clients with the opportunity to earn interest on cash intended to purchase securities through Betterment LLC and Betterment Securities. Cash Reserve should not be viewed as a long-term investment option.

Funds held in your brokerage accounts are not FDIC‐insured but are protected by SIPC. Funds in transit to or from Program Banks are generally not FDIC‐insured but are protected by SIPC, except when those funds are held in a sweep account following a deposit or prior to a withdrawal, at which time funds are eligible for FDIC insurance but are not protected by SIPC. See Betterment Client Agreements for further details. Funds deposited into Cash Reserve are eligible for up to $1,000,000.00 (or $2,000,000.00 for joint accounts) of FDIC insurance once the funds reach one or more Program Banks (up to $250,000 for each insurable capacity—e.g., individual or joint—at up to four Program Banks). Even if there are more than four Program Banks, clients will not necessarily have deposits allocated in a manner that will provide FDIC insurance above $1,000,000.00 (or $2,000,000.00 for joint accounts). The FDIC calculates the insurance limits based on all accounts held in the same insurable capacity at a bank, not just cash in Cash Reserve. If clients elect to exclude one or more Program Banks from receiving deposits the amount of FDIC insurance available through Cash Reserve may be lower. Clients are responsible for monitoring their total assets at each Program Bank, including existing deposits held at Program Banks outside of Cash Reserve, to ensure FDIC insurance limits are not exceeded, which could result in some funds being uninsured. For more information on FDIC insurance please visit www.FDIC.gov. Deposits held in Program Banks are not protected by SIPC. For more information see the full terms and conditions and Betterment LLC’s Form ADV Part II.

DoughRoller receives cash compensation from Wealthfront Advisers LLC (“Wealthfront Advisers”) for each new client that applies for a Wealthfront Automated Investing Account through our links. This creates an incentive that results in a material conflict of interest. DoughRoller is not a Wealthfront Advisers client, and this is a paid endorsement. More information is available via our links to Wealthfront Advisers.

Source: doughroller.net

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Apache is functioning normally

August 24, 2023 by Brett Tams

Robo-advisors have barely been around for 10 years, but in the past couple of years several have been steadily expanding their investment menus, and even offering valuable add-on services. One of the leaders in this regard is Wealthfront. The robo-advisor has been growing its investment capability in every direction but is now even offering financial planning. The platform now bills itself as offering High-Interest Cash, Financial Planning & Robo-Investing for Millennials. If you’re looking for more than just investing, Wealthfront has it. And as has become their trademark, it’s all available at a low cost.

What is Wealthfront?

Based in Palo Alto, California, and founded in 2011, Wealthfront has about $25 billion in assets under management. It’s the second-largest independent robo-advisor, after Betterment. And while dozens of robo-advisors have arrived in recent years, Wealthfront stands out as one of the very best. There isn’t any one thing Wealthfront does especially well, but many. And they’re adding to their menu of services all the time.

Their primary business of course is automated online investing. You can open an account with as little as $500, and the platform will design a portfolio for you, then manage it continuously. Your money will be invested in a globally diversified portfolio of ETFs–just like most other robo-advisors. But Wealthfront takes it a step further, and also adds real estate and natural resources.

Like other robo-advisors, Wealthfront uses Modern Portfolio Theory (MPT) in the creation of portfolios. They first determine your investment goals, time horizon, and risk tolerance, then build a portfolio designed to work within those parameters. MPT emphasizes proper asset allocation to both maximize returns, and minimize losses.

But in a major departure from other robo-advisors, Wealthfront now offers the ability to customize your portfolio and get access to a variety of investment methodologies and portfolios, including Smart Beta, Risk Parity and Stock-Level Tax-Loss Harvesting. And more recently, they’ve also stepped into the financial planning arena. They now offer several financial planning packages, customized to very specific needs, including retirement planning and college planning.

If you haven’t checked out Wealthfront in the past year or so, you definitely need to give it a second look. This is a robo-advisor platform where things are happening–fast!

How Wealthfront Works

When you sign up with Wealthfront, they first have you complete a questionnaire. Your answers will determine your investment goals, time horizon, and risk tolerance. A portfolio invested in multiple asset classes will be constructed, with an exchange-traded fund (ETF) representing each.

The advantage of ETFs is that they are low-cost, and enable the platform to expose your portfolio to literally hundreds of different companies in each asset class. With your portfolio invested in multiple asset classes, it will literally contain the stocks and bonds of thousands of companies and institutions, both here in the U.S. and abroad.

Wealthfront offers tax-loss harvesting on all portfolio levels. But they’ve also added portfolio options for larger investors, that include stocks as well as ETFs. The inclusion of stocks gives Wealthfront the ability to be more precise and aggressive with tax-loss harvesting.

Each portfolio also comes with periodic rebalancing, to maintain target asset allocations, as well as automatic dividend reinvestment. As is typical with robo-advisors, all you need to do is fund your account–Wealthfront handles 100% of the investment management for you.

More recently, Wealthfront has also added external account support. The platform can now incorporate investment accounts that are not directly managed by the robo-advisor. This will provide a high-altitude view of your entire financial situation, helping you explore what’s possible and providing guidance to optimize your finances.

And much like many large investment brokers, Wealthfront now offers a portfolio line of credit. It’s available only to investors with $25,000 or more in a taxable account, but if you qualify you can borrow money against your investment account and set your own repayment terms in the process

Wealthfront Features and Benefits

Minimum initial investment: $500

Account types offered: Individual and joint taxable accounts; traditional, Roth, rollover and SEP IRAs; trusts and 529 college accounts

Account access: Available in web and mobile apps. Compatible with Android devices (5.0 and up), and available for download at Google Play. Also compatible with iOS (11.0 and later) devices at The App Store. Compatible with iPhone, iPad and iPod touch devices.

Account custodian: Account funds are held in a brokerage account in your name through Wealthfront Brokerage Corporation, which has partnered with RBC Correspondent Services for clearing functions, such as trade settlement. IRA accounts are held with Forge Trust.

Customer service: Available by phone and email, Monday through Friday, from 7:00 AM to 5:00 PM, Pacific time.

Wealthfront security: Your funds invested with Wealthfront are covered by SIPC, which insures your account against broker failure for up to $500,000 in cash and securities, including up to $250,000 in cash.

Wealthfront uses third-party providers to maintain secure, read-only links to your account. The providers specialize in tracking financial data, as well as employ robust, bank-grade security, and in general, they follow data protection best practices. In addition, Wealthfront does not store your account password.

Wealthfront Investment Methodology

For regular investment accounts, Wealthfront constructs portfolios from a combination of 10 different specific asset classes. This includes four stock funds, four bond funds, a real estate fund, and a natural resources fund.

Each portfolio will contain various allocations of each asset class, based on your investor profile as determined by your answers to the questionnaire. The one exception is municipal bonds. That allocation will appear only in taxable accounts. IRAs don’t include them since the accounts are already tax-sheltered.

Notice in the table below that most asset classes have two ETFs listed. This is part of Wealthfront’s tax-loss harvesting strategy. In each case, the two ETFs are very similar. To facilitate tax-loss harvesting, one fund position will be sold, then the second will be purchased at least 30 days later, to restore the asset class. (We’ll cover tax-loss harvesting in a bit more detail a little further down.)

The ETFs used for each asset class are as follows, as of December 29, 2018:

Specific Asset ClassGeneral Asset ClassPrimary ETFSecondary ETF

US Stocks Stocks Vanguard CRSP US Total Market Index (VTI) Schwab DJ Broad US Market (SCHB)
Foreign Stocks Stocks Vanguard FTSE Developed All Cap ex-US Index (VEA) Schwab FTSE Dev ex-US (SCHF)
Emerging Markets Stocks Vanguard FTSE Emerging Markets All Cap China A Inclusion Index (VWO) iShares MSCI EM (IEMG)
Real Estate Real Estate Vanguard MSCI US REIT (VNQ) Schwab DJ REIT (SCHH)
Natural Resources Natural Resources State Street S&P Energy Select Sector Index (XLE) Vanguard MSCI Energy (VDE)
US Government Bonds Bonds Vanguard Barclays Aggregate Bonds (BND) Vanguard Barclays 5-10 Gov/Credit (BIV)
TIPS Bonds Schwab Barclays Capital US TIPS (SCHP) Vanguard Barclays Capital US TIPS 0-5 Years (VTIP)
Municipal Bonds (taxable accounts only) Bonds Vanguard S&P National Municipal (VTEB) State Street Barclays Capital Municipal (TFI)
Dividend Stocks Bonds Vanguard Dividend Achievers Select (VIG) Schwab Dow Jones US Dividend 100 (SCHD)

Wealthfront’s historical returns are as follows (through 1/31/2019). But keep in mind these numbers are general. Since the portfolios designed for each investor are unique, your returns will vary.

Specialized Wealthfront Portfolios

As mentioned in the introduction, Wealthfront has rolled out several different investment options, in addition to its regular robo-advisor portfolios. Each represents a specific, and generally more specialized investment strategy, and is typically available to those with larger investment accounts.

Smart Beta: You’ll need at least $500,000 to be eligible for this portfolio. Smart beta departs from traditional index-based investing, which relies on market capitalization. For example, since Apple is one of the most highly capitalized S&P 500 stocks, it has a disproportionate weight in strict S&P 500 index funds. In a smart beta portfolio, the position in Apple will be reduced based on other factors.

In general, under smart beta, the weighing of stocks in the fund uses a variety of factors that are less dependent on market capitalization. There’s some evidence this investment methodology produces higher returns. This portfolio is available at no additional fee.

Wealthfront Risk Parity Fund: This is actually a mutual fund–the first offered by Wealthfront. It involves the use of leverage with some positions within the portfolio. It attempts to achieve higher long-term returns by equalizing the risk contributions of each asset class. It’s based on the Bridgewater Hedge Fund, and requires a minimum of $100,000, with an additional annual fee of 0.25% (0.50% total). This is the only Wealthfront portfolio that charges a fee over and above the regular advisory fee.

Socially responsible investing (SRI): Wealthfront just recently began to offer a specific SRI portfolio option. Once you sign up, you’ll be able to customize your portfolio and add socially responsible ETFs.

Sector-specific ETFs: If you want to invest in a particular portion of the market, such as technology or healthcare, Wealthfront gives you the option to build a portfolio that focuses on certain industries to portions of the stock market.

Customized Wealthfront Portfolios:

Wealthfront also lets investors build their own portfolios, which is somewhat uncommon among robo-advisors.

Most robo-advisors will build your portfolio automatically based on your risk tolerance and goals. If you like that service, Wealthfront can do it. However, more hands-on investors are free to make tweaks to the automatically designed portfolio by adding or removing ETFs.

You can also build a portfolio entirely from scratch if you’d rather. You can choose which ETFs to invest in and how much you want to invest in them. You can then let Wealthfront handle things like rebalancing and tax-loss harvesting while maintaining the portfolio you desire.

Wealthfront Tax-loss Harvesting

If there’s one investment category where Wealthfront stands above other robo-advisors, it’s tax-loss harvesting. Not only do they offer it on all regular taxable accounts (but not IRAs, since they’re already tax-sheltered), but they also offer specialized portfolios that take it to an even higher degree.

Wealthfront starts with a tax location strategy. That involves holding interest and dividend-earning asset classes in IRA accounts, where the predictable returns will be sheltered from income tax. Capital appreciation assets, like stocks, are held in taxable accounts, where they can get the benefit of lower long-term capital gains tax rates.

But for larger portfolios, Wealthfront offers Stock-level Tax-Loss Harvesting. Three specialized portfolios are available, using a mix of both ETFs and individual stocks. The purpose of the stocks is to provide more specific tax-loss harvesting opportunities. For example, it may be more advantageous to sell a handful of stocks to generate tax losses, than to close out an entire ETF.

Given that Wealthfront puts such heavy emphasis on tax-loss harvesting, it’s not surprising they’ve published one of the most respected white papers on the subject on the internet. If you want to know more about this topic, it’s well worth a read. The paper concludes that tax-loss harvesting can significantly increase the return on investment of a typical portfolio.

US Direct Indexing

US Direct Indexing is an enhanced level of tax-loss harvesting that Wealthfront offers to people with account balances exceeding $100,000.

Instead of building a portfolio of ETFs, Wealthfront will use your money to directly purchase shares in 100, 500, or 1,000 US companies. By buying shares in so many companies, Wealthfront can emulate an index fund in your portfolio while owning individual shares in the businesses.

Owning individual shares in hundreds of companies makes tax-loss harvesting easier as it lets Wealthfront’s algorithm trade based on movements in individual stocks rather than in funds. This can increase the number of tax losses that Wealthfront harvests each year, reducing your income tax bill.

Other Wealthfront Features

Wealthfront Cash Account

Wealthfront offers a cash account where you can safely and securely store your money for anything–emergencies, a down payment for a home, or to later invest. By working with what they call Program Banks, Wealthfront has quadrupled the normal FDIC insurance on this account, so you’re protected for up to $5 million.

There’s also no market risk since it’s not an investment account and the money isn’t being invested anywhere. You can make as many transfers in and out of the account as you’d like, and it only takes $1 to start.

So what’s the catch?

There really isn’t one. Wealthfront will skim a little off the top to make some money before giving you an industry-leading 4.30% APY, but other than that, you’re just giving them more financial data. Since we’re doing this all the time with technology anyway, it shouldn’t make that big of a difference.

I see no downside, especially if you’re already a client of Wealthfront.

They’re really making a play to be your all-in-one financial services provider, too.

A new feature, just launched, is the ability to use your cash account as a checking account. This includes the ability to access your paycheck up to two days early when you set up a direct deposit. Additionally, you can invest in the market within minutes using your Wealthfront Cash account. Put the two together and you give yourself the ability to invest more than 100 days more in the market. The account also allows you to auto-pay bills and use apps like Venmo and PayPal to send money to friends or family. Account-holders also get a debit card to make purchases and get cash from ATMs. And you can use the account to organize your cash into savings buckets – like an emergency fund, down payment on a house, or other large purchase – and use Wealthfront’s Self-Driving Money offering to automate your savings into those buckets.

If you have cash that’s getting rusty in a traditional bank account and you want to earn more, the Wealthfront Cash Account is a great place to keep it.

Read more about the cash account in our Wealthfront Cash Account full review.

Wealthfront Portfolio Line of Credit

This feature is available if you have at least $25,000 in your Wealthfront account. It allows you to borrow up to 30% of your account value, and currently charges interest rates between 3.15% and 4.40% APR depending on account size. You can make repayments on your own timetable, since you’re essentially borrowing from yourself. And since the credit line is secured by your account, you don’t need to credit qualify to access it.

Wealthfront Free Financial Planning

This is Wealthfront’s entry into financial planning. But like everything else with Wealthfront, this is an automated service. There are no in-person meetings or phone calls with a certified financial planner. Instead, technology is used to help you explore your financial goals, and to provide guidance to help you reach them. And since the service is technology-based, there is no fee for using it.

The service can be used to help you plan for homeownership, college, early retirement, or even to help you plan to take some time off to travel, like an entire year!

Simply choose your financial objective, enter your financial information, and Wealthfront will direct you on how to plan and prepare.

Self-Driving Money

One of the biggest and largely unrecognized obstacles for most investors is something known as cash drag. That’s when you have too much of your portfolio sitting in cash, which may earn interest, but it doesn’t provide the investment returns you can get in a diversified investment portfolio.

Wealthfront has addressed the cash drag dilemma with their newly released Self-Driving Money features. It’s a free service offered by the robo-advisor that essentially automates your savings strategy. It does this by automatically moving excess cash to help meet your goals, including into investment accounts where it will earn higher returns. And in the process, it eliminates the need to make manual cash transfers, and the judgment needed to decide exactly when to make that happen.

Our vision of Self-Driving Money is going to be a complete game-changer for people’s finances, said Chris Hutchins, Head of Financial Automation at Wealthfront. We want to completely remove the burden of managing your money so you can focus on your career, your family or whatever is most important to you.

You can take advantage of Self-Driving Money from the Wealthfront Cash Account. You’ll set a maximum balance for the connected account, which should be an amount that’s more than you expect to spend or withdraw on a monthly basis.

How It Works

When Wealthfront determines you’re over your maximum balance by at least $100 it will schedule an automatic transfer of the excess cash based on your goals. For example, you can tell Wealthfront you want to save $10,000 in an emergency fund, then max out your Roth IRA, then put the rest toward saving for a down payment on a house. Once you set the strategy, Wealthfront will automate the rest.

And before it happens, you’ll receive an email alert, then always have 24 hours to cancel the transfer if you need to cover unexpected expenses. You’ll also be able to turn on and off your Self-Driving Money plan at any time.

It’s usually possible to set up automated transfers from external accounts into most investment accounts. But what sets Wealthfront apart is the fact that it will make those transfers automatically. They will make sure you always have enough cash to pay your bills, then automatically transfer any excess into your savings buckets or investment accounts to improve the return on your money.

The strategy is designed to optimize your money across spending, savings, and investments, and to make it all flow with no effort on your part. You can simply have your paycheck direct deposited into your external checking account or Wealthfront Cash Account, cover your expected monthly spending, then have excess funds automatically transferred into the Wealthfront account of your choice.

By delivering on its Self-Driving Money vision, Wealthfront is taking the robo-advisor concept to a whole new level. Not only do you not need to concern yourself with managing your investments, but now even funding those investments will happen automatically. The result will be near complete freedom from the financial stresses that plague so many individuals.

Wealthfront Fees

Wealthfront has a single fee structure of just 0.25% per year for their advisory fee. That means you can have a $100,000 portfolio managed for just $250, or only a little bit more than $20 per month.

The one exception is the Wealthfront Risk Parity Fund, which has a total fee of 0.50% per year.

How to Sign Up with Wealthfront

To open an account with Wealthfront, you’ll need to be at least 18 years old, and a U.S. citizen.

You’ll need to provide the following information:

  • Your name
  • Address
  • Email address
  • Social Security number
  • Date of birth
  • Citizenship/residency status
  • Employment status

As is the case with all investment accounts, you’ll also be required to supply documentation verifying your identity. This is usually accomplished by supplying a driver’s license or other state-issued identification.

As mentioned earlier, you complete a questionnaire that will be used to determine your investment goals, time horizon, and risk tolerance. Your portfolio will be based on your answers to that questionnaire, and will be presented to you upon completion of the questionnaire.

For funding, you can use ACH transfers from a linked bank account. You will also have the option to schedule recurring deposits, on a weekly, biweekly, or monthly basis. The platform can even enable you to set up dollar-cost averaging deposits.

If you already have a brokerage account with another company, Wealthfront makes it easy to transfer your funds to your new account. If you’re invested in ETFs that Wealthfront supports, Wealthfront will assist with an in-kind transfer.

That means that you won’t have to sell your shares before transferring funds, which lets you avoid capital gains taxes that would be triggered by a sale.

Wealthfront Alternatives

Wealthfront’s closest competitor, and the robo-advisor that offers the most comparable services, is Betterment. They also have an annual advisory fee of 0.25%, but require no minimum initial investment. That could make it the perfect robo-advisor for someone with no money, who plans to fund their account with monthly deposits. Read the full Betterment review here.

Related: Wealthfront vs. Betterment

Another alternative is M1. Also a robo-advisor, M1 enables you to invest your money in what they call “pies”. These are miniature investment portfolios comprised of both stocks and ETFs. You can invest in existing pies, or create and populate pies of your own design. Once you invest in one or more pies, the platform will automatically manage it going forward. What’s more, M1 is free to use. Read more about M1 here.

Related: Wealthfront vs. Vanguard

Read More: The Best Robo Advisors – Find out which one matches your investment needs.

Wealthfront Pros and Cons

  • Investment options: Wealthfront offers more investment options than just about any other robo-advisor, particularly for investors with at least $100,000.

  • Reasonably priced: The annual fee of 0.25% is extremely reasonable, especially when you consider the degree of sophistication offered by Wealthfront’s investment methodology.

  • Tax-loss harvesting: This is available on all accounts, and Wealthfront is probably better at this investment strategy than any other robo-advisor.

  • Portfolio credit line: Gives you the ability to borrow against your portfolio with ease, and represents a form of margin investing.

  • Financial planning feature: The financial planning service is free to use and is available to all investors.


  • Limited access for smaller investors: Some of the more advanced investment portfolios and services are available only to investors with $100,000 or more to invest.

  • $500 minimum initial investment: It’s a minor issue, though some competitors require no funds to open an account.

FAQs

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Should You Sign Up for Wealthfront?

In a word, absolutely! Wealthfront is one of the very top robo-advisors, and you can’t go wrong with this one. Not only do they offer far more services than most other robo-advisors, but they also allow you to grow along the way. For example, as your account increases in value, you can take advantage of more sophisticated investment strategies, including advanced tax-loss harvesting.

That Wealthfront offers its portfolio line of credit and free financial planning services only makes the platform a bit more attractive, But the real benefit is the actual investment service. Wealthfront’s investment service comes extremely close to that of traditional human investment advisors, but at only a fraction of the annual cost.

Source: doughroller.net

Posted in: Investing, Money Basics Tagged: 2019, 529, About, ACH, actual, Advanced, advisor, All, Alternatives, android, app, apple, appreciation, Apps, apr, asset, asset allocation, assets, Auto, Automate, automatic, Automatic Transfer, automation, balance, Bank, bank account, banks, barclays, before, Benefits, best, best practices, betterment, big, bills, bond, bond funds, bonds, Borrow, borrowing, Broker, brokerage, brokerage account, brokers, build, building, business, Buying, california, Capital, Capital Gains, capital gains tax, capital gains taxes, Career, cash, Checking Account, choice, College, college planning, companies, company, cons, contributions, correspondent, cost, couple, Credit, customer service, data, Debit Card, deposit, Deposits, design, Direct Deposit, dividend, dividend reinvestment, dividend stocks, dollar-cost averaging, down payment, down payment on a house, driving, Early retirement, earn interest, earning, Emergency, Emergency Fund, Employment, energy, entry, estate, ETFs, existing, expenses, Family, FDIC, FDIC insurance, Features, Fees, finances, financial, Financial Goals, Financial Planning, Financial Services, Financial Wize, FinancialWize, first, Fraction, Free, freedom, fund, funds, General, Giving, goals, Google, government, great, Grow, healthcare, historical, home, homeownership, hours, house, How To, id, in, Income, income tax, index, index fund, index funds, industry, Insurance, interest, interest rates, internet, Invest, Investing, investment, investment portfolio, investment returns, investment strategies, investments, Investor, investors, iOS, iPhone, IRA, IRAs, Leaders, leverage, line of credit, Links, low, LOWER, Make, making, manage, Managing Your Money, market, markets, max out, millennials, mobile, Mobile Apps, modern, modern portfolio theory, money, More, Moving, mpt, municipal bonds, natural, needs, new, no fee, offer, offers, online investing, or, organize, Other, paper, party, password, pay bills, paycheck, paypal, place, plan, planner, Planning, plans, play, portfolio, portfolios, pros, Pros and Cons, protection, Purchase, Rates, reach, read, Real Estate, rebalancing, reit, repayment, retirement, Retirement Planning, return, return on investment, returns, Review, risk, robo-advisor, robo-advisors, rollover, roth, Roth IRA, s&p, S&P 500, sale, save, Saving, savings, schd, Schwab, second, sector, securities, security, Sell, SEP, settlement, shares, single, SIPC, smart, social, social security, Spending, stock, stock market, stocks, Strategies, structure, target, tax, tax rates, taxable, taxes, Technology, The Stock Market, time, time horizon, tips, tracking, traditional, Travel, trust, trusts, under, unique, US, value, Vanguard, venmo, wealthfront, weighing, white, will, work, working, wrong

Apache is functioning normally

July 28, 2023 by Brett Tams

Suze Orman set off quite a stir a few months ago in a New York Times interview. Although some folks were all atwitter to find out she was gay, what really had people in the personal finance world talking was the fact that the most successful personal finance writer in the country had the bulk of her $25 million portfolio in conservative municipal bonds, with only about $1 million invested in the stock market.

My buddy Chuck Jaffe, a MarketWatch columnist and not exactly a Suze fan, had a particularly good time that little factoid. Chuck has often criticized Suze’s advice as too conservative, and her lack of personal exposure to the stock market confirmed his suspicions that she was out of touch with the needs of everyday people. “In short,” he thundered, “the person being trusted as everyone’s financial adviser has a portfolio that few people could live with.”

I think Suze should be allowed to invest any way she wants to, but the whole kerfluffle points up an irony of personal finance columnizing: the more successful we pundits are, the less our lives resemble those of the majority of our readers.

I was thinking about that when J.D. asked if I’d be willing to write a little exposé for his site on how well I follow my own advice.

“I always wonder just how personal finance gurus lead their lives,” J.D. wrote in an email. “Do they really follow the advice they give? Are they frugal? Do they put their money in index funds? Do they drive older cars? I think this is a question many people have. I also think it’s one reason they read Get Rich Slowly: I quite clearly do follow my own advice, or try to.”

So do I — mostly. At J.D.’s request, I’m pulling back the curtain a bit to show you where I walk my talk, and where I’m full of (well-meaning) hot air.

In case you’re not familiar with my work: I’m the most-read personal finance columnist on the Web. I write a twice-weekly column for MSN Money and a nationally syndicated newspaper column. I’m also the author of three books about finance:

You can find out more about me, if you want, at asklizweston.com. But in answer to J.D.’s questions:

Am I frugal? Congenitally. Most of the time.

I grew up in a middle-class family with a dad who worked as an electric journeyman at the local power plant and a stay-at-home mom who had the Depression-era baby’s classic aversion to debt. We had a garden, we canned, we rinsed and reused baggies. My mom went back to work to help pay my college tuition, while I worked two to four part-time jobs each semester to make ends meet. I graduated without student loan or credit card debt.

I’ve never been much of a shopper, and was taught to pay credit card balances in full every month. (I have carried credit card debt a couple of times in my life — for cash flow reasons, not because we couldn’t pay the whole bill.) Since my early 20s, when I started working as a daily newspaper reporter, I’ve saved 15% to 20% — and sometimes more — of my income. Most of it goes into retirement funds and the majority of those are invested in stock mutual funds.

But a lot of the things I used to do to save money I now do mostly to save the environment: things like turning off lights, using a programmable thermostat, walking or biking instead of driving the car.

And now that I travel a lot, I’ve developed an appreciation for luxuries that would have been unthinkable in my salad days: things like membership to an airline lounge and occasionally paying for a first-class ticket, when I can’t qualify for an upgrade with frequent flyer miles. Flying coach these days reminds me way too much of riding the Greyhound bus during college, and I’m lucky enough to be able to afford an alternative.

Do I put my money in index funds? Yes. Mostly.

I’m a confirmed believer that people who think they’re going to beat the market probably are deluding themselves. I know I would be; I’m way too busy to monitor individual stocks or actively-managed mutual funds.

But a recent review of our portfolio showed that while most of our money is in broad-market index funds, we’re still hanging on to a few actively-managed funds I bought before I’d become firmly convinced of the futilely of trying to predict market-beaters. Like the cobbler’s children with no shoes, my portfolio’s overdue for a clean-up and rebalancing. Thanks, J.D., for goading me into it.

Do I drive an older car? Oh, boy. Do I.

I’m the proud driver of a 1993 SUV with—ta-da—250,000 miles on it. I inherited it from my husband, who upgraded to a later-model Volvo. (The man actually cares what he drives, unlike me.) I’d eventually like to replace it with a more fuel-efficient car, but at this point I drive so few miles that it doesn’t make sense to replace it. Besides that, I’m oddly curious to see how long the old beast will hold out.

I’ve also learned a lot about money over the years by making mistakes. I bought “retirement property” when I was in my 20s (anybody want 14 acres in Alaska, 80 miles from the nearest road?). After years of railing about the insanity of the dot-com boom, I sunk $2,000 into a tech fund in — get this — March 2000, about a week before the bubble started to burst. And the last time we bought a house, I forgot (yes, forgot) about closing costs, and had to sell off some investments at the last minute to cover closing costs. (Fortunately, the stock market cooperated with me for once — you’re not supposed to keep short-term money, like down payments and closing costs, in stock or stock mutual fund investments lest they take a dive right when you need the money.)

But yeah, overall I’ve followed my own advice. I’ve avoided toxic debt including credit card debt; put a pile away for retirement; and invested a ton of money over the years in fun and experiences. I’ve traveled around the world, earned my pilot’s license, threw some great parties, took two sabbaticals to care for my dying mother, and am in the process of raising a wonderful daughter (who may turn out to be our more expensive experience yet, but is soooo worth it). I firmly believe that managing money well helps you live life well, and that’s the message I hope to communicate to readers — regardless of where they happen to be on the road to financial health.

Source: getrichslowly.org

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Apache is functioning normally

July 27, 2023 by Brett Tams

There are many uncertainties on the road to financial independence. You can’t know what rate of return your investments will earn over the coming decades. And you certainly don’t know exactly how long you’ll live.

That old cliché is true: the only certainties in life are death and taxes.

So, we control what we can. And we try not to worry about the things we can’t control. From experience, this is easier said than done.

Tax is one variable over which we have a modicum of control. No, we cannot control how the government changes the tax code. But we can plan our lives and investments in ways that will affect how much tax we owe – both now, and in the future.

Strategic tax planning isn’t just for the wealthy. Unfortunately, it’s true that billionaires seem to benefit most from it. But, in fact, there are some simple things nearly everyone can do that may end up saving you tens of thousands of dollars in taxes – or more – over your lifetime.

Here, I’m going to show you what they are. I’ll begin with tax moves that will be available to most people. Some of the strategies that come later will only be relevant once you’ve taken advantage of the basics or earn a certain amount of income.

What’s Ahead:

Take advantage of retirement accounts

Are you tired of hearing about the importance of saving for retirement using a 401(k) or IRA? Well, there’s a reason that guys like me go on and on about them. These accounts represent a huge gift from Uncle Sam to taxpayers including you and me.

In a traditional IRA or 401(k), contributions are tax-free. Then, your earnings grow tax-deferred until retirement.

Every year, investments generate dividends, interest, and – if you sell investments at a profit – capital gains. In a traditional taxable investment account, you pay taxes on that investment income every year.

With a traditional 401(k) or IRA, you can invest pre-tax dollars now and you don’t pay taxes on any of that investment income until you begin withdrawing money in retirement. With a Roth IRA, you must invest after-tax dollars now, but all of the investment income you earn over the years is tax-free. With either type of account, the money you save by not paying taxes on investment income each year can continue compound growth. The earlier you start putting money in these accounts, the more you’ll save.

A modest example – consider the following situation

A 29-year-old in the 25% tax bracket contributes $5,000 every year to an IRA for 30 years and retires at age 65. She earns an average of 6% annual interest. At retirement, her IRA is worth $631,341 before taxes. If the money had been invested in a taxable account, it would be worth only $337,655. That’s a significant difference! But, since this is a traditional IRA, she still has to pay taxes on withdrawals.

After paying taxes on the IRA, she’s left with $473,505. That’s still a savings of $135,850 over investing in a taxable account!

Everybody needs to put as much money as they can afford into these kinds of retirement accounts. Not only is it smart planning for your future; it’ll save you a bundle on your taxes.

If you need help managing your 401(k) or IRA, I’d highly recommend checking out blooom. They can manage your account for you, taking into consideration your retirement goals, and rebalance your portfolio as needed.

Get an HSA or FSA

Flexible spending arrangements (FSAs) and health savings accounts (HSAs) are accounts that allow you to use tax-free dollars for medical expenses. The largest difference between them is that FSAs are owned by employers while HSAs are controlled by individuals.

HSAs are the better option, in my opinion. But to qualify for an HSA, you need to be enrolled in a qualifying high-deductible health plan.

What are health savings accounts (HSAs)?

You can contribute up to $3,450 pre-tax dollars per year ($7,750 per household) to an HSA. These funds can be withdrawn at any time to pay for qualifying medical expenses tax-free. There’s no need to “use or lose” HSA dollars, as unused funds roll over every year.

Like traditional IRAs and 401(k)s, early withdrawals that aren’t used for medical expenses are subject to a 20% penalty and income taxes. After you turn 65, however, you can withdraw HSA funds for any purpose (not just medical expenses) penalty-free. (You will owe income taxes on withdrawals not used for medical expenses).

HSAs are great for saving on medical expenses now. But they’re even better if you invest dollars in HSAs and let them grow to pay for medical expenses later in life. If you invest the funds in your HSA, the money will grow tax-free (just like an IRA.)

But when you withdraw money later in life to pay for medical expenses, you pay no taxes at all on both the dollars you contributed and your earnings. No IRA is truly tax-free. With a traditional IRA, you pay taxes on withdrawals but not deposits. With a Roth IRA, you pay taxes on deposits but not withdrawals. When used for medical expenses, you don’t have to pay any taxes on the money you put into or take out of an HSA.

Whare are flexible spending arrangements (FSAs)?

Flexible spending arrangements are another type of account that provides tax-free dollars for medical expenses. FSAs are set up by your employer and go away when you change jobs unless you contribute your health insurance through COBRA.

FSAs have lower contribution maximums ($3,050 for individuals and $5,000 for households).

The trickiest part of FSAs is that they are “use it or lose it” accounts. You can roll over up to $550 every year, but all other funds in an FSA expire at the end of the year (with a two-and-a-half-month grace period). This can lead employees to scramble at year-end to line up routine doctor appointments and even stock up on prescriptions or qualifying OTC pharmacy purchases!

Since you can’t usually have access to both an HSA and an FSA at the same time, take advantage of either if you can. If you find yourself in the unusual position of having the option between the two, choose the HSA.

Avoid tax penalties and interest

It should go without saying, but I’ve seen enough to know that it needs to be said: pay your taxes! Equally as important, do not ignore or procrastinate on any tax problems that arise.

The IRS charges penalties and interest any time you don’t pay enough tax by the relevant deadline. This can occur for lots of reasons, but most commonly it happens when:

  • You don’t have enough taxes withheld from your paycheck (W4 error).
  • You earn money through a business or self-employment and do not make or underpay quarterly estimated payments.
  • You file a tax return extension and fail to pay any estimated amount due. (An extension to file is not an extension to pay).
  • You simply pay late!

The longer you go with a balance due to the IRS, the more interest accrues. And a tax debt is the worst kind of debt to have. The IRS has the power to garnish your wages, seize future tax refunds, attach your assets, and even reduce Social Security benefits when you retire.

Donate to charity smartly

You probably know that donations to qualified charities are tax-deductible. 

But you can only claim the tax benefits of charitable donations if it makes sense for you to itemize your deductions. With the standard deduction standing at $13,850 for individuals and $27,700 for couples, a minority of taxpayers itemize.

Does this mean charitable donations can’t help you if you don’t itemize? No! Keep reading…

If you do itemize deductions, charitable donations made in cash can reduce your taxable income dollar-for-dollar by up to 60%. Go ahead and make them every year.

You can also donate appreciated stock to charity can be a win-win. The charity gets its donation and you get a tax deduction equal to the stock’s fair market value (not its cost basis). You can deduct up to 30% of your income this way.

If you don’t regularly exceed the itemized deduction amounts, you can still make charitable donations work for you by either grouping your deductions in certain years or, better yet, making occasional large gifts to a donor-advised fund.

Donor-advised funds

A donor-advised fund is an investment account to which contributions are tax-deductible in the year you make them. You can contribute cash, appreciated assets, or investments held for more than a year. Then, you can make donations from the fund whenever you want. Donor-advised funds are a great way to give because you can give your money a chance to grow and yourself years to choose the best way (and time) to allocate your charitable funds.

To give you an example of how this might work, let’s say you give $1,000 to charity a year, on average. Your total tax deductions, not including your donations, total about $10,000. Even adding the donation will keep you under the standard deduction.

So, rather than donating $1,000 every year, you set $1,000 aside in a savings account every year for five years. In the fifth year, you put that money into a donor-advised fund and add $5,000 to your itemized deductions. This gets you a $1,150 additional deduction ($15,0000 itemized – $13,850 standard) in your taxes that year.

Be tax-savvy about where you live

If you’re serious about paying fewer taxes, you’ll want to consider living in a low-tax state.

When it comes to state and local taxes, not all states are created equal. Far from it. According to data from the Tax Policy Center, the difference in tax burden between the state with the highest burden (New York) and the state with the lowest burden (Alaska) is 7.12%. If you’re a New Yorker, you might be thinking about what you could do with an extra 7% of your income right now!

A handful of states attract an outsized share of entrepreneurs and other wealthy residents because of their 0% income tax rate. Although I personally can’t imagine moving across the country solely for tax purposes, I do know people who’ve done it. There is an argument to be made that a lifetime of state tax payments invested is an amount of money too significant to ignore.

For example, let’s say you will earn an average of $100,000 a year over 50 years (not that you have to work 50 years…income can include other sources like dividends). Over those years, you pay an average state income tax rate of 5%. If you could skip the tax payments and instead invest that money in the stock market at an average annual return of 7%, you would be sitting on just over $2 million ($2,032,660 to be precise).

And, now, seeing those numbers, I’m about to call my realtor.

Be a tax-efficient investor

When you own stocks and bonds outside of a retirement account like a 401(k) or IRA, you will owe taxes on the interest, dividends, and capital gains earned from those investments.

Although you do not need to not pay capital gains taxes until you sell an investment at a profit, most investments will pay you interest and dividends each year. Whether you spend that money or reinvest it, you will owe taxes on it.

There are two schools of thought when it comes to taxes and investing. Most investors try to minimize the tax consequences of their investments whenever possible. Some, however, argue that taxes should take the backseat to whatever investing strategy will get the best return. I think the answer lies somewhere in between.

Whatever your view, some of these ways to reduce taxes on your investments just make sense.

Take credit investment losses

If you own investments (stocks and bonds or even real estate) and sell them at a loss, you can write-off your losses.  This can be an incentive to exit a losing investment if you suspect it’s never going to recover its value. But this tactic can also be used strategically as a part of routine portfolio re-allocation. When used in this way it is called “tax-loss harvesting”.

You can deduct up to $3,000 per year for stock investment losses, but you can carry-forward losses to future tax years. For example, if you had a $9,000 capital loss, you could deduct $3,000 a year for three years.

You may also be able to deduct up to $25,000 of rental real estate losses if your adjusted gross income is $100,000 or less (or a portion of that amount if your AGI is up to $150,000).

Hold bonds and dividend-paying stocks in retirement accounts

Bonds and dividend stocks will generate taxable investment income every year. Growth stocks that do not pay dividends, however, do not. If you have a taxable investment account and want to own both kinds of investments in your portfolio, put the income-generating investments in your IRA or 401(k) and buy non-dividend stocks with your taxable account.

Use ETFs instead of mutual funds

Exchange-traded funds can be more tax-efficient than traditional mutual funds. Both can generate capital gains and dividends, but ETFs are structured in a way that minimizes tax liability for the investor.

Invest in municipal bonds

If want to pay even fewer taxes on your investment income, consider tax-exempt municipal bonds. Municipal bond earnings are exempt from federal income taxes. The government makes interest on these bonds tax-free to encourage investment in local and state projects.

These bonds (called munis) yield less than corporate bonds before taxes but are competitive, and sometimes better when you compare after-tax returns.

Use a business to reduce your tax bill

Starting a business takes you to the next level of tax breaks. You don’t even need to create an entity like an LLC. If you earn money outside of a salary (W-2), you can call yourself a sole proprietor.

To deduct business expenses and take advantage of other business tax breaks, you’ll need to do two things:

  • Keep an accounting of your business income and expenses separate from your personal accounting.
  • File a Schedule C with your tax return.

In addition to deducting business expenses and, potentially, the use of part of your home as an office, you can also take advantage of some special retirement savings accounts.

The Solo 401(k) and SEP-IRA both allow much higher contributions than traditional 401(k)s and IRAs. For 2023, you can contribute up to the lesser of $66,000 or 25% of operating profits to a SEP-IRA. Otherwise, the SEP works like a traditional IRA: money in is tax-deductible and your money grows tax-deferred until retirement.

Summary

Nobody wants to pay more taxes than they have to. Everybody should take their taxes seriously and seek professional advice when they need it.

If you’re intent on achieving financial independence as quickly as possible, reducing taxes will likely be a large part of your plan. The methods described above will be invaluable.

As you begin implementing them, just remember not to let your life be dictated by paying as little tax as possible. At a certain point, the law of diminishing terms will apply. There are probably uses of time that will be more profitable in the long run!

Read more:

Source: moneyunder30.com

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Apache is functioning normally

July 16, 2023 by Brett Tams

This is a guest post from ABCs of Investing, a new site for novice investors. ABCs of Investing offers one short and simple investing post each week. Understanding asset allocation is a key piece of financial literacy.

In my last post at Get Rich Slowly, I explained the basics of passive investing and why it’s a good strategy. I explored the differences between index funds and exchange-traded funds (ETFs), and showed how they’re great tools for passive investors. My article ended with a breezy “just pick some basic index funds and away you go”. But in reality there are a few more steps before you actually make any investments.

One of the keys to investing is deciding your asset allocation. “But what is asset allocation?” you ask. Asset allocation is the relative amount of each asset class in your portfolio, and it determines how much risk your portfolio has. Still confused? Let’s take a closer look.

Asset Classes

An asset class is simply a group of similar investments whose prices tend to move together. In other words, their price movements are at least partially correlated.

Asset classes can be defined on a very general level (“stocks”, “bonds”) or on a more specific level (“oil companies”, “municipal bonds”). Since most oil companies make money based on similar variables, such as the price of oil, most oil company stock prices tend to move up together or down together.

The concept of asset classes is important. One of your goals when building an investment portfolio is to practice diversification, to use asset classes that are not correlated to each other. That is, you want a portfolio in which not every investment moves the same direction at the same time.

When your assets are not correlated, if one of your asset classes performs poorly (such as stocks in 2008), then your other asset classes (such as cash) will help make up for it. This works the other way too — if stocks do well, then your other asset classes will probably lower the overall return.

Diversification lowers the volatility of your portfolio. If you only own stocks, then you could have years where you have -40% returns — or +40% returns. If you own a mix of stocks, bonds, and cash, then your best and worst years will be a lot less dramatic than with an all-stock portfolio.

General asset classes include:

  • Stocks. This could be individual company stocks or shares of a stock mutual fund, ETF, or index fund.
  • Fixed income. Any type of bond, bond mutual fund, or certificate of deposit.
  • Cash. Usually money in a high-interest savings account, but could also include money carefully hidden under your mattress.

There are many different asset classes. It’s important to be familiar with the general asset classes (stocks, bonds, cash, real estate, precious metals, etc.) and then learn about more specific classes only if they’re applicable to your situation.

Asset Allocation

Asset allocation refers to how much of the various asset classes you have in your portfolio. An older, more conservative investor might have a retirement asset allocation containing mostly fixed-income investments (80% bonds and 20% stocks, for example). A younger, more aggressive investor might have most of their investments in stocks.

Many people make the mistake of thinking you need to choose between all risky assets (stocks) or all safe investments (cash). In reality, you should pick a happy medium. Riskier assets like stocks have a higher expected rate of return. If your investment time horizon is long enough, don’t avoid stocks completely just because they’re more volatile than fixed income or cash.

A retirement account with a long investment time horizon might have 80% of the portfolio invested in stocks and 20% invested in bonds. If this is too volatile for your stomach and you are have a hard time sleeping at night, consider switching some of the stocks to bonds or cash so that your asset allocation has a less risky profile, such as 60% stocks and 40% bonds.

Investment Time Horizon

The investment time horizon is the length of time until you need the money in your investment account. Simple, right?

Some asset classes, such as cash, are very safe. If you have $5,000 in a savings account, you can sleep very well knowing that in 6 months you will still have at least $5,000 in that account. If you put your $5,000 into a riskier asset class, such as stocks (or a stock mutual fund), then in 6 months your investment might be worth more than $5,000 — or it might be worth less. (Perhaps a lot less.)

If you’re investing money you don’t need for a long time (20 years, for example), then you might consider investing it in riskier investments such as a stock mutual fund. If you need the money in a shorter time period (like 6 months), then you should invest it in a safe asset class, such as cash. The idea is to maximize the chance that your money will be there when you need it. If you are saving for a house down payment that you need next year, the return you get in that year is not as important as the need for that down payment to retain its value.

There are other factors to consider. For example, somebody approaching retirement might want to start withdrawals from their investments in a few years, but most of the money won’t be needed for many years after they start retirement. Going to a 100% bond portfolio in that situation is probably too conservative.

Rebalancing

Rebalancing your portfolio is an important part of investing. Portfolio rebalancing is accomplished by occasionally resetting the proportions of each asset class back to their original percentage.

For example, assume that Susan has just won $50,000 by playing the lottery. After doing some reading, she decides that her portfolio asset allocation will be 60% stocks and 40% bonds.

One year later, Susan checks the value of her portfolio and notices that stocks have declined. They now only make up 50% of her portfolio instead of the 60% she considers ideal. The bonds are also now 50% of her portfolio instead of the original 40%. To return to the original proportions, Susan decides to rebalance her portfolio so the asset allocation is the same as when she started.

To do this, she sells some of the bonds and uses the money to buy some stocks. Another option would be for her to make any new contributions only to stocks (and none to bonds) in order to return to the original allocation.

There are a couple of reasons to rebalance. First, by selling asset classes that have risen in value, and by buying other asset classes that have dropped, you are selling high and buying low. Second, if you don’t rebalance, it’s possible for your asset allocation (and investment risk) to become radically different from your intended levels.

Summary

Determining the best asset allocation for your portfolio involves a combination of:

  • Investment time horizon — When do you need the money?
  • Risk profile — Can you handle the ups and downs of the stock market?
  • Rebalancing — This is something you should do once a year or so.

It is difficult for the average investor to watch her portfolio value take wild swings every time the markets jump up and down. With proper asset allocation, it’s possible to lower the amount of risk in your portfolio while still maintaining a decent return, which should help you get better sleep at night!

Previously at Get Rich Slowly, this author shared an introduction to index funds and passive investing. Catch more great articles for beginning investors at ABCs of Investing.

Source: getrichslowly.org

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