Getting started on retirement saving can be daunting when there are so many confusing options. There are thousands of stocks, not to mention other complex-sounding things to buy: bonds, mutual funds, exchange-traded funds, futures. And when you start reading about them, you’re liable to run into an impenetrable wall of investment jargon. So do you go it alone, taking shots in the dark with your…
Can you retire at 50? On average, people usually retire at 65. But what if you want to retire 15 years earlier than that likeÂ at 50? Is it doable? Below are 10 easy steps to take to retire at 50.Â Retiring early can be challenging. Therefore, SmartAsset’s free tool can match you with Â a financial advisor who can help to work out and implement a retirement income strategy for you to maximize your money.
10 Easy & Simple Steps to Retire at 50:
1. How much you will need in retirement.
The first thing to consider is to determine how much you will need to retire at 50. This will vary depending on the lifestyle you want to have during retirement. If you desire a lavish one, you will certainly need a lot.
But according to a study by SmartAsset, 500k was found to be enough money to retire comfortably. But again that will depends on several factor.
For example, you will need to take into account where you want to live, the cost of living, how long you expect to live, etc.
Read: Can I Retire at 60 With 500k? Is It Enough?
A good way to know if 500k is possible to retire on is to consider the 4% rule. This rule is used to figure out how much a retiree should withdraw from his or her retirement account.
The 4% rule states that the money in your retirement savings account should last you through 30 years of retirement if you take out 4% of your retirement portfolio annually and then adjust each year thereafter for inflation.
So, if you plan on retiring at 50 with 500k for 30 years, using the 4% rule you will need to live on $20,000 a year.Â
Again, this is just an estimation out there. You may need less or more depending on the factors mentioned above. For example, if you’re in good health and expect to live 40+ years after retiring at 50, $500,000 may not be enough to retire on. That’s why it’s crucial to work with a financial advisor.
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2. Maximize your tax-advantaged retirement accounts.
Once you have an idea of how much you need in order to retire at 50, your next step is to save as much as possible at a faster rate. If you are employed and you have a 401k plan available to you, you should definitely participate in it. Nothing can grow your retirement savings account faster than a 401k account.
See: How to Become a 401k Millionaire.
That means, you will need to maximize your 401k contributions, for example. In 2020, and for people under 50, the 401k contribution limit is $19,500. Also, take advantage of your company match if your employee offers a match.
In addition to the maximum contribution of $19,500, your employer also contributes. Sometimes, they match dollar for dollar or 50 cents for each dollar the worker pays in.
In addition to a 401k plan, open or maximize your Roth or traditional IRA. For an IRA, it is $6,000. So, by maximizing your retirement accounts every year, your money will grow faster.
3. Invest in mutual or index funds. Apart from your retirement accounts (401k, Roth or Traditional IRA, SEP IRA, etc), you should invest in individual stocks or preferably in mutual funds.Â
4. Cut out unnecessary expenses.
Someone with the goal of retiring at 50 needs to keep an eye on their spending and keep them as low as possible. We all know the phrase, “the best way to save money is to spend less.”
Well, this is true when it comes to retiring 15 years early than the average. So, if you don’t watch TV, cancel Netflix or cable TV. If your cell phone bill is high, change plans or switch to another carrier. Don’t go to lavish vacations.
5. Keep an eye on taxes.
Taxes can eat away your profit. The more you can save from taxes, the more money you will have. Retirement accounts are a good way to save on taxes. Besides your company 401k plan, open a Roth or Traditional IRA.
6. Make more money.
Spending less is a great way to save money. But increasing your income is even better. If you need to retire at 50, you’ll need to be more aggressive. And the more money you earn, the more you will be able to save. And the faster you can reach your early retirement goal.
7. Speak with a financial advisor.
Consulting with a financial advisor can help you create a plan to. More specifically, a financial advisor specializing in retirement planning can help you achieve your goals of retiring at 50. They can help put in a place an investment strategy to put you in the right track to retire at 50. You can easily find one in your local area by using SmartAsset’s free tool. It matches users with financial advisors in just under 5 minutes.
8. Decide how you will spend your time in retirement.
If you will spend a lot of time travelling during retirement, then make sure you do research. Some countries like the Dominican Republic, Mexico, Panama, the Philippines, and so many others are good places to travel to in retirement because the cost of living is relatively cheap.
While other countries in Europe can be very expensive to travel to, which can eat away your retirement money. If you decide to downsize or sell your home, you can free up more money to spend.
9. Financing the first 10 years.
There is a penalty of 10% if you cash out your retirement accounts before you reach the age of 59 1/2. Therefore, if you retire at 50, you’ll need to use money in other accounts like traditional savings or brokerage accounts.
10.Put your Bonus, Raise, & Tax Refunds towards your retirement savings.
If retiring at 50 years old is really your goal, then you should put all extra money towards your retirement savings. That means, if you receive a raise at work, put some of it towards your savings account.
If you get a tax refund or a bonus, use some of that money towards your retirement savings account. They can add up quickly and make retiring at 50 more of a reality than a dream.
Retiring at 50: The Bottom Line:
So can I retire at 50? Retiring at 50 is possible. However, it’s not easy. After all, you’re trying to grow more money in less time. So, it will be challenging and will involve years of sacrifices, years living below your means and making tough financial decisions. However, it will be worth it in the long run.
How Much Is Enough For Retirement
How to Grow Your 401k Account
People Who Retire Comfortably Avoid These Financial Advisor Mistakes
5 Simple Warning Signs Youâre Definitely Not Ready for Retirement
Speak with the Right Financial Advisor
You can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning to retire at 50, saving, etc). Find one who meets your needs with SmartAssetâs free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.
The post How To Retire At 50: 10 Easy Steps To Consider appeared first on GrowthRapidly.
Whether youâre trying to buy a home or looking to get a college degree, you may need to take out a loan to finance your goals. If youâre seeking out your first loan, know that borrowing money is a common practice and you donât need a degree in economics to understand it! Learning more about loans and the different types can help you make informed decisions and take control of your finances.
Loans take many forms but they all fall within two common categories: secured vs. unsecured loans. Whether youâre approved for either type of loan depends on your creditworthiness. Creditworthiness refers to how responsible you are at repaying debt and if it’s worthwhile or risky to grant you new credit. Itâs helpful to be aware of your credit prior to seeking out a loan so you know where you stand.
Now that youâre familiar with the role creditworthiness plays in getting a loan, letâs discuss the differences between secured and unsecured loans, the advantages and disadvantages of each, and which one may be right for you.
Whatâs the Difference Between Secured vs. Unsecured Loans?
The main difference between secured and unsecured loans is how they use collateral. Collateral is when something of economic value is used as security for a debt, in the event that the debt is not repaid. Usually collateral comes in the form of material property, such as a car, house, or other real estate. If the debt is not repaid, the collateral is seized and sold to repay all or a portion of the debt.
Key Difference: A secured loan requires collateral, while an unsecured loan doesnât require collateral.
What Is a Secured Loan?
A secured loan requires collateral as security in case you fail to repay your debt. If secured debt is not repaid, the collateral is taken. In addition to seizing collateral, lenders can start debt collection, file negative credit information on your report, and sue you for outstanding debt. This generally makes secured loans more risky for the borrower.
Conversely, collateral decreases the risk for lenders, especially when loaning money to those with little to no credit history or low creditworthiness. Less risk means that lenders may offer some leeway regarding interest rates and borrowing limits. See the list below to review other typical secured loan characteristics.
Characteristics of a Secured Loan:
Presence of collateral
Typically more risky
May require a down payment
May sell property to repay loan
Generally lower interest rates
Longer repayment period
Higher borrowing limits
Easier to obtain for those with poor or little credit history
Typically less risky
Lender can take your collateral
Lender can hold the title to your property until loan is repaid
Secured Loan Examples
The most common uses of a secured loan are to finance large purchases such as a mortgage. Usually, these loans can only be used for a specific, intended purchase like a house, car, or boat. A home equity loan is another example of a secure loan. Some loans like business loans or debt consolidation can be secured or unsecured.
What Is an Unsecured Loan?
An unsecured loan doesnât require collateral to secure the amount borrowed. This type of loan is granted based on creditworthiness and income. High creditworthiness makes an unsecured loan more accessible.
The absence of collateral makes this type of loan less risky for borrowers and much riskier for lenders. If unsecured debt is not repaid, the lender cannot seize property automatically. They must engage in debt collection, report negative credit information, or sue. As a result of the increased risk, unsecured loans have characteristics that attempt to reduce the risk. These may include higher interest rates or lower borrowing limits, and you can see more in the list below.
Characteristics of an Unsecured Loan:
No collateral required
Typically less risky
Qualify based on credit and income
Stricter conditions to qualify
Generally higher interest rates
Lower borrowing limits
Typically more risky
Lender canât take property right away if you default
Unsecured Loan Examples
Common unsecured loans include credit cards, personal loans, student loans, and medical debt. Debt consolidation and business loans can also be unsecured. In each of these instances, collateral is not required and you are trusted to repay your unsecured debt.
Advantages and Disadvantages to Consider
When it comes to deciding on the type of loan you need, itâs important to consider the advantages and disadvantages of each.
Secured loans present advantages for repayment, interest, and borrowing amount, but have disadvantages regarding a borrowerâs risk and limitations of use.
Bigger borrowing limits
Less risk for lenders usually means lower interest rates for borrowers
Longer repayment period
Available tax deductions for interest paid on certain loans (e.g., a mortgage)
Risky for borrower (potential for loss of collateral like home, car, stocks, or bonds)
Specifically for intended purpose (e.g., a home, but home equity loans are an exception)
Unsecured loans can be advantageous for borrowers regarding risk and time, but they pose a disadvantage when it comes to interest rates and stricter qualifications.
Less risky for borrower
Useful loan if you donât own property to use as collateral
Quicker application process than for a secured loan (e.g., a credit card)
More risky for lenders usually means higher interest rates for borrowers
Hard to qualify for if you have low creditworthiness or inconsistent income (can qualify with a cosigner)
Take a look at the chart below to compare the key advantages and disadvantages between secured and unsecured loans.
After considering the advantages and disadvantages of both loan types, it’s helpful to know which one is the best for certain circumstances. Here are some common contexts in which one may be better than the other.
A secured loan may be best if youâre trying to make a large property purchase or donât have the best credit. The piece of property that you are purchasing can be used as collateral if you donât already own other property. Additionally, this loan is more accessible for you if you have low creditworthiness and may be more advantageous with lower interest rates.
An unsecured loan may be best if you have high creditworthiness and a steady income. High creditworthiness helps you meet strict qualification criteria and can also help you obtain better interest rates (given that this type is characterized by higher interest).
Overall, secured and unsecured loans are each useful in different situations. Remember that the key difference is that unsecured loans donât need collateral, while secured loans do. Secured loans are less risky for the lender and may allow for some advantageous repayment conditions. On the other hand, unsecured loans are risky for the lender, and they often come with stricter conditions that try to lessen that risk.
It is important to make smart financial decisions such as repaying debt on time and maintaining a good credit history. High creditworthiness is the key to getting the best conditions on any loan. No matter your circumstances, identifying which loan type is best for you depends on your specific credit and goals. Visit our loan center for help in deciding which loan is right for you.
Sources: Consumer Financial Protection Bureau
The post Secured vs. Unsecured Loans: Hereâs the Difference appeared first on MintLife Blog.
A website called Insure makes it super easy to compare car insurance prices. All you have to do is enter your ZIP code and your age, and itâll show you your options â and even discounts in your area.
But is it dangerous to be too obsessed with the stock market?
If you owe your credit card companies ,000 or less, AmOne will match you with a low-interest loan you can use to pay off every single one of your balances.
Using Insure, people have saved an average of 0 a year.
Another way to grow your money: Stop overpaying on your bills.
1. Just Steadily Invest Like a Normal Person
Enter your email address here to get a free Aspiration Spend and Save account. After you confirm your email, securely link your bank account so they can start helping you get extra cash. Your money is FDIC insured and they use a military-grade encryption which is nerd talk for âthis is totally safe.â
But a debit card called Aspiration lets you earn up to 5% cash back and up to 16 times the average interest on the money in your account.
Yup. That could be 0 back in your pocket just for taking a few minutes to look at your options. *For Securities priced over ,000, purchase of fractional shares starts at It takes about one minute to sign up, and start getting paid to watch the news.
2. Grow Your Money 16x Faster â Without Risking Any of It
Plus, with Stash, youâre able to invest in fractions of shares, which means you can invest in funds you wouldnât normally be able to afford. Is it OK that heâs stopped contributing to his 401(k) so he can trade stocks? the reader asked. How do I ask him what heâs actually investing in? Iâm worried that heâs gambling money that we need for our retirement.
The benefit? Youâll be left with one bill to pay each month. And because personal loans have lower interest rates (AmOne rates start at 3.49% APR), youâll get out of debt that much faster. Plus: No credit card payment this month.
You bet it is. Our financial advice columnist, Dear Penny, recently heard from a reader whose husband stopped funding his 401(k) so he can bet on the stock market, instead.
Not too shabby!
3. Stop Paying Your Credit Card Company
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
Weâre big on investing. Itâs an important way to grow your money and set yourself up for retirement someday. **Youâll also bear the standard fees and expenses reflected in the pricing of the ETFs in your account, plus fees for various ancillary services charged by Stash and the custodian. Source: thepennyhoarder.com
Weâre living in historic times, and weâre all constantly refreshing for the latest news updates. You probably know more than one news-junkie who fancies themselves an expert in respiratory illness or a political mastermind.
4. Cut Your Bills by $540/Year
Save some of your money in a safer place than the stock market â but where youâll still earn money on it. Mike Brassfield (firstname.lastname@example.org) is a senior writer at The Penny Hoarder. He tries not to be obsessed with the stock market.
Thatâs not the way to go. Here are five safer ways to invest and grow your money.
You just have to answer honestly, and InboxDollars will continue to pay you every month. This might sound too good to be true, but itâs already paid its users more than million.
And research companies want to pay you to keep watching. You could add up to 5 a month to your pocket by signing up for a free account with InboxDollars. Theyâll present you with short news clips to choose from every day, then ask you a few questions about them.
5. Add $225 to Your Wallet Just for Watching the News
For example, whenâs the last time you checked car insurance prices? You should shop your options every six months or so â it could save you some serious money. Letâs be real, though. Itâs probably not the first thing you think about when you wake up. But it doesnât have to be.
It takes two minutes to see if you qualify for up to ,000 online. You do need to give AmOne a real phone number in order to qualify, but donât worry â they wonât spam you with phone calls.
Instead of betting all your money on the stock market, just steadily invest in it. Take the long view. The stock market is unpredictable, which means that sometimes stock prices go up, and sometimes they go down â but over time, they tend to go up.
We like Stash, because it lets you choose from hundreds of stocks and funds to build your own investment portfolio. But it makes it simple by breaking them down into categories based on your personal goals. Want to invest conservatively right now? Totally get it! Want to dip in with moderate or aggressive risk? Do what you feel.
One way to make sure you have more money is to stop wasting money on credit card interest. Your credit card company is getting rich by ripping you off with high interest rates. But a website called AmOne wants to help.
Under your mattress or in a safe will get you nothing. And a typical savings account wonât do you much better. (Ahem, 0.06% is nothing these days.)
Hereâs a safe way to earn a little cash on the side.
If you havenât started investing and have some money to spare, you can start small. Investing doesnât require you throwing thousands of dollars at full shares of stocks. In fact, you can get started with as little as .*
AmOne keeps your information confidential and secure, which is probably why after 20 years in business, it still has an A+ rating with the Better Business Bureau. If you sign up now (it takes two minutes), Stash will give you after you add to your invest account. Subscription plans start at a month.**
Do you know the allegory of Mr. Market? This useful parable—created by Warren Buffett’s mentor—might change everything you think about the stock market, its daily prices, and the endless news cycle (and blogs?!) built upon it.
The Original Mr. Market
The imaginary investor named “Mr. Market” was created by Benjamin Graham in his 1949 book The Intelligent Investor. Graham, if you’re not familiar, was the guy who taught Warren Buffett about securities analysis and value investing. Not a bad track record.
Graham asks the readers of his book to imagine that they have a business partner: a man named Mr. Market. On some days, Mr. Market arrives at work full of enthusiasm. Business is good and Mr. Market is wildly happy. So happy, in fact, that he wants to buy the reader’s share of the business.
But on other days, Mr. Market is incredibly depressed. The business has hit a bump in the road. Mr. Market will do anything to sell his own shares of the business to the reader.
Of course, the reader is always free to decline Mr. Market’s offers. And the reader certainly should feel wary of Mr. Market. After all, he is irrational, emotional, and moody. It seems he does not have good business judgement. Graham describes him as having, “incurable emotional problems.”
How can Mr. Market’s feelings fluctuate so quickly? Rather than taking an even emotional approach to business highs and lows, Mr. Market reacts strongly to the slightest bit of news.
If anything, the reader could probably find a way to take advantage of Mr. Market’s over-reactions. The reader could buy from Mr. Market when he’s feeling overly pessimistic and sell to Mr. Market when he’s feeling unjustifiably euphoric. This is one of the basic principles behind value investing.
But Mr. Market is a metaphor
Of course, Mr. Market is an imaginary investor. Yet countless readers have felt that Mr. Market acts as a perfect metaphor for the market fluctuations in the real stock market.
The stock market will come to you with a different price every day. The market will hear good news from a business and countless investors will look to buy that business’s stock. Will you sell to them? But a negative headline will send the market tumbling. Investors will sell. Please, they plead, will you buy my shares?!
Don’t like today’s price? You’ll get a new one tomorrow.
Is this any way to make rational money decisions? By buying while manic and selling while depressive? Do these daily market fluctuations relate to the true intrinsic value of the businesses they represent?
“Never buy something from someone who is out of breath”
There’s a reason why Benjamin Graham built Mr. Market to resemble an actual manic-depressive. It’s an unfortunate affliction. And sadly, those afflicted are often untethered from reality.
The stock market is nothing more than a collection of individuals. These individuals can fall prey to the same emotional overreactions as any other human. Mr. Market acts as a representation of those people.
“In the short run, the stock market is a voting machine. Yet, in the long run, it is a weighing machine.”
Votes are opinions, and opinions can be wrong. That’s why the market’s daily price fluctuations should not affect your long-term investing decisions. But weight is based on fact, and facts don’t lie. Over the long run, the true weight (or value) of a company will make itself apparent.
Warren Buffett’s Thoughts
Warren Buffett is on the record speaking to Berkshire Hathaway shareholders saying that Mr. Market is his favorite part of Benjamin Graham’s book.
If you cannot control your emotions, you cannot control your money.
Of course, Buffett is famous for skills beyond his emotional control. I mean, the guy is 90 years old and continues his daily habits of eating McDonalds and reading six hours of business briefings. That’s fame-worthy.
But Buffett’s point is that ignoring Mr. Market is 1) difficult but 2) vitally important. Your mental behavior is just as important as your investing choices.
For example: perhaps your business instincts suggested that Amazon was a great purchase in 1999—at about $100 per share. It was assuredly overvalued at that point based on intrinsic value, but your crystal ball saw a beautiful future.
But Buffett’s real question for you would be: did you sell Amazon when the Dot Com bubble burst (and the stock fell to less than $10 per share)? Did Mr. Market’s depression affect you? Or did your belief in the company’s long-term future allow to hold on until today—when the stock sits at over $3000 per share.
The Woefully Ignorant Sports Fan
I know about 25 different versions of this guy, so I bet you know at least one of them. I’m talking about the Woefully Ignorant Sports Fan, or WISF for short.
The WISF is a spitting image of Mr. Market.
When Lebron James has a couple bad games, the WISF confidently exclaims,
“The dude is a trash basketball player. He’s been overhyped since Day 1. I’m surprised he’s still in the starting lineup.”
Wow! That’s a pretty outrageous claim. But when Lebron wins the NBA finals and takes home another First-Team All-NBA award, the WISF changes his tune.
“I’m telling you, that’s why he’s the Greatest of All Time. The GOAT. Love him or hate him, you can’t deny he’s the King.”
To the outside observer, this kind of flip-flop removes any shred of the WISF’s credibility. And yet the WISF flip-flops constantly, consistently, and without a hint of irony. It’s simply his nature.
Now think about the WISF alongside Mr. Market. What does the WISF actually tell us about Lebron? Very little! And what does Mr. Market tell us about the true value of the companies on the stock market? Again, very little!
We should not seek truth in the loud pronouncements of an emotional judge. This is another aphorism from The Intelligent Investor book.
But I Want More Money!
Just out of curiosity, I logged into my Fidelity account in late March 2020. The COVID market was at the bottom of its tumble, and my 401(k) and Roth IRA both showed scarring.
Ouch. Tens of thousands of dollars disappeared. Years of saving and investing…poof. This is how investors lose heart. Should I sell now and save myself further losses?
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No! Absolutely not! Selling at the bottom is what Mr. Market does. It’s emotional behavior. It’s not based on rationality, not on the intrinsic values of the underlying businesses.
My pessimism quickly subsided. In fact, I began to feel silver linings. Why?
I’m still in the buying phase of my investing career. I buy via my 401(k) account every two weeks. And I buy via my Roth IRA account every month. I’ve never sold a stock. The red ticks in the image below show my two-week purchasing schedule so far in 2020.
If you’re investing for later in life, then your emotions should typically be the opposite of the market’s emotions. If the market is sad and prices are low and they want to sell…well, great! A low price for you increases your ability to profit later.
And Benjamin Graham agrees. He doesn’t think you should ignore Mr. Market altogether, but instead should do business with him only when it’s in your best interest (ooh yeah!).
“The intelligent investor shouldn’t ignore Mr. Market entirely. Instead, you should do business with him, but only to the extent that it serves your interest.”
If you log into your investment accounts and see that your portfolio value is down, take a step back and consider what it really means. You haven’t lost any money. You don’t lock in any losses unless you sell.
The only two prices that ever matter are the price when you buy and the price when you sell.
Mr. Market in the News
If you pay close attention to the financial news, you’ll realize that it’s a mouthpiece for the emotional whims of Mr. Market. Does that include blogs, too? In some cases, absolutely. But I try to keep the Best Interest out of that fray.
For example, here are two headlines from September 29, 2020:
Just imagine if these two headlines existed in another space. “Bananas—A Healthy Snack That Prevents You From Ever Dying” vs. “Bananas—A Toxic Demon Food That Will Kill Your Family.”
The juxtaposition of these two headlines reminds me of Jason Zweig’s quote:
“The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap).”
More often than not, reality sits somewhere between unsustainable optimism and unjustified pessimism. As an investor, your most important job is to not be duped by this emotional rollercoaster.
Investing Based on Recent Performance
Out of all the questions you send me (and please keep sending them!), one of the most common is:
“Jesse – I’m deciding between investment A, investment B, and investment C. I did some research, and B has the best returns over the past three years. So I should pick B, right?”
Great question! I’ve got a few different answers.
What is Mr. Market saying?
Let’s look at the FANG+ index. The index contains Twitter, Tesla, Apple, Facebook, Google, Netflix, Amazon, NVIDIA, and the Chinese companies Baidu and Alibaba. Wow! What an assortment of popular and well-known companies!
The recent price trend of FANG+ certainly represents that these companies are strong. The index has doubled over the past year.
Mr. Market is euphoric!
And what do we think when Mr. Market is euphoric?
How do you make money?
Another one of my favorite quotes from The Intelligent Investor is this:
“Obvious prospects for physical growth in a business do not translate into obvious profits for investors”
You make money when a company’s stock price is undervalued compared to its prospects for physical growth. You buy low (because it’s undervalued), the company grows, the stock price increases, you sell, and boom—you’ve made a profit.
I think most people would agree that the FANG+ companies all share prospects for physical growth. But, are those companies undervalued? Alternatively, have their potentials for future growth already been accounted for in their prices?
It’s just like someone saying, “I want a Ferrari! It’s such a famous car. How could it not be a great purchase?”
The statement is incomplete. How much are you paying for the Ferrari? Is it undervalued, only selling for $10,000? Or is it overvalued, selling at $10 million? The product itself—whether a car or a company—must be judged against the price it is selling for.
Past Results Do Not Guarantee Future Performance
If investing were as simple as, “History always repeats itself,” then writing articles like this wouldn’t be worthwhile. Every investment company in the world includes a disclaimer: “Past results do not guarantee future performance.”
Before making a specific choice like “Investment B,” one should understanding the ideas of results-oriented thinking and random walks.
Farewell, Mr. Market
Mr. Market, like the real stock market, is an emotional reactionary. His daily pronouncements are often untethered from reality. Don’t let him affect you.
Instead, realize that only two of Mr. Market’s thoughts ever matter—when you buy from him and when you sell to him. Do business with him, but make sure it’s in your best interest (oh yeah!). Everything else is just noise.
If the thoughts of Benjamin Graham, Warren Buffett, and the Best Interest haven’t convinced you, just look at the financial news or consider the Woefully Ignorant Sports Fan. Rapidly changing opinions rarely reflect true reality.
Stay rational and happy investing!
If you enjoyed this article and want to read more, Iâd suggest checking out my Archive or Subscribing to get future articles emailed to your inbox.
Inflation measures how much an economy rises over time, comparing the average price of a basket of goods from one point in time to another. Understanding inflation is an important element of investing.
The Bureau of Labor Statistics CPI Inflation Calculator shows that $5.00 in September 2000 has the purchasing power equal to $7.49 in September 2020. To continue to afford necessities, your income must pace or rise above the rate of inflation. If your income didnât rise along with inflation, you couldnât afford that same pizza in September 2020 â even if your income never changed.
Inflation represents a real risk for investors as it could erode the principal value of your investment.
For investors, inflation represents a real problem. If your investment isnât growing faster than inflation you could technically end up losing money instead of growing your wealth. Thatâs why many investors look for stable and secure places to invest their wealth. Ideally, in investment vehicles that guarantee a return thatâll outpace inflation.
These investments are commonly known as âinflation hedgesâ.
5 Top Inflations Hedges to Know
Depending on your risk tolerance, you probably wouldnât want to keep all of your wealth in inflation hedges. Although they might be secure, they also tend to earn minimal returns. Youâll unlikely get rich from these assets, but itâs also unlikely youâll lose money.
Many investors turn to these secure investments when they notice an inflationary environment is gaining momentum. Hereâs what you should know about the most common inflation hedges.
Some say gold is over-hyped, because not only does it not pay interest or dividends, but it also does poorly when the economy is doing well. Central banks, who own most of the worldâs gold, can also deflate its price by selling some of its stockpile. Goldâs popularity might be partially linked to the âgold standardâ, which is the way countries used to value its currency. The U.S. hasnât used the gold standard since 1933.
Still, goldâs stability in a crisis could be good for investors who need to diversify their assets or for someone whoâs very risk-averse.
If you want to buy physical gold, you can get gold bars or coins â but these can be risky to store and cumbersome to sell. It can also be hard to determine their value if they have a commemorative or artistic design or are gold-plated. Another option is to buy gold stocks or mutual funds.
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Is gold right for you? Youâll need to determine how much risk youâre willing to tolerate with your investments since gold offers a low risk but also a low reward.
Physical asset: Gold is a physical asset in limited supply so it tends to hold its value.
Low correlation: Creating a diversified portfolio means investing in asset classes that donât move together. Gold has a relatively low correlation to many popular asset classes, helping you potentially hedge your risk.
Performs well in recessions: Since many investors see gold as a hedge against uncertainty, it is often in high demand during a recession.
No dividends: Gold doesnât pay any dividends; the only way to make money on gold is to sell it.
Speculative: Gold creates no value on its own. Itâs not a business that builds products or employs workers, thereby growing the economy. Its price is merely driven by supply and demand.
Not good during low inflation: Since gold doesnât have a huge upside, during periods of low inflation investors generally prefer taking larger risks and will thereby sell gold, driving down its price.
2. Real Estate Investment Trusts (REITs)
Buying real estate can be messy â it takes a long time, there are many extra fees, and at the end of the process, you have a property you need to manage. Buying REITs, however, is simple.
REITs provide a hedge for investors who need to diversify their portfolio and want to do so by getting into real estate. Theyâre listed on major stock exchanges and you can buy shares in them like you would any other stock.
If youâre considering a REIT as an inflation hedge youâll want to start your investment process by researching which REITs youâre interested in. There are REITs in many industries such as health care, mortgage or retail.
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Choose an industry that you feel most comfortable with, then assess the specific REITs in that industry. Look at their balance sheets and review how much debt they have. Since REITs must give 90% of their income to shareholders they often use debt to finance their growth. A REIT that carries a lot of debt is a red flag.
No corporate tax: No matter how profitable they become, REITs pay zero corporate tax.
High dividends: REITs must disperse at least 90% of their taxable income to shareholders, most pay out 100%.
Diversified class: REITs give you a way to invest in real estate and diversify your assets if youâre primarily invested in equities.
Sensitive to interest rate: REITs can react strongly to interest rate increases.
Large tax consequences: The government treats REITs as ordinary income, so you wonât receive the reduced tax rate that the government uses to assess other dividends.
Based on property values: The value of your shares in a REIT will fall if property values decline.
3. Aggregate Bond Index
A bond is an investment security â basically an agreement that an investor will lend money for a specified time period. You earn a return when the entity to whom you loaned money pays you back, with interest. A bond index fund invests in a portfolio of bonds that hope to perform similarly to an identified index. Bonds are typically considered to be safe investments, but the bond market can be complicated.
If youâre just getting started with investing, or if you donât have time to research the bond market, an aggregate bond index can be helpful because it has diversification built into its premise.
Of course, with an aggregate bond index you run the risk that the value of your investment will decrease as interest rates increase. This is a common risk if youâre investing in bonds â as the interest rate rises, older issued bonds canât compete with new bonds that earn a higher return for their investors.
Be sure to weigh the credit risk to see how likely it is that the bond index will be downgraded. You can determine this by reviewing its credit rating.
Diversification: You can invest in several bond types with varying durations, all within the same fund.
Good for passive investment: Bond index funds require less active management to maintain, simplifying the process of investing in bonds.
Consistency: Bond indexes pay a return thatâs consistent with the market. Youâre not going to win big, but you probably wonât lose big either.
Sensitive to interest rate fluctuations: Bond index funds invested in government securities (a common investment) are particularly sensitive to changes to the federal interest rate.
Low reward: Bond index funds are typically stable investments, but will likely generate smaller returns over time than a riskier investment.
4. 60/40 Portfolio
Financial advisors used to highly recommend a 60/40 stock-bond mix to create a diversified investment portfolio that hedged against inflation. However, in recent years that advice has come under scrutiny and many leading financial experts no longer recommend this approach.
Instead, investors recommend even more diversification and whatâs called an âenvironmentally balancedâ portfolio which offers more consistency and does better in down markets. If youâre considering a 60/40 mix, do your research to compare how this performs against an environmentally balanced approach over time before making your final decision.
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Simple rule of thumb: Learning how to diversify your portfolio can be hard, the 60/40 method simplifies the process.
Low risk: The bond portion of the diversified portfolio serves to mitigate the risk and hedge against inflation.
Low cost: You likely donât have to pay an advisor to help you build a 60/40 portfolio, which can eliminate some of the cost associated with investing.
Not enough diversification: Financial managers are now suggesting even greater diversification with additional asset classes, beyond stocks and bonds.
Not a high enough return: New monetary policies and the growth of digital technology are just a few of the reasons why the 60/40 mix doesnât perform in current times the same way it did during the peak of its popularity in the 1980s and 1990s.
5. Treasury inflation-protected securities (TIPS)
Since TIPS are indexed for inflation theyâre one of the most reliable ways to guard yourself against high inflation. Also, every six months they pay interest, which could provide you with a small return.
You can buy TIPS from the Treasury Direct system in maturities of five, 10 or 30 years. Keep in mind that thereâs always the risk of deflation when it comes to TIPS. Youâre always guaranteed a minimum of your original principal at maturity, but inflation could impact your interest earnings.
Low risk: Treasury bonds are backed by the federal government.
Indexed for inflation: TIPS will automatically increase its principle to compensate for inflation. Youâll never receive less than your principal at maturity.
Interest payments keep pace with inflation: The interest rate is determined based on the inflation-adjusted principal.
Low rate of return: The interest rate is typically very low, other secure investments that donât adjust for inflation could be higher.
Most desirable in times of high inflation: Since the rate of return for TIPS is so low, the only way to get a lot of value from this investment is to hold it during a time when inflation increases and you need protection. If inflation doesnât increase, there could be a significant opportunity cost.
The Bottom Line
Inflation represents a real risk for investors as it could erode the principal value of your investment. Make sure your investments are keeping pace with inflation, at a minimum.
Inflation hedges can protect some of your assets from inflation. Although you donât always have to put your money in inflation hedges, they can be helpful if you notice the market is heading into an inflationary period.
The post 5 Best Hedges in the Face of Inflation appeared first on Good Financial CentsÂ®.
Learning how to invest in silver can be difficult – but can pay off in the long-run if you know how. Learn all about investing in silver in this comprehensive guide.Learning how to invest in silver can be difficult – but can pay off in the long-run if you know how. Learn all about investing in silver in this comprehensive guide.
The post How To Invest In Silver appeared first on Money Under 30.