Financial Learning Center

Mother and daughter looking at financial documents
Financial Learning Center
Financial Learning Center
  • How do I build a balanced portfolio?

    Managing risk is one of the most important jobs you have when you are investing. The key way to do this is to spread your risk among different investments. By putting your eggs in different baskets, you are “balancing your portfolio” and spreading your overall risk.

    As you know, markets go up and down. But these ups and downs are uneven and unpredictable. When one part of the market goes up, others can go down. When stocks go ups, bonds often go down. Even on the same news, the impact can be different.

    This volatility can be managed to some degree. Events like drops in commodity prices, bad management decisions, product recalls, and changes in regulations hit individual companies, industries and countries differently. These are called non-systemic risks, and these risks are what you try to manage though balance.

    The tool that is used to balance non-systemic risk is diversification. By diversifying your portfolio, you can manage some of your risk. You can do this in three ways: diversifying by asset class, geography or industry.

    Most of the heavy lifting of diversification happens by diversifying by asset class. When you invest, you can buy stocks, bonds and funds, or just hold cash. Each of these asset classes behaves in its own way. Stocks tend to be more volatile and risky. Bonds tend to be much less volatile and more stable. Stocks and bonds also tend to move in opposite cycles. And cash keeps its value even in market downturns.

    So by spreading your portfolio among these asset classes, your portfolio can be somewhat insulated from different types of market forces. Something that hits stocks hard may be a benefit to bonds and something that hurts bonds can sometimes help stocks. So by mixing your asset holdings, your portfolio can weather many kinds of market storms.

    You can also diversify your portfolio geographically. If your portfolio holds lots of US stocks, it would be a good idea to diversify by buying European or Asian investments. By spreading your money this way, a downturn in the US will only impact part of your portfolio.

    Finally, you can diversify by industry. Different industries run in different cycles. A downturn in oil prices for example may be devastating to oil companies, but lower fuel prices are a boon to transportation. By buying into different industries you will make sure that a down-cycle in one part of your portfolio will not spread to your whole portfolio. If you start with broad categories such as primary industries, manufacturers and services, you can branch out into more specific categories once you get the hang of it.

    Also note that Exchange Traded Funds (ETF), can be an simple, low cost way to instantly diversify your portfolio. You can find ETFs that are diversified by geography, industry or asset class. A single fund can do a ton of diversification work for you, especially when you are just starting out.

    Now that you know how to balance your portfolio, we need to look at the most important part of balance: you! No matter how you balance your portfolio, you need to take into account your own risk tolerance. If you don’t have much of an appetite for risk, or really cannot afford to lose money, then your portfolio should be balanced towards more conservative products.

    The most effective way to manage risk is through asset allocation, specifically the proportion of stock, bonds and cash you hold. If you have a conservative risk profile, it would be good to hold more bonds and cash and a lower proportion of stock. If you can accommodate a lot of risk, you can hold a greater proportion of stock.

    As a guideline, this is a sample of what a balanced portfolio should look like: A conservative investor can have a mix of 70% bonds, 20% stocks and 10% cash. For an aggressive investor, the holdings are inverse, 70% stocks, 20% bonds and 10% cash.

    If you don’t have an appetite for risk, choose a bond fund at the core of your portfolio and take only a small proportion of stock. If you have a higher tolerance for risk, maybe take a more aggressive fund as your core, and take a larger proportion of stock.

    One last thing, it’s always good to go back and revisit your balance every three months. The value of your holdings will change over time, so your balance will change. Make sure you check to see if you’re comfortable with your new balance. If you’re not, rebalance by selling some of the asset where you’re overweight, putting the proceeds into the assets where you’re underweight.

    So that’s balance. It’s easier than it looks. Start by diversifying between stocks, bonds, funds and cash. Use ETFs to do some easy diversification for you. Aim to diversify even further by industry or geography if you can. But make sure you’ve taken your own risk tolerance into consideration. If you do this well, even if one part of the market hits the rocks, your overall portfolio won’t be impacted severely. And that’s the goal of balance: making sure a downturn in one part of the market doesn’t ruin your whole portfolio.

  • How do I determine my risk tolerance?

    You probably know this already, but it can’t hurt to repeat it: Investing can be risky. This means that your investments can lose value. And when this happens, it can not only be painful, it can also impact your economic wellbeing.

    But risk can also be your friend. Without taking on some risk, it is almost impossible to get good returns. The key is finding an appropriate level of risk that you are comfortable with. An educated risk is what you’re after, and that balance will reward you in the long run

    In order to sort out how much risk you should take on, it is a good idea to take an overt look at where you are as an investor. Every investor should do this, and every investment advisor is mandated to do this. It’s called a ‘know your client’ (KYC) assessment, which gauges how much risk an investor should take on.

    Generally, you should take on less risk if you are

    1. An inexperienced investor
    2. Have a family to support
    3. Want to protect your savings
    4. Are saving very little
    5. Have a lot of debt
    6. Are close to retirement

    If you fall into a category that qualifies you as a low risk investor, it means you should take on more low-risk investments and less higher risk investments. This means your portfolio should hold a greater weight of government bonds and investment grade bonds and a lower weight of individual stocks. And if you do hold stocks, they should be large, strong blue chip stocks.

    If you qualify to take on more risk, then you can lower the weight of bonds and hold more stocks. And those stocks can be smaller, more growth focused companies.

    What about funds? Where do they fit into this mix? A fund can be made up of just about anything: bonds, large stocks, small cap stocks. So their risk is dependent on what is inside the fund. So bond funds can replace bonds and equity funds can replace individual funds in a portfolio.

    Index funds, on the other hand, track the overall market. This means that when the overall market goes up, your investments increase in value, and when it goes down, you lose value. You will never do better or worse than the market. Index funds have the same risk as the overall market and sit right in the middle in terms of risk.

    But this is all a very objective exercise. What about you and what you want? What if you are the type of person that likes to jump out of airplanes? Maybe you can tolerate more risk?

    As part of any KYC, an advisor needs to ask an investor how much risk they believe that they can tolerate. Maybe a conservative portfolio is still too risky for someone who has little appetite for risk? Or maybe a low-risk portfolio has too little potential up side for someone who can tolerate more risk.

    This self-assessment needs to take into consideration not only how much potential loss an investor can handle, but also how much potential return they are interested in. 

    In the end, a personal risk assessment should only change an investor’s risk profile a few degrees. An investor who should take on only a little bit of risk is not served well with a portfolio of volatile stocks. The risk assessment should still focus on what is appropriate for the investor and adjust it slightly for his or her own preferences.

    Also consider that your risk profile is something that evolves over time as you gain confidence, experience, knowledge and assets. So don’t rush into risk. It is something that you will learn to manage and you should give yourself time to understand it.

    In the end, the only time you will know your true tolerance for risk is when you are risking real money. Only when you actually feel the impact of a loss will you truly know if you can manage it. If the loss impacts you so much that it affects your quality of life, you need to lower the amount of risk you’ve taken on.

    So do your best to make sure you understand how much risk you can take on. And reassess where you are at least once a year.

  • How do I get started investing?

    There is so much confusion and emotion around money that for many people, learning about investing can seem very overwhelming.

    But it doesn’t have to be that way.

    Here’s a path to getting started with investing that is easy to navigate. If you just take one step at a time, you can become a confident investor in no time. 

    Ask Questions

    To get on the path to investing, the first thing you should do is ask questions. We all come at investing from different starting points, and we all have different hurdles to overcome, so confidently asking questions about money is the best way to understand where you are, and where you want to go.

    Don’t be afraid to channel your inner 5 year old. The simplest questions can often be the hardest: Why? What? How much? And How? Ask until you feel that you have a good grasp of the issue at hand.

    Most people are usually stuck somewhere in their financial life, and have a pile of questions that need to be answered. Read appropriate content that enables you to answer your own questions, or attend conferences or seminars that are about learning, versus ones just trying to sell you something.

    Understand yourself

    At the same time, once you’ve begun the process of learning what investing is, the focus needs to turn to you. Understanding your financial position and risk profile will help you determine how to get started.

    Most advisors use series of questions to define your risk profile and set how much risk you should take on. For novice investors, or those close to retirement, it means taking on less risk.

    The way your risk is balanced is by managing what you invest it. So a novice investor should have a lower share of risky investments like small, volatile stocks and a greater share of lower risk investments like bonds and index funds.

    And for those just starting out, starting with a low-risk portfolio will smooth out some of the bumpy ups and downs that come with investing, and will help build confidence.

    Start with what you know

    Confidence also comes from starting with things that are familiar to you. If you are very knowledgeable about certain companies or industries – look to include the top rated performers into your portfolio. This familiarity can help contextualize investing, and is a great way to start investing.


    But before you go out and start investing your hard earned money, there is one thing you really should do first: Practice. Build your money muscles before you risk your own money. Create a practice portfolio first. There is a tremendous amount of learning that you can gain from watching a portfolio, seeing how prices move, watching the value of your portfolio change, watching to see how news impacts individual companies. These lessons go a long way to helping you avoid mistakes when you open a brokerage account and begin investing. Or if you are going to be working with an advisor in the future, you have a better base of experience in order to gauge how well your advisor is doing.

    Look to sites like Investopedia, Yahoo Finance or Google Finance to set up a virtual portfolio.


    Once you have some practice, and you want to get started – the next step is to open an account that will allow you trade. You’ll need to open an account with a broker. Look to find one that has account minimums and trading fees that are most appropriate to you.

    What sort of account to open is not necessarily obvious - so start with why you’re investing.  If you want to put the money aside for retirement, then think about opening a ROTH IRA trading account. It allows you to grow the money tax-free and withdraw tax-free after you retire. There are earnings limits to ROTH IRA’s, so if you’re not eligible for a ROTH IRA, think about opening a traditional IRA trading account. These have the same tax-free growth benefits as a ROTH IRA, but are taxed when the money is withdrawn.

    Let’s stop here for a second. It is super important to make sure you are POSITIVE that the money that you put in your IRA is money that you don’t need until you retire. If you suddenly find you need access to your IRA before you retire, and you take it out early (and 25% of Americans do!), you get taxed on the withdrawal AND pay a 10% penalty! That will destroy any of the tax benefits you will have gained from the IRA.

    So… if you might need the money before you retire, or you have maxed out your retirement contributions, think about opening an individual trading account (or a joint account if you’re married). You will be taxed on the gains you earn on this account, but paying tax on gains means that you earned money from your investments! That’s money earned from cash that would otherwise be just sitting there. So don’t be too sad about the tax. Just try to hold each of your investments for more than a year so you are eligible for a lower capital gains tax rate…

    Once you open an account, you will need to fund it.  It usually takes a few days for the money to arrive at the broker, and again a few more days for the money to clear. So know that it will be a few days before you can actually begin investing.

    Another good idea is to fund your trading account regularly. The two most proven drivers of wealth are 1. starting early and 2. regular contributions. If you can keep adding to your portfolio with new money, your investment will grow at a much faster pace.

    Using a money manager

    One day you might decide that you want someone else managing your money. Which is fine. But if someone is investing on your behalf, make sure they are following a strategy that you’re comfortable with. Ask lots of questions, and don’t ever assume that the money that you worked so hard to earn is doing just fine without your attention. You absolutely need to look at your monthly statements and watch how your portfolio is doing. Also, add up the fees that have been taken out. Make sure they aren’t eating away at your gains. You are still the boss of your money, so make sure you keep an eye on it.

    Lastly, know that markets can and will go down. Be prepared for those times. Make sure you can sleep at night when the markets drop. If you can’t, and you’re feeling a tremendous amount of anxiety about your portfolio, look to reduce your risk and focus more on less risky investments, like bonds. And make sure you buy on the dips. Don’t be an investor that runs out of the store when things go on sale!! 

    So begin your investing journey by asking questions. Get a handle on who you are as an investor and practice with a virtual portfolio. And when you’re ready, jump into the market, build a portfolio you’re comfortable with, and try to keep adding money into your account. Investing is a lifelong journey – and for many, the hardest part is getting started – but it’s important that you do!

  • How do I measure future value?

    People invest their money in the hope that it will increase in value over time. Without this reward, people would not take on the risk of investing. Growth is a fundamental prerequisite for almost any investment.

    But how do you predict growth? Or even measure it? How do you figure out how much your investment will be worth in the future? Well, guess what? There is a way to figure this out! Roll up your sleeves and dig into the concept of ‘future value’.

    Future value (FV) is the idea that a current investment will have a predictable value in the future, given an assumed rate of growth over time. So if you want to look at the future and see how much your investments might be worth, try a future value calculation.

    There are online calculators that will do the work for you – but it’s important to understand the underlying idea.

    We’ll start with an easy example: An interest bearing savings account. Let’s also assume that you don’t add any money to the account along the way and the interest rate you get does not change. Let’s say you put $5,000 in a savings account. We’ll call that ‘present value’ (PV). Now let’s say that the account pays 3% interest. We’ll call that the ‘rate of return’ (r). Finally, let’s also assume that you put the money away for 5 years. We’ll use 5 as the ‘number of periods’ (n). So now, if you want to know how much your money will be worth after 5 years, you use this ‘future value’ (FV) calculation

    FV = PV (1 + r)n

    If we plug in the numbers into Excel, it looks like this:


    Which gives you the result $5,796. So there you go, your money grew! Sweet!

    Now lets assume that instead earning interest once per year, you get interest once per month. Nothing else changes, you still get 3% interest, but it gets paid as 0.25% every month. Let’s see what happens.

    So now your (r) is .0025 (3% per year divided into 12 months) and your (n) is 60 (5 years times 12 months). If we plug these numbers into Excel, it looks like this:


    By changing the frequency of your interest payments, your money grew faster, to $5,808 after 5 years. So the frequency of your compounding makes a difference! By spreading out your interest payments, you will earn interest on your already accumulating interest, thereby amplifying the effects of compounding, even at the same interest rate.

    Future value calculations are a great way to compare potential investments, extrapolate savings into retirement or to see if you’ll have enough money to put your kids through college.

    The only weakness to future value calculations is having to select an appropriate rate of return. It is impossible to look into the future, so there is no way to know precisely what rate of return you will actually get on your investments. So it’s a good idea, with any future value calculation, to use a range of inputs. The historical rate of return for US stock markets is around 7%, so it would be good to look at returns above and below that rate. If you are a conservative investor who avoids risk, focus on rates of return that are below 5%.

    Finally, it is important to note that future value can be super-amplified by adding to your investments over time. The examples we’ve used here assume you put your money away and don’t add to it. If you instead added $10 every month to your investment, it would be worth $6,455 at the end of five years. Even adding a small amount regularly to your investments can make a huge difference.

    Try out this more sophisticated future value calculator to see how adding deposits over time impacts the growth of your investments.

    Get familiar with future value by trying out different rates of return, different starting values and different durations for your investments. When you do this, you will get a good idea how much you need to be putting away and what sort of return you will need to get for various future goals.

    Future value is a vital concept to understand if you are setting any sort of savings goal for yourself. Savings goals become much more reasonable when you plug them into a future value calculator. It may seem like a boring proposition, but an hour spent experimenting with future value will go a long way to helping you realize your investment goals.

  • How do I measure present values?

    How much is your money worth right now? The balance you see on your ATM receipt only tells part of the story. Your money also has another story, which speaks of it’s potential to do things in the future.

    Money holds tremendous opportunity. Maybe the money you have saved will be able to pay for a boat in 5 years? Maybe it will be the deposit on a house in 10 years? What if you want to pay for $10,000 in tuition in 5 years, will the $7,500 you have right now pay for it?

    These are all great questions and ones we can actually figure out.

    These are called Present Value calculations and with it, you can figure out if you have enough today to do something important in the future.

    To make the calculation, you need to know 3 things:

    1. The price of the thing you want in the future (Future Value, FV)
    2. The length of time in until that point in the future (In years, Y)
    3. The rate of return you would get if you invest that money (Return, r)

    You can go online to find present value calculators, but to do it manually, here’s the formula:

    PV   =   FV / (1 + r)Y

    It looks a little complicated, but it is fairly simple.

    Let’s look at the above tuition example. If you need $10,000 in 5 years, you have two of the inputs figured out, FV, which is $10,000 and Y, which is 5 years.

    The last thing you need is the rate of return. To be conservative, let’s assume you put that money into the stock market, buying an index Exchange Traded Fund. Let’s say you buy SPY, an ETF that tracks the S&P 500, and is super low cost. Its 10-year average return is around 7% per year. So let’s assume that SPY will return the same 7% for the next 5 years (a big assumption yes, but we have to put our feet somewhere).

    In Excel the formula would be =10000/(1+.07)^5

    When you plug the numbers into the formula you get a present value of $7,130, which means that you would need to invest $7,130 today in order to have $10,000 in five years. So the answer to the question is yes, our friend with $7,500 in the bank today should be able to invest her money and pay her tuition in 5 years (and still have money left over for some books!).

    But, you may have noticed that the weakness of the present value calculation is the rate of return. As we said, you have to put your feet down and make an assumption about the rate of return you’ll get. But in reality, it is hard to predict what kind of return you will get, or even what risks you will tolerate to get it. So present value calculations have to be used with an eye to your own situation.

    If instead you want to know the rate of return you require to grow your current savings into your goal amount, the present value calculation can be flipped around to tell you that rate of return. In order to calculate this, you would use this formula:

    r = (FV / PV)1/y - 1

    Let’s look at our tuition example again. If you want to grow your $7,500 savings into your $10,000 tuition in 5 years, you need to figure out what kind of annual return you need to earn in order to get to your goal.

    In excel, the calculation would be =((10000/7500)^(1/5))-1

    So in this example, you would need a compounded annual growth rate of 5.92% in order to get to your $10,000 tuition goal.

    Present value calculations are a great way to help you get your head around investment goals and targeted returns. The formulas get more complicated as your situations get more complex. There are lots of terrific calculators on-line to help you make these calculations. Go here for a very simple present value calculator. Or look to Calculator Soup or Financial-Calculators.comfor more sophisticated present value calculators.

  • How do I measure progress?

    So you have money to invest. You have a plan. You know your goals. You know your risk profile. You know what you want to invest in. Maybe you’ve already begun the journey and invested your hard-earned money already. Now what? How will you know how well you’re doing? How do you measure success?

    First of all, it is super-important to go back to your objectives. Did you want to be cautious and preserve the money you had, or did you want to go all out and generate huge returns? The performance of your portfolio needs to be seen in comparison to those objectives.

    You also need to look at what you’ve invested in. If you invested in conservative government bonds, you should not expect outsized gains. Your performance needs to be compared to the kinds of investments you’ve bought.

    So let’s start by measuring gains. First of all there is a big difference between realized gains and unrealized gains. Realized gains are investments that you have sold, for a profit. The gain, called a capital gain, is taxed. Until you sell, there is no “real” gain and no tax. It also means you can’t really brag about all the huge gains you’ve made until you actually realize them by selling!

    To figure out your gain, start with what you paid for the stock, including fees. This is called your costs basis. Now subtract this from the sum total of what you sold the stock for (the amount you got from the stock sale, minus any fees). This is your gain.

    If you want to know the percentage gain, take your gain and divide it by your cost basis and multiply that by 100. That will give you your percentage gain. So if you bought a stock for $1,000 and sold it for $1,200, your gain would be 200 divided by 1,000, or 20%.

    To better understand this percentage gain, you have to take note of how long it took you to earn it. A 10% might look great on paper, but if it took you 5 years to earn that gain, it really is only a 2% gain per year. So dividing your gain by the number of years you held the investment, will give you a good overall picture of your gain.

    As a side note, if you sell for a gain outside of a tax advantaged retirement account (IRA or 401K), make sure you keep some of the money aside to pay taxes on your gain. If you held the stock for more than a year, you get a preferential capital gains rate that ranges from 0% to 20%. If you held it for less than a year, you will be taxed at your normal income tax rate.

    To keep track of day-to-day changes, you should track unrealized gains. Keep track of each individual investment’s cost basis, and its current value. Also keep track of any fees as they come up and add them to the cost basis. This may be difficult to do for funds that charge fees over time. But it is super-important to do this. You need to see how of your gains are eaten by fees.

    By adding up all your unrealized gain and losses, you will get a good sense of how well your overall portfolio is doing. Most brokers allow you to track this fairly easily.

    So now that you know how to measure gains and losses, how do you judge those gains and losses? Is a 10% gain good? Is 5% terrible? How can you tell how well you’re doing?

    Strangely enough, in order to know how well you’re doing, you need to compare yourself to how everyone else is doing.

    If your stocks went up 5% last year, that sounds good. But what if the overall economy was in full gear and the overall stock market went up 20%? It means your stocks didn’t leverage the high-flying economy very well, and your stocks lagged the average. On the other hand, that 5% would be terrific if the overall market went down 5%. So context is important. Compare your gains to average stock market performance to see how well you’re doing.

    The S&P 500 is considered the best proxy for the overall stock market, so compare your stock returns to that index.

    The final thing to watch is deciding when to sell. Watching the performance of your stocks should give you sell information. If you’ve made terrific gains, on a stock, you should consider selling some of it to lock in the gain, or get out entirely. Don’t be too greedy! Also if a company’s stock drops because something fundamentally is wrong with the company such as restated earnings, lawsuits, plummeting sales, it may be time to bite the bullet and sell at a loss. Always have an exit strategy.

    So that’s how you measure progress. You should look at it as often as you can, and as carefully as you can, making sure you incorporate all costs. By watching your progress, you’ll close the loop in your investing journey, giving you feedback to help you make good investing decisions.

  • How do I set financial goals?

    Setting goals is a vital step you need to take to ensure a financially healthy life. But when an investment company asks “what’s your retirement number?” it’s hard for many people to answer. How much do you need to retire? How about “As much as humanly possible!!”

    So instead of obsessing about a random number, you should first take a good look at who you are and what your needs are. Once you do that, you’re going to learn what kind of investments you should make and how much risk you should take on. Only then can you even begin to set goals.

    So, let’s first look at you and begin with your investment objectives.

    Objectives may sound like the same thing as goals, but they are slightly different. Your objective should be a general idea of what you want to get out of your investments. Do you want to generate income that you can use to live off? Or do you want to grow your saving for later use? Do you want to grow as quick as you can? Or do you want to make sure don’t lose any value to your investments? These general objectives will guide your investment decisions.

    Next, evaluate how much risk you are willing to take on. If you will lose sleep when any of your investments lose value, then you probably have a low tolerance for risk. If you want fast growth and can tolerate the prospect of sometimes losing money, you probably have a high tolerance for risk.

    Your objectives and risk tolerance can sometimes run counter to each other. If, for example, you want high returns, but you’re scared to death losing money, then you need to move away making high growth investing your objective. The strategy would be too risky and would be beyond what your risk tolerance could handle, So make sure your objectives and risk tolerance match.

    Next, let’s look at where you are in life. Life-related self-assessments must be taken into consideration when setting your goals. To do this, you should ask yourself a few key questions. In fact, every registered investment advisor is mandated to do the same for every client.

    First question is your experience level. This one is straightforward. If you’ve never invested before, you should start off slowly and not take on too much risk.

    Next, look at your time horizon. This one is not as straightforward. There is a lot of debate about how much risk you should take as you get older. Conventional wisdom says that you should take on less risk as you get older because you have less time left to correct mistakes. Which makes sense.

    But there is now a lot of evidence to show that keeping a higher level of risk can pay off substantially when you’re older because you’ll have so much more money to invest.

    In the end, a middle ground probably makes sense. Keeping some level of risk doesn’t mean you have to be reckless. It just means you don’t have to eliminate risk altogether as you get older.

    Here is a good way to think about risk:

    1. Take on as much risk as you can tolerate when you’re young because you have more time to make up for mistakes.
    2. When you near retirement, maintain as much risk as you can tolerate. Retirement doesn’t mean you stop investing.
    3. But if the risk of losing money gives you anxiety, lower your risk level.

    Another question to consider is your financial situation. If you have some debt and only a little bit of savings, you should not take on much risk. You literally cannot afford to lose money. On the other hand, if you have little or no debt and some savings, you can take on more risk.

    Finally, your family situation should also influence how much risk you take on. If you are married with kids, you need to be more conservative to protect the savings you have, especially for things like health care and education.

    So now let’s look back at your objectives. Again, you need to modify your objectives to match your self-assessment. If you are inexperienced, have some debt and have a family, you need to be very conservative with your investments to protect your savings. If are young, without kids, have trading experience, have little debt and a sizable disposable income, you can take on a considerable amount of risk.

    In the meanwhile, here’s a goal for you: Save as much money as possible! But make sure you keep that goal within the bounds of your objectives and tolerance for risk.

    Also keep in mind the bigger picture of savings. You should be thinking about budgeting and debt reduction so that you have more money to invest.

    In the end, your objectives will get you on a road to savings and growth. Over time, this will help will buy you options in life. You’ll suddenly have to opportunity to go back to school, or take time off to take care of your kids, or buy a house… You don’t know where you’ll be in the future, but if you invest and grow your savings, in the future you will have options. And your future you will thank you for that.

  • How do I ‘practice’ investing before putting money in?

    Practicing investing before you put real money in is a way to build your money muscles. Just like when you exercise your regular muscles, your money muscles can be strengthened over time with practice and training. Investing won’t cause you physical pain, but the very act of using your money muscles, and making decisions for yourself, helps make your money muscles strong.

    You can find practice portfolios at sites like (relatively simple) or Marketwatch (more complex). They are sometimes called simulations, or virtual portfolios.

    When you get good at it, your investing confidence will grow and you will become an empowered investor.

    So what can you learn by exercising your money muscles through practice portfolios? Let’s go through them.


    Every investment carries a level of risk. Some investments are riskier than others, and understanding the differences is vitally important.

    But more importantly, you need to understand your own tolerance for risk. It is one thing to say that a portfolio full of penny stocks is risky, but it’s another thing to be up at night, unable to sleep because of the stress you feel about the loses you have in your penny stock portfolio.

    Understanding your tolerance for risk is something that you can only really come to terms with through practice. You need to know how gains and losses impact you, your future plans and your day-to-day well-being. Getting to a place where you are comfortable with the amount of risk you’ve taken on takes time and practice.


    The price for all investments fluctuates. That’s the nature of the market. The value of an investment is only what someone will pay for it at this exact moment. In the next moment, the price will change because the next person may not be willing to pay that same price. Markets are fluid and the prices of investments traded in those markets are always in flux.

    While volatility is a given, getting used to it can take time. It can be unnerving watching your investments jump up and down in price. It takes time to understand what a natural fluctuation is and what a problematic change looks like, so that those can be addressed. Practice will allow you to get used to these different price fluctuations.


    Knowing when to buy and when to sell is a critical part of investing. It is also one of the hardest things to do! In fact, it is impossible to know what the future holds for your investments, so it is up to investors to make their own assumptions as to what the future holds.

    The good news is that the whole market is in the same boat. People who panic and sell when investment values go down, and jump in when they are sky high are the ones who drive value for other investors. So don’t panic when prices go down!

    Practice certainly makes this process easier. The more correct decisions you make, the easier the next decision will be. Even bad decisions make the process easier. You certainly won’t repeat a bad decision.

    But practice definitely makes buy and sell decisions easier.


    How much attention do you pay to your portfolio? Do you check it every day? Every hour? Every month?

    While you definitely need to pay attention to your investments, paying too much attention can lead you to over-think events and lead you to make decisions based on insignificant events. But not checking your investments frequently enough may make you miss key events that have fundamentally changed one or more of your investments.

    As a good rule of thumb, you should check your portfolio at least once a week. You definitely don’t need to check it more than once a day. But you do need to check it enough to catch significant events when they happen.

    Also make sure you keep an eye out for news events that could impact your investments. Try to digest the news in a way that incorporates your investments.

    You should also make sure to sit down and reevaluate all of your holdings at least once every three months. Taking time out to look at your investments critically can help you make better decisions about your portfolio.

    Using pretend money in a virtual portfolio is a terrific way to build you money muscles. By investing virtual dollars you’ll get a good feel for the market. You will get an understanding of how the value of your virtual portfolio fluctuates, when to buy and sell, how to ride though the dips, how to manage your risk and how much attention to pay to your portfolio. These are all critical skills that you can learn through practice in a virtual portfolio.

  • Is insurance an investment?

    In the world of investing, insurance tends to be ignored. Nobody really sees insurance as an investment. But it can be.

    Insurance can be much more sophisticated than just the policy you buy to cover your car, house or life. There are insurance products that have all the dimensions of an investment product, and should be considered as such

    First of all, it is true that most types of insurance you buy are not investment products. They are a way to protect yourself from unexpected, high cost events. You pay a premium to get the insurance, $1,000 per year to insure your car for example, and if you get into an accident, your insurance company will pay your expenses (minus your deductible). Pretty straightforward, right? The insurance company uses actuaries to build policies, and their underwriters decide how risky you are to insure, and tell you how much you should pay.

    How about insurance products that have an investment component? They also use underwriting as the basis of their products. But there is also a part of the premium that is invested and can grow in value. The two main products we will cover here are Whole Life Insurance, and Annuities.

    When people think of life insurance, it’s usually ‘Term Life’ they think of. Term life means that you pick a period of time that want to be insured for, and if you die before that time is up, your beneficiaries get paid. If you don’t die during that time, the policy ends, the insurance company keeps your premium and you get nothing. (But you’re alive! So it’s not all bad).

    Whole life is similar to term life, in that it has an insurance contract which will pay a stated value when the insured person dies. But there are differences. First of all, there is no term to the policy, so as long as you keep paying the premium, the policy remains in force. Secondly, the policy has as an investment component that can grow in value. The benefit of this product is that the insured person can withdraw or borrow against the invested portion of the policy, which can grow tax deferred. The policies are more expensive than term life policies, but have the financial benefit of the invested portion of the policy.

    Annuities - whether fixed or variable, are tax deferred insurance products that you pay into, with the intention of getting a regular, level income when you are older. A fixed annuity means that you will be paid a guaranteed, fixed payment every year until you die. If you live a long life, fixed annuities are a terrific way of having income if you live beyond what your savings can support. Fixed annuities are often used as a way to top up social security payments.

    A variable annuity has similar benefits to a fixed annuity, but has more flexible funding, investing and payout options. Payments into variable annuities are invested, so the value of the annuity is dependent on the performance of ‘the market’. This makes variable annuities riskier because they do not have guaranteed payments. On the other hand, they have more flexibility because your annuity can grow if your investments grow. Variable annuities also have a death benefit if the annuity holder passes away before payouts begin. And finally, variable annuities have very flexible payout schemes and can be paid out for a fixed period or for the lifetime of the annuity holder. As with fixed annuities, payments into variable annuities are tax deferred.

    The critical things to consider with whole life insurance or an annuity are the terms, the fees and the risks. Whole life and annuities are investment products that are particularly complex, expensive and jargon filled - so make sure you know what you’re signing up for and paying for.

    Unfortunately, the one variable that will determine whether these products are a good option for you, is completely out of your hands: How long you’ll live. If you live a long life, annuities are terrific. If you don’t, whole life would be a better option… Another way of looking at this dilemma is to think of it this way: Do you fear running out of savings in retirement, or do you fear that your loved ones will not be taken care of after you die. If savings is the issue, annuities are something to look at. If you worry about your loved ones, then insurance may be better.

    But make sure you benchmark these products against simpler products that may or may not have higher rates of return.

    And ask the critical questions of your insurance provider:

    • How much commission are you being paid to sell me this?
    • What are the annual fees?
    • When can I access my money?
    • What are the tax implications?

    Variable annuities in particular have been growing in popularity recently, and with good reason: They earn huge commissions for the people who sell them.

    So, as with all investment products, do the math carefully on what you need to put in, who is getting paid, and what your expected return is. And don’t look at the products in isolation. Look at the opportunity cost of not being invested elsewhere. If you can get a 5%-7% average return from the stock market, why would you put money into an insurance product that may not pay as much?

    Using insurance products as an investment is a difficult choice. They are expensive and complex. They do serve a purpose, and do make sense for some people. But make sure you have all the information you need before using these products as investments.

  • Roth vs. traditional IRA

    With all the complexity in retirement savings, it’s hard to sort out the alphabet soup of options. Let’s focus on one segment: IRAs

    Individual Retirement Accounts (IRAs) were set up as a way to save for retirement using tax advantaged investment accounts. The idea with all IRAs is to allow the money in the accounts to grow without being hit with a capital gains tax, allowing the money in the accounts to grow more quickly.

    In order to take advantage of these benefits, an IRA account has to be set up with a broker. All brokers can open IRAs.

    IRAs are great for people who are self-employed, or for people who do not have access to a 401K. It can also be used by people who have maximized their 401K contributions and are looking to put more money away for retirement.

    So what are the differences between a Traditional IRA and a Roth IRA?

    The big difference is how they take advantage of their tax savings.

    Roth IRA accounts are considered to be “tax-free” accounts. There are no capital gains taxes on any of the investment gains made in the account. And there are no taxes when the funds are eventually withdrawn. Once in the account, there are no tax implications to funds in a Roth IRA.

    The only drawback is that the Roth IRA deposits have to be made from post tax money. So the money that goes in has already been taxed.

    Traditional IRAs, on the other hand, are considered to be “tax-deferred” accounts. The money that goes in is usually pre-tax money. But the tax is still owed. It’s just being deferred until the account holder retires. The benefit here is that the tax rate in retirement is usually lower than when the money was earned, and the retiree will pay less tax at the lower rate.

    Like a Roth IRA, Traditional IRAs allow money to grow in the account without incurring capital gains taxes.

    But not everyone qualifies for a Roth IRA. As of 2016, you must be earning under $132,000 as a single tax filer, or $194,000 as married filing jointly. You can see the full earnings limits here at the IRS web site.

    Traditional IRAs are available to anyone under 70½ years of age, who is earning any amount of income. But there are earnings limits that restrict eligibility for the pre-tax benefit. The earnings limits can be found here.

    There are limits to how much you can put in an IRA. The current contribution limit is $5,500 ($6,500 if you are 50 or older). And if you happen to have both a Roth and a Traditional IRA, the limit is combined, so you can’t contribute $5,500 to each account.

    How money can be withdrawn is also very different between the two. A Roth IRA doesn’t require you to withdraw any money during your lifetime, so it’s a great way to pass on money tax free to your beneficiaries. Traditional IRAs require that you start taking ‘required minimum distributions’ at age 70½ . Both plans allow you to start withdrawing at 59½ years of age – although with the Roth you must have been contributing at least five years before you can start to withdraw.

    If you’re trying to figure out which account to open, the Roth IRA is generally preferred if you are currently in a low tax bracket. If you’re in a higher tax bracket, the immediate tax-free savings of a Traditional IRA may be more beneficial.

    Here’s a handy infographic that may help you to decide which option is better.

    One caveat. These rules may change between now and when you retire. But that doesn’t mean that you shouldn’t consider an IRA. Too many Americans are not prepared for retirement – don’t be one of them! Because for now, both the Traditional and Roth IRA are pretty great ways to put money aside in a tax advantaged way.

  • Should I invest now or reduce debt first?

    Debt is something of a double-edged sword. On one hand, it offers you ability to buy something that would normally be out of reach financially and allow you to pay for it over time. But on the opposite side, debt comes with a cost. You are borrowing someone else’s money, and for that privilege, you need to pay money.

    So when is debt too costly? If you have extra money on hand, when does it make more sense to pay off debt, and when does it make sense invest the money instead?

    Well... It all depends on interest rates.

    The line between bad debt and good debt depends entirely on how expensive that debt is.  And the higher the interest rate on the debt is, the more expensive it is to hold. So debt that is considered bad, should be paid down, and if it is considered good debt, then the urgency to pay it down is lower.

    So what is the dividing line between good debt and bad debt? A quick answer to that question is to say that right now, 6% or 7% is the dividing line between good debt and bad debt. But the issue is not as clear-cut as that. There are a lot of grey areas,

    Instead, you should ask yourself if you should pay down your debt, or whether there is something “better” that you can do with your money? So instead of paying down your debt, is it a better idea to invest your spare cash?

    To make that decision, you have to look at what kind of returns you can get from investing your money.  If the returns you can get from investments are higher than the interest you pay on your debt, then investing your money may be a better option.

    So what kind of return can you get from investing? That’s a big question. Historically, average annual returns of from the US stock market (including from dividends) has been around 11%. We’ll note here that this number is debatable, and depends on the time-line you use and how you measure “the stock market”. But over the long run, US equities have generated handsome returns.

    But for the sake of argument, let’s temper our expectation of returns. Let’s say we are conservative investors and expect a 6% return. Let’s see how that impacts your decision about paying down debt.

    Historically, credit card debt has carried a double-digit interest rate. Average rates hover around 15% and penalty rates can be as high 29%.

    Let’s assume your credit card interest rate is 15% and you have an extra $100 that you can use to pay down the money you owe on your credit card. If you pay down your principle by that $100, it means over the next year, you would have saved the 15% interest that would have been charged on that $100, which would be $15.

    If you instead took that $100, and invested it, and everything went according to plan and you earned a 7% return, you would have made $7. So you’re $7 richer than when you started. But remember that you didn’t pay down your credit card debt. So you paid $15 in interest you could have avoided had you paid down your credit card debt. So in this case, you’re $8 worse off than if you had paid down your credit card debt.

    Any way you look at credit card debt, it is almost always better to pay down this high interest debt than it is to invest. There will be some years where stock market will perform above expectations, and will give you better returns than paying down your credit card. But these are definitely the exception, and over the long run, paying down credit card debt is the better option than putting that money into investments.

    On the opposite end of the debt scale are mortgages. Because they are backed by the value of a house, they tend to be lower risk for the lender and offer some of the lowest interest rates of any debt. In this case, the savings you get from paying down an average mortgage is usually lower than the gains you get on an average year of investing. Again we say “average” because in some years this will not be the case. But over the 20 or 30-year span of a mortgage, it wouldn’t make sense to stay away from investing while you pay extra on your mortgage. (You should still always pay your monthly payments though!).

    While the logic of paying down debt is clear on both extremes of interest rates, the logic is much less clear when the interest rate is somewhere in the middle. There are no rules when it comes to making decisions about debt with moderate interest rates. So here are some guidelines.

    1. Check your gut. Look at how well you tolerate risk. If you can stomach the ups and downs of a bumpy stock market, then maybe investing your extra money in the stock market is a good idea. On the other hand, if a bumpy stock market will cause you undue stress, then paying down your moderate interest debt may be a better idea for you.
    2. Go you like guarantees? The savings you make by paying off your mortgage are guaranteed savings. You know that if you pay down your debt, you will save money. There are no such guarantees in investing.
    3. What does the future look like? If the market is in turmoil, or there is economic uncertainty on the horizon, think twice about putting more money into investments. Paying down moderate interest debt might be a better option.

    Here’s an important note for people carrying student loan debt. If the interest rate on your loan is low, and you can manage the payments easily in your monthly budget, try to prioritize saving and investing. Starting investing early can have a huge impact on your future financial success.

    Finally, remember that there are no guarantees with the stock market. There is no way to predict which way the market will go in the future. So there is no guarantee that investing in the stock market will get you a better return than paying down any debt. The stock market can (and does) go down. All you can say is that the historical odds are in your favor over the long run. So if you do decide to use your spare cash to invest, make sure it is for the long run so you can ride out the bumps.

  • Should I pay into a 401K?

    Did you know that the 401K is named after a little known section of the tax code? It was originally used as a way to help employees generate additional retirement wealth. Over time it has become immensely popular with companies because it has taken the risk associated with company run pensions and pushed the responsibility (and risk) onto employees. 401ks have now become the de facto substitute for pensions.

    Let’s be clear. 401K s are complicated. It’s tempting to tell yourself that they’re not worth it and avoid the headache, but read on to understand why you perhaps shouldn’t sit on the sidelines.

    The first reason to pay into a 401K is that it is funded with pre-tax money. This means that some of your income goes directly into your 401K, before it is taxed. So although you don’t get the money in your paycheck, you get all of it deposited in your 401K account. No tax comes off.

    But 401Ks are not “tax-free”. You will eventually pay tax on the funds. But this will happen way off in the future, after your savings have grown tax-free for decades and you’ve retired under a lower tax bracket. So 401Ks are called “tax deferred” plans because they delay your tax bill to a later date when your tax rate is lower.

    But the big selling point for 401Ks is that with most plans, employers contribute to their employees’ 401Ks with the company’s cash. This company match can be a significant addition to your 401K. If you don’t participate you are literally leaving free money on the table.

    When you sign up for a 401K, your employer will connect you with the plan administrator, which is usually a Wall Street bank or broker. They will open your account and tell you what you can invest in. You won’t be able to buy any stock, bond or fund that you want. Usually you have to pick from a list of funds that they have chosen for your plan.

    Try to do some research into the products on your list. If there are mutual funds in your plan, use the FINRA fund analyzer to assess them. You will be able to see the fund’s past performance and returns over time. But more importantly, you’ll be able to see the fund’s fees. Make sure you focus on the funds with the lowest fees. Performance is not something you can predict. But fees you can. And they eat away at your gains.

    If you are in the position of choosing your own funds, don’t go too crazy. Use low cost, diversified funds and aim to hold them for the long term

    And don’t over-manage your plans. You risk losing what you put in by selling and buying at bad times.

    If you move to another job, you may have the option of getting another 401K. Having multiple 401Ks isn’t necessarily a good thing. You’re paying so many fees to so many providers; it makes more sense to ‘roll over’ your old 401Ks into your current one. You can also roll your old 401K into an IRA where you will have a much broader range of investment options.

    Most importantly, paying into a 401K or IRA is an investment in your future self. It’s a great way to build up wealth that you can use in retirement. But make sure that when you put money into your 401K you’re not putting away money you may need before retirement. This is money that you can’t tap into before you turn 59½. (Well, you can, but you will pay significant penalties if you do!).

    The bottom line is that for now, we’re stuck with 401Ks as the go-to retirement plan for employees. Try not to leave 'free money' on the table, and when you pick the holdings in your plan, choose low cost index funds.  And remember to check in on your 401K every few months to see how things are going.

  • Should I put my money to work by lending it to others?

    The great economies of the world have been built on peer to peer lending. It’s what people have done for millennia: You take your money and lend it (with interest) to family, friends or the community, to create value for yourself and for them.

    There are two different ways to think about this.

    There are probably many in your circle of family and friends who may need money at some point in time. They will ask to borrow money from you, maybe with regular payments and fixed interest. But this is not putting your money to work.  This is helping your family & friends, and it’s a fraught process. If you’re in a position to gift money (i.e. you have a fully funded retirement account, emergency savings and are living well below your income) – then consider it. But there’s a chance you’ll never see the money again. So if you do it, make sure you consider it a gift.

    The second way to put your money to work by lending it to others is through ‘peer to peer’ lending. This is where you deposit your money with an intermediary, who then lends it out to people who need it. It’s very similar to the traditional way that banks work. But with a big difference – you get visibility into where your money is going. With some lenders you can see where your loan is going. You also get to choose the amount of risk you want to take, and what return you are looking for.

    Prosper, SoFi and Lending Club are all peer to peer lending companies where you can deposit your money, which is then loaned out for higher interest rates than what you can get with your savings account at a regular bank.

    So is it a good idea for you?

    The first thing to consider is risk. When you put your money in a savings account, it’s insured by the FDIC for up to $250,000. So if the bank goes out of business, you won’t lose your money.

    Funds with P2P lenders are not insured – so should there be issues with the financial stability of the lender, there’s a chance you could lose your money. So consider where you are on the spectrum of risk tolerance and see if this is money you can afford to lose.

    Next thing to consider is performance.

    The relationship between risk & return is what investing is all about. The stock market and P2P lenders are both higher risk / higher potential return. Currently the estimated returns from P2P loans are between 5-8% per year. This is significantly higher than what you can get in a regular savings account, and on par, over the past few years, with what you would have gotten in the stock market. But as with all investments, there is no guarantee of returns.

    Third thing to consider is ethics.

    For many borrowers, P2P loans are a godsend. If you’re consolidating high interest credit card debt for example, going from paying 20+% interest to 8% is pretty great.

    But in order for these platforms to give high returns to investors, they also charge high penalties – such as late fees. It can happen that borrowers get trapped in these loans. It’s estimated that 70 percent of those who consolidate their debt end up with as much or more debt a few years later. So the benefits of these loans may have strings attached for the borrowers. And as a lender you have to make sure you are comfortable lending your money into this system.

    Lending money doesn’t usually get included in recommendations by financial advisors. It’s an interesting and unique investing option. But doing so involves risk.

    Think carefully about putting your money to work by lending it to others. Understand the risks involved. But if you enter this market, also enjoy the fact that you can direct your money to specific areas of specific need. It really can be a rewarding way of investing.

  • What accounts do I need to invest?

    So now you’re ready to become an investor. In order to buy and sell stocks, bonds and funds, you need to open a brokerage account.

    There are many ‘retail brokers’ in the US. Look for one with low trading fees, and who speaks in investment language that is at your level of understanding.

    When you open a trading account, there are a number of options that will be available to you. You can even have several different accounts open at the same time. But choosing the correct account is very important.

    The first thing you need to ask yourself is whether the account you open will be specifically for retirement, or will it be for pre-retirement financial needs.

    If you want the account to be specifically set up for retirement, then you want to look at opening a Roth IRA with your broker. These accounts allow you to grow your money tax-free and allow you to withdraw your money tax-free after you retire.

    There are earnings limits to Roth IRA’s (they are not available to those earning above a certain level), so if you’re not eligible for a Roth IRA, think instead about opening a traditional IRA. These have the same tax-free growth benefits as a Roth IRA, but are taxed when the money is withdrawn.

    But let’s stop here for a second. When you open an IRA trading account, it is super important to make sure you are POSITIVE that the money that you put in this account is money that you don’t need until you retire. If you suddenly find that you need access to this money before you retire, and you take it out early (and 25% of Americans do!), you get taxed on the withdrawal AND pay a 10% penalty! That will destroy any of the tax benefits you will have gained from the IRA.

    There are some exemptions from this penalty, like if the withdrawals are for education or the purchase of a first house. But generally, if you might need the money before you retire, you should not put it in an IRA.

    If you have intermediate needs that will come up before you retire, then having an individual trading account (or a joint account if you’re married) is a great idea. You will be taxed on the gains you earn on this account, but you can take money in and out of the account without penalty.

    Many people open both an IRA and an individual trading account. This gives you the flexibility to save for retirement and save for other needs that may come up in the meantime.

    Another choice you’ll need to make when you open a trading account is whether you want the ability to trade on margin. Margin is essentially borrowing money from your broker, which you use to trade. Trading on margin costs you money. You pay interest on the amount you borrow. But more importantly, trading on margin is very risky. If the trade you make goes the wrong way, you will have lost some of the money you borrowed. You’ll have to use your own money to pay the borrowed money back to your broker. In a worst-case scenario, if your broker feels that their money is in jeopardy because of your losses, they will make a ‘margin call’, and you’ll immediately have to find the cash to pay your broker back.

    The only low-risk use of margin is to bridge the 2 or 3 day gap when you’re waiting for the proceeds of a stock sale clear. Sometimes when you sell a stock, it takes a couple of days for the cash to hit your trading account. If you want to buy another stock in that time, having margin to trade is extremely helpful. You only borrow the money for a couple of days, and it gives you the flexibility to be able to move into new positions quickly.

    Once you open an account, you will need to fund it.  It usually takes a few days for the money to arrive at the broker, and again a few more days for the money to clear. So know that it will be a few days before you can actually begin trading.

    In order to maximize the growth of your investments, it is a very good idea to try and fund your account as frequently as you can. If you keep adding to your account, and invest that money, your gains will compound on an ever-increasing base. It is the single most important way to build wealth.

    Finally, it’s important to understand fees. Whenever you buy or sell a stock, your broker will charge a commission. Also, when you sell a stock, there are a few additional fees imposed by the exchange. Fees can kill the growth of your investments. So in order to keep fees to a minimum, you need to do two things.

    1. Keep your trading to a minimum. Buying and holding for the long term has been proven to be the best strategy for investing. Timing the market so you buy at the bottom and sell at the peak is almost impossible to do. Buying and holding will allow you to ride out the ups and downs of a stock. It also minimizes fees. And if you hold for more than a year, the gain will be taxed at a lower rate.
    2. Make big trades. Trade big as big a chunk of money per transaction as you can. Trading commissions with most brokers are a fixed price. So a $5 commission on a $50 trade will burn 10% of your investment. On a $500 trade it will take 1%. And $5,000 will take 0.1%. As you can see, the larger the trade, the smaller the share of your portfolio the commission eats. And remember that the commission will come when you buy AND sell. So if you can, try to keep the commission below 1% of the trade.

    Once you open a trading account, make sure you keep an eye on things. You want to make sure you know how your portfolio is doing. And you should sit down at least once every three months and assess where your investments are. Be critical of the stocks and funds you are holding to make sure they still make sense. Follow the news and look for the companies in your portfolio so you know what they are up to and you aren’t surprised by unexpected events.

    And enjoy being an investor! Ride out the downs and take pride in the upswings. It’s a great feeling when your portfolio does well, so make sure you enjoy it.

  • What is a bond?

    How would you feel if I told you the only way you could buy a house was pay for it entirely in cash? Hard to imagine, right? And that’s why loans exist. Loans make big important purchases possible.

    This is essentially what a bond is: A loan that you make to a company or a government so that they can finance large projects.

    In order to do this, they issue bonds.

    Government issued bonds (also called notes or bills) are considered quite safe. Cities, states and federal governments all issue bonds. With rare exceptions, governments always pay back their bonds. When a government fails to pay its bond, which is called a sovereign default, the impact to world markets is quite severe. So it is avoided at all costs.

    Some government bonds are also tax free, so if you fall into a high tax bracket, a tax-free bond can be used as a way to earn income without having to pay tax on the interest.

    Corporations also issue bonds. Many large companies issue bonds as a way to fund expansion, build new products, or move into new markets. Large, well-known companies rarely default on their bonds so they are considered quite safe. Smaller, less known companies also issue bonds. Some of these bonds are much more speculative and risky. For this reason, they are generally called “junk bonds”. They aren’t, as their name implies, garbage. But they do default much more frequently and are much higher risk than higher-grade bonds.

    At this point we should talk about risk. The great thing about bonds is that there are independent third parties who rate bonds. The two main ratings agencies, Moody’s and Standard and Poor’s are very good at giving you a rating for bonds. Anything above a BBB for Standard & Poor’s or a Baa for Moody’s is considered “investment grade” or the least risky bonds.

    The ratings reflect risk and should definitely be examined before you purchase a bond. Lower rated bonds definitely have more risk. But they also pay more interest. This “risk premium” is why people buy junk bonds. It is a gamble. But for someone who has the tolerance for risk, these bonds could have a higher return than a low risk bond. And the key word here is “could”. A company “could” also default on their bond. Taking on excessive risk could also lose you money.

    Pricing of bonds is fairly straightforward. Every bond has a face value or par value.  This is what the value of the bond was when it was issued. Every bond also has an interest rate it pays, which is called the nominal yield or coupon rate.  So a $1,000 par value bond with a coupon rate of 4% will pay you $40 per year.

    Bonds also have a maturity date, the date at which they pay back their principal.

    One more thing about bonds you need to know is that they fluctuate in value. Bonds are traded in secondary markets, and they often change hands at a value different from their par value. The present value of a bond is driven by supply and demand, as well as external economic forces, specifically inflation and interest rates.

    Here is an example of how this works: Let’s say the US economy is booming, and there is a shortage of all sorts of things, and as a result, all prices rise. This is inflation. Everyone gets nervous, including the banks. To cool off inflation and slow the economy, the Federal Reserve uses one of their inflation taming powers, and raises interest rates.

    But not on your bond. You’re holding a bond that has a fixed 4% yield and will stay at 4% until it matures. But new bonds are being issued with a 5% coupon rate. So nobody is going to pay full value for your 4% bond, when for the same price they can get a bond that pays 5%. So in order to sell your bond, you have to sell it at a discount.

    This is how the secondary market for bonds work. As a rule of thumb, as interest rates rise, the price of existing bonds drop. And as interest rates fall, the price of existing bonds go up.

    The last thing you should take note of is what a bond is backed by. Bonds can be backed by land, buildings, equipment, securities or just a promise. Generally it is better if your bond is backed by something tangible. But for bonds issued by super-strong corporations or governments, a promise is often good enough.

    Many investors put bonds into a portfolio in order to lower risk, or to provide ongoing income.  Adding bonds to your investment strategy yourself is easy. New government bonds are often available through your bank, but in order to buy and sell them quickly in a secondary market, you should purchase them through a broker. Most other bonds require a brokerage account to trade them. You can also find bonds packaged up in mutual funds and exchange traded funds. These are an excellent way to get the power of multiple bonds in a single security.

    Bonds are a terrific investment. They pay income and can be very safe. Some investors use cash that normally sits in the bank and instead invest them in bonds. They are easy to buy and sell and can pay better income than a bank account. Keep bonds in mind when you build a portfolio.

  • What is a fund?

    If you need a bit of help investing, you might want to leverage the help of some experts. Wall Street is full of them. And the funds they create are a great way to do it.

    First of all, funds are pooled stocks or bonds, which are put together to attain a specific objective. These objectives can be anything from generating income, to investing in gold, to matching the movement of a specific index. These objectives are contained in a prospectus (an overly complex, but important document) that comes with every fund. But usually the fund will be very overt about it’s overall goal. You can usually find good, concise summaries for most funds on-line. So make sure you check the fund’s objectives to make sure it matches your own.

    The best thing about funds is that they are created by experts. They are either actively managed, where the fund’s holdings are constantly rebalanced to match its objectives, or they are passively managed, where the fund is expertly set up and allowed to run on its own. Either way, you get the help of an expert.

    Funds also allow you to do things you cannot do with a single stock or bond. Because they are pooled investments, you can get the advantage of spreading your investment among various different holdings, which allows you to access more opportunities. It also allows you to spread your risk.

    There are generally two types of funds: Mutual funds and Exchange Traded Funds (ETFs). There are some important differences between the two.

    1. Structure: ETFs trade freely on an exchange, much like stocks, while mutual funds are bought or sold directly with the issuer of the mutual fund. An ETF can be bought or sold any time while the market is open at a specific price, while a mutual fund is priced at the close of the market and the exchange is made after hours.
    2. Expertise: Generally, mutual funds are actively managed. This means that an investment professional somewhere is working to make sure that your investment is well taken care of. ETFs, on the other hand, are generally passively managed. They are built to mimic a specific, pre-defined index, or contain a specific mix of investments, and once they are set up, they run on their own. While ETF’s don’t have the day-to-day expert oversight, they are still set up by experts.
    3. Flexibility: Mutual funds have the benefit of low minimum investment sizes and automatic (and free) dividend reinvestment, where any income generated from your mutual fund is automatically reinvested into shares of the mutual fund. Mutual funds also give breaks in fees for higher levels of investment. ETFs work like stocks and the investor must reinvest their dividends on their own.
    4. Price: ETFs have the benefit of price. Because they are usually passively managed, you don’t have a lot of high priced talent to pay for. Some of the largest funds have annual fees that are a fraction of a percent. Because these are traded like a stock on an exchange, you will also have to pay a broker to buy and sell the ETF, but these should be less than $10 per trade in the US. You also need to be aware of a cost called “the spread”, which is the price difference between what the buyers and sellers are willing to pay. Big spreads increase your buying price and reduce your selling price. But these can be reduced substantially if you stick to more popular, highly traded ETFs.

    Mutual funds are generally actively managed, and require you to pay for some of that high priced talent. An expense ratio is an annual fee that pays for this talent. The average fee on a US mutual fund in 2015 was 1.15% of your investment. And you pay for it year after year, even if the fund goes down in value! It may not seem like much, but if you made a 5% return last year, you will have to give back almost a quarter of your profit to the mutual fund company in fees.

    But mutual fund fees don’t stop there. There are also fees called “loads”. These are commissions paid to brokers when you buy or sell a mutual fund through a broker, bank or insurance agent. These loads can be front-end (when you buy the fund), back end loads (when you sell the fund), and can be as high as 5% or 6%. These loads generally go down the longer you hold the fund. And there are no-load funds, but they too can charge a fee as long as it is less than .25% per year. Loads are worthless fees. They are a commission to a sales person and not pay go to the experts who run the fund. Loads should be avoided at all cost.

    So how about performance? This is Wall Street’s biggest dirty secret: There is no evidence to show that a fund that charges a high fee (ostensibly for better advice) generates higher returns than one that charging a low fee. Added to that, actively managed funds will on average, give you lower returns than the overall market because of the fees they charge. So the advice here is: avoid fees. They take away your hard earned money and do not pay for better returns!

    So, the bottom line: If you buy and hold a few select funds for the long term, and don’t trade too often, ETFs are your answer. If you have a 401K with limited options, or don’t have a lot of money to invest, then a no-load mutual fund may be a better option.

    So that’s funds. They are a great way to use a single product to spread your portfolio into a wide rage of investments. This market has really expanded over the last decade, and there are now some fantastic, low-cost options out there. So if you avoid fees, funds can be an excellent option for your portfolio.

  • What is a stock?

    If you had a choice to invest in real estate, gold, bonds, or stocks, which investment, has historically given the best return? It’s stocks. Hands down. Through thick and thin, the US stock market has returned on average 7% per year. Even after recessions, dot-com bubbles and economic meltdowns, stocks still have the best returns over time of all asset classes.

    So let’s look at stocks and see why they have traditionally been such good investments.

    First, let’s start with what a stock is. Stocks, also called equities or shares, are an ownership stake in a company. When you buy a share, you actually become an owner of small percentage of a company. As an owner you get certain benefits, which vary depending on what kind of stock you own.

    There are two types of stock you can buy. First, are common shares. These are by far the most widely used form of stocks. They give the shareholder an ownership stake in the company, and with it, the right to vote at shareholder meetings. An owner of common stock can also share in the company’s profits, which are distributed as dividends (if the company offers them). Common shares are traded on stock markets and have prices that fluctuate based (generally) on how well, the company is performing.

    Preferred stocks are a different class of shares. They are also an ownership stake in a company, but they don’t have voting rights. Generally preferred stock pays a higher dividend than the common stock of the same company, and their payments are fixed and predictable. Typically, a preferred stock’s value is driven more by the dividend it offers, than by the company’s performance. This means that preferred shares don’t move up and down in price as much as common shares.

    As we said, prices of stocks go up and down. As an investor, you want to make sure you take advantage of those price movements. You want to buy a share when the price is low and sell it when the price is high. This gain is called a capital gain, and you want that gain to be as big as possible!

    The key to doing this successfully is by correctly assessing a stock’s potential value. At any moment in time, a stock’s price is NOT a perfect reflection of a stock’s value.  It’s just what someone will pay for the stock at a single moment in time. A stock’s true value is essentially the unlocked potential that the stock has. If you can find a stock with lots of unlocked potential and buy it, the price of the stock will rise as the value is unlocked.

    Here’s an example. The day Apple launched the first iPod, the stock price was the equivalent of $1.22. At the time, Apple was losing money and the stock looked expensive. But now Apple stock costs around 100x that 2001 price. Was Apple undervalued on that day? Absolutely. But who was to know how well Apple was going to do? Did anybody know the iPhone was coming? Or the iPad? No. But the iPod contained the seeds of massive untapped potential for Apple.

    So just like buying any product, you want to calculate the untapped value in a share. And this is the holy grail of Wall Street. Everybody tries to do it. Everyone is looking into the future and making a value judgment. Wall street analysts do it, and average investors do it. Anybody can do it.

    So where do you start? Start with yourself and your spending. Where does your money go? What products do you love? What products are your friends talking about? What was your last ‘Aha’ moment when you bought some truly breakthrough product? What will the world look like in 5 years? 10 years? And what companies will be the market leaders of that world?

    These questions all form the basis of your stock valuation. And the difference between the price of a stock today and your perception of where it should be will determine whether the stock is undervalued or overvalued. And you want to buy the undervalued stocks and sell the overvalued stocks.

    A bonus is if you find a stock that you love, but others hate. An example is Netflix when they moved from DVDs to a digital model (and raised their prices). People hated the idea and crushed the stock. But when their decision proved to be smart, and subscriber growth shot up, the stock soared.

    The lesson here? Buy from the pessimists and sell to the optimists.

    And this is the true value of stocks. As an owner of a smart company, you can, and should, benefit from their smart ideas and the growth that these ideas create.

    Finally, you’ll need a brokerage account to buy and sell (trade) stocks. In order to open any brokerage account, you’ll have to answer a bunch of questions, and it may take some time, but it is well worth the effort.

    A company can grow from a start-up in garage to a multinational conglomerate within a single generation. No other asset class allows you to piggyback on that phenomenon. And that’s why stocks can grow like no other asset class. And that is why it is so important that you learn about stocks and make them part of your life for the long term

    Just make sure you buy and hold for the ling term. Companies you believe in may encounter some bumps along the way. But a long time horizon will smooth out those bumps.

    And never forget the words of Warren Buffett: the stock market is a device for transferring money from the impatient to the patient.

  • What is compounding and where can I get it?

    Compounding is a powerful tool. It can accelerate the growth of your investments. So make sure you take advantage of it. If you don’t, you’ll be leaving potential returns behind.

    First, a quick explanation:

    Compounding is essentially accelerating your investments by earning money on the money you’ve already earned. Take your bank account for example.  You probably earn interest on your deposits once a month, which is added automatically to your account. In the next month, when you earn interest again, you’ll not only earn it on your original deposit, you’ll also earn it on the interest you earned the previous month.

    The difference between compounded earnings and non-compounded earnings is substantial. For example, a $1,000 bond paying 4% interest without compounding will double in value after 25 years. With compounding, the money doubles after 18 years. That’s seven years sooner! That’s a big difference!

    The key to compounding is to make sure interest is reinvested.

    So here are some tips for making the most of compounding with the different kinds of accounts or investments you may have:

    1. Savings accounts: If you have a saving account, your interest will be paid right into your account. You don’t have to do a thing to take advantage of compounding. Unfortunately, when interest rates are low, you won’t be earning much interest, so the value of compounding will be low. But shop around for higher interest. Even at your own bank you may find accounts that pay higher interest.

      One thing to keep in mind is the frequency of the compounding. The more frequently your interest is paid, the better the compounding effect. You can find accounts that compound annually, monthly or even daily. So if you have a choice of two accounts paying the same interest, take the one that pays interest more frequently.
    2. Certificates of Deposit (CDs): CDs are interest-bearing accounts that pay higher interest than savings accounts. Most banks have these. The only catch with these accounts is that you have to put your money away for a fixed period of time, during which you can’t touch the funds. Generally the longer the term, the higher the interest. But, if you need to take the money out early, you have to pay an early withdrawal fee! Ouch.

      CDs pay interest upon maturity, but the interest is usually compounded either monthly or daily. Check the frequency of the compounding to make sure you know what you’re getting. Also make sure that when the CD matures, you put all of that money to work again, either in a new CD or another investment. If you don’t, you won’t be taking advantage of compounding.
    3. Bonds: Bonds come in all sorts of different flavors. Although there are a few bonds that pay interest quarterly or monthly, the general rule is that bonds pay interest semi-annually (every six months). But the key term here is “paid out”, which means the interest is paid out directly to you, and is not reinvested into the bond. So there is no compounding with bonds unless you reinvest the interest yourself somewhere else. It’s up to you to make compounding work.

      The exception to this rule is a class of bonds called ‘zero coupon bonds’. The most familiar of these is a US savings bond. These bonds do not pay out interest until the bond matures, where it is paid out as a lump sum. The benefit of these bonds is that interest actually compounds semi annually within the bond. So even though you can’t see it or spend it, interest is compounding. If you don’t believe it’s happening, just ask the IRS: They want you to pay tax on this invisible interest even though you can’t touch it! So yes, the interest is real.
    4. Stocks: Compounding in stocks can come two ways. One is by reinvesting the proceeds of a stock sale the other is by reinvesting dividends.

      If you’ve made a good return on a stock, and you’re ready to cash it in, it is always good to have another investment ready to go. Rolling one investment right into another prevents your money from sitting idly on the sidelines. So it’s always good to be thinking one step ahead.

      The other way to compound returns from stocks is through dividend reinvestment.

      When you get a dividend from a company, it is always a good idea to reinvest the dividend back into investments.

      Unfortunately, reinvesting dividends can be somewhat complicated. Dividends payments can be quite small. So if you buy more stock using that small amount, trading fees can swallow a huge chunk of the dividend. Dividends can also be less than the price of a single share of a stock, making it impossible to even buy one share.

      But there are ways around this. One way is to add regular transfers into your account to supplement the dividends you get. If you fund your trading account regularly, your dividend will become pooled with a bigger chunk of money, making it easier to trade.

      Another way to manage dividends is through a Dividend Reinvestment Plan (DRIP). DRIPs overcome the two hurdles of reinvesting dividends by allowing you to buy fractions of shares and allowing you to do so (usually) with no charge.

      DRIPS are not available everywhere. Only certain brokers will offer them and usually only on specific stocks. You can also find some 401(k)s that have DRIPs. So they do exist. But DRIPs do take a bit of extra effort to find.
    5. Funds: Mutual funds generally reinvest proceeds of sales and dividends automatically, and for free. But be a little careful. While the advantages of compounding can be significant with automatic reinvestment programs, fees can kill the benefits. Make sure your check to see if there are high fees in a mutual fund. Go to the FINRA fund analyzer to see a fund’s fees.

      DRIPs on Exchange Traded Funds (ETFs) are relatively new. Because of this there is not a lot of standardization to the programs. Not all ETFs have DRIPs and many of them are a bit convoluted. You’ll need to do some research to make sure that your ETF’s DRIP is appropriate for you.

      Otherwise, try to reinvest any income that you get from ETFs on your own. Try not to let the cash sit in your account. And again, try to supplement any income you get from ETFs with money that you transfer in to the account to make it easier to buy shares.

    That’s it for compounding! Take advantage of it when you can so you can maximize the growth of your investments.

  • What is diversification all about?

    Nobody likes bad news. And that is especially true for investors. Bad news about a company can lower its stock price and wipe out billions of dollars of investor’s money.

    Unfortunately bad news is hard to avoid. Often investors don’t see it coming. It could be news of a criminal investigation, an outbreak of a virus at a restaurant chain, a drop in oil prices, restated earnings, a lawsuit, new regulations, a product recall… These are risks that are hard to predict and even harder to avoid.

    These risks are called ‘non-systemic risks.’ They are things that hit individual companies or isolated pockets of the market more than the rest of the overall market.

    Although you can’t entirely avoid non-systemic risks, there are ways to minimize their impact. This is done through diversification. By putting your eggs in different baskets, you are diversifying your investments and lowering your overall risk.

    You can do this in three ways: diversify by asset class, geography or industry

    Asset Class

    The most important area of diversification is by asset class. When you invest, you can hold different asset classes, namely stocks, bonds, funds and cash. It is always a good idea to have a mix of all of these.

    Stocks tend to be more volatile and risky and have more exposure to non-systemic risk. Bonds tend to be much less volatile, more stable and less risky. Stocks and bonds also tend to move in opposite cycles.

    Funds can function like either bonds or funds, depending on what they hold. And cash is held as protection against a falling market (cash will not lose value like a stock).

    By holding a mix of these four asset classes, it allows you spread your risk so that bad news will not hit all of your holdings at once. And by reducing your exposure to stocks, you can lower your exposure to non-systemic risk.


    You can also diversify by geography by buying stocks and or bonds from different parts of the world. You can spread your investments across the US, Europe, Asia and the developing world. By segmenting your investments this way, the drop in the Russian Ruble or a meltdown in Asia will impact only a portion of your portfolio.


    Finally, you can diversify by industry. Many industries run in different cycles, so by diversifying by industry you will make sure your entire portfolio doesn’t hit a down-cycle at the exact same time. For example, by investing in both miners and manufactures, you will protect yourself from falling commodity prices because low commodity prices will hurt mining but benefit manufacturers.

    You should try to make sure your holdings are not concentrated in a single industry like technology or retail. Companies in these segments are popular and easy to understand, so make sure your portfolio isn’t biased towards these industries.

    Simple Diversification

    It should be noted here that Exchange Traded Funds (ETFs) can be an excellent, low cost way to diversify your portfolio. You can find ETFs that are diversified by geography, industry or asset class. A single fund can do a ton of diversification work for you, especially when you are building your first portfolio.

    So that’s diversification. It’s easier than it looks. Start by diversifying between stocks, bonds, funds and cash. Use ETFs to do some easy diversification for you. Aim to diversify even further by industry or geography if you can. If you do it well, you can reduce some of the bumpiness of the overall market and lower your exposure to the impact of bad news.

  • What's an annuity and should I consider one?

    When you retire, your regular income stops. You no longer get that paycheck deposited into your bank account and your savings account stops growing. This can be a frightening proposition. If there is no more money coming in, retirees become dependent on savings and need to figure out how long they can live off of what they have saved.

    Wouldn’t it be nice to have an income stream in retirement? Wouldn’t be terrific to not be so dependent of savings?

    Social Security can do some of this in retirement. It is a steady income stream that can ease the dependence on savings. But Social Security is not a substitute for a solid income and can not, on its own, fund retirement.

    And remember pensions? Many Americans used to have pensions that would pay a good income all the way through retirement. But pensions have fallen out of favor as companies have thrown the burden of retirement onto their workers, forcing them into the alphabet soup of 401Ks and IRAs.

    So are there any other options? Well, you know what? There are. And they’re called annuities.

    But first, here’s a bucket of cold water. Annuities are actually complex investments. While they can be valuable products for you in retirement, they can also be confusing. Before you buy an annuity, make sure you know what you’re signing up for and think about talking to an independent advisor for a second opinion.

    So what are annuities?  Annuities are basically a way to take a lump of savings and turn it into a stream of income. So for example, you may get be able to arrange a fixed annuity with an insurance company by handing over $80,000 and in return, they will give you $1,000 per month for the rest of your life. By doing this, a retiree can reduce what is called ‘longevity risk’, otherwise know as “living so long you run out of money”.

    This a bit of a morbid analogy, but basically an annuity is a bet between you and a financial company about when you’re going to die. The annuity company will secretly hope that you to die young so that they will only have paid you a small portion of your lump sum. And you, on the other hand, want to live as long as possible, so that you will get all of your cash back, and then some.

    You can actually calculate the date when the annuity company expects you do die. In the above $80,000 example (assuming this annuity is for a man, who sets up his annuity at age 68, funds it from a qualified IRA, and would have made 5% on his money had he invested it), his expected death date is one month after his 76th birthday! Kind of creepy isn’t it…

    And just so you know, because women statistically live longer than men, annuities are more expensive for them. If the above example had been a woman, the annuity would have required an $85,400 lump sum premium.

    So ignoring the morbid details, annuities can be a terrific way of taking the burden off of your savings in retirement. Many people use it as a way to supplement Social Security so that they will have their essential expenses covered if their savings run out.

    You should also have noticed that annuities could swallow up a substantial amount of your savings. In the above example, the annuity company takes $80,000 of your savings. It is a lot of money to give up. This is why annuities are only recommended for people who already have SUBSTANTIAL savings in a 401K or an IRA. They really should be thought of as an insurance product for the worst-case scenario of running out of savings.

    You will find all sorts of annuities with lots of bells and whistles. In the above example we used the simplest form of annuity: a ‘fixed annuity’, which takes a lump sum and pays it back over a lifetime.

    But there are other annuities that offer a multitude of other options. Some operate like a life insurance policy and pay out a benefit if the annuity holder passes away before a fixed date. Others have an investment component that allows the annuity to grow over time.  These ‘variable annuities’ can become quite complex and hard to understand. They also blur the line into insurance products. They are not for novice investors and should be looked at by an independent professional to make sure they are an appropriate product.

    In the end, annuities serve a specific purpose of generating a flow of income in retirement. This income can ease a tremendous amount of stress in retirement. It can also give you peace of mind that no matter what, you’ll be able to pay for the essentials in life.

    With pension plans vanishing, people have had to scramble to find ways of retiring comfortably. And with people living longer and longer, running out of savings is becoming a very real possibility for retirees. Annuities serve a valuable role of bridging the unknown of retirement and protecting your wellbeing far into the future.

  • When is life insurance a good investment?

    There are times when investors need sophisticated investment products. You can think of investing as something of a ladder where, you begin with simple investments like stocks, bonds and funds at the bottom and work your way up to things like insurance products as you move to the top.

    First of all, you should know that we’re not talking here about traditional insurance products here. Traditional insurance is used as a way to protect you and your family from unexpected, high cost events. Car insurance, home insurance and term life are all important ways to do this. But they are not investments.

    Insurance as investment has a protective component to it, but also has an investment component. We’re talking specifically about ‘whole life’ insurance and annuities.

    First, a bit about these two products:

    Whole Life Insurance

    Whole life is has two parts. The first is an insurance contract, which will pay a stated value when the insured person dies. This is similar to traditional life insurance (aka ‘term life’). But there are differences. There is no term to the policy, so as long as you keep paying the premium, the policy remains in force. The second part of the policy is an investment component that can grow in value. The benefit of this product is that the insured person can withdraw or borrow against the invested portion of the policy, which can grow tax deferred.

    Whole life policies are more expensive than term life policies, but have the financial benefit of the invested portion of the policy, which can grow over time.


    Annuities - whether fixed or variable - are tax deferred insurance products that you pay into, with the intention of the getting a regular, level income when you are older. A fixed annuity means that you will be paid a guaranteed, fixed payment every year until you die. If you live a long life, fixed annuities are a terrific way of having income when you live beyond what you’ve saved. Fixed annuities are often used as a way to top up social security payments.

    A variable annuity has the similar benefits to a fixed annuity, but has more flexible funding, investing and payout options. Payments into variable annuities are invested, so the value of the annuity is dependent on the performance of ‘the market’. This makes variable annuities riskier because they do not have guaranteed payments. On the other hand, they have more flexibility because your annuity can grow if your investments grow. Variable annuities also have a death benefit if the annuity holder passes away before payouts begin. And finally, variable annuities have very flexible payout schemes and can be paid out for a fixed period or the lifetime of the annuity holder. As with fixed annuities, payments into variable annuities are tax deferred.

    So when are these product appropriate for you?

    It is super-important to stress that these Insurance products should not be looked at until you have most of your other financial issues sorted out. You should have a retirement account that is well funded. You should have your debts fully managed. You should have your kid’s education sorted out. And you should be 100% certain that you need it.

    And here is the reason: 26% of whole life insurance policies are surrendered within the first 3 years, and 45% are surrendered in the first 10 years. It is in the first few years that most of your fees are paid, so little of your premium goes into your investment account. If you surrender very early, very little of your premium paid will be returned to you and you will definitely be on the losing end of that investment.

    So if you have maxed out the tax deferred contributions to your traditional retirement accounts, and you have substantial income, you can look at insurance as in investment.

    The critical things to consider with whole life insurance or an annuity are the terms, the fees and the risks. Whole life and annuities are categories of investment products that are particularly complex, expensive and jargon filled - so make sure you know what you’re signing up for, and paying for.

    Unfortunately, the one variable that will determine whether these products are a good option for you, is completely out of your hands. If you live a long life, annuities are terrific. If you don’t, whole life would be a better option…

    A better way of looking at this dilemma is to think of it this way: Do you fear running out of savings in retirement, or do you fear that your loved ones will not be taken care of after you die? If savings is the issue, annuities are something to look at. If you worry about your loved ones, then whole life insurance may be better.

    But make sure you benchmark these products against simpler products that may have similar rates of return.

    When you’re doing your assessment, make sure you find out what commissions you are paying and what the fees are. Make sure the agent gives those to you in writing. Also make sure you understand if you can access your money and if there are any early withdrawal penalties. And finally make sure you know any tax implications.

    So, as with all investment products, do the math carefully on what you need to put in, who is getting paid, and what your expected return is. And don’t look at the products in isolation. Look at the opportunity cost of not being invested elsewhere. If you can get a 5% average return from the stock market, would the money you are putting into insurance products potentially earn more elsewhere?

    You should be absolutely certain that you need the product. They are expensive and complex. But they do serve a purpose, and do make sense for some people. So make sure you have all the information you need before using these products as investments.

  • Why should I invest?

    If you watch television, you’ve probably seen commercials for big banks and investment companies. If you watch the ads closely, their message is very much the same. “Give us your money. Trust us. We’ll get you to retirement”. That’s why most retirement ads feature a happily retired couple relaxing at their beachside home.

    If you can’t relate to that couple, you’re not alone. It’s just too big a conceptual leap for many to make. The gap between the here and now (where many people struggle with day to day money issues), to that distant beachside home is too big to reconcile.

    The problem is that brokers, fund managers and investment advisors want you to associate investing with WEALTH and RETIREMENT. This is because their businesses need you to move your pile of money from where it is now, to them. But when you’re younger, not wealthy, and maybe living paycheck to paycheck – it’s hard to imagine what investing could do for you.

    Even though investing traditionally has been the domain of wealthy people – times have changed. The costs have come way down, as has the amount of money you need to get started. It really is possible for everyone to be an investor in one way or another.

    This is important because we live in a world that favors investing. The tax system, for one, favors investment earnings, giving it lower tax rates than it does for income you earn through working.

    Unfortunately, the days of pension funds and lifetime benefits are mostly behind us. In order to navigate this new world, developing your understanding of the financial world is critical.

    Investing and financial health is a lifelong journey. It isn’t just about the happy beachside retirement, but more importantly, about buying options in life.

    So what does this mean? Options in life mean different things to different people. And they are different to “goals”.

    Your goals may be to ‘get 8% return a year’ or have 500K in 10 years’. They are good, specific goals. But they don’t take into account changes to your life along the way.

    Options in life are more about being able to make decisions that take you in a different direction to the one you’re on. What if you have an opportunity to move to a different state, or country, or go back to school, or start your own business? These options in life may cost you in the short term, but may pay you back either economically, or in quality of life, in the long term.

    The key to creating more options in life for yourself is to prioritize saving, and begin investing. Learn, get practice, start slowly and build your money muscles.

    Adapting your spending habits to prioritize investing can have a giant impact on your future financial success.  And for many people, step one in that equation is to SAVE.

    Build a contingency fund at your bank – a buffer of money for unexpected expenses. A good rule of thumb is to have 3-6 months of living expenses on hand. Then, prioritize investing any money above that amount.  Depending on your risk profile you can put that money to work with a range of options like stocks, bonds or funds. Most of these are considered highly liquid which means that they can be sold within a day should you truly need the money.

    And what about if you have no money now? GREAT. Now is the time to learn about investing, in a truly risk free way. Think like an investor – look for opportunities – be curious about what’s going on in the economy and with companies you like. The best way to do this is to set up a virtual portfolio. Many financial web sites like, Investopedia, allow you to do this. It’s even more interesting when you do this with friends, family or colleagues.

    This a great way to learn from each other, especially people who have less investing experience – their instincts and ideas are often very different than experienced investors.

    Regardless of where you are on your investment journey, think about your goals not just in terms of a number that you need to retire, but creating a way for you to buy future options in your life.

    You work so hard to earn your money. You go to school, you compete for jobs, you jostle for raises, and you spend a large portion of your waking hours dedicated to generating income for you and your family. Why not make it a priority to put your money to work for you?

    But remember - there are no future facts - you don’t know what is going to happen, but having a healthy approach to money and investing can help buy you better options in life.

The information contained herein is solely for informational purposes and should not be construed, in any manner, as accounting, legal, tax, or investment advice from Amalgamated Bank. Investments or strategies mentioned on this website may not be suitable for you. Consult your investment, tax or other professional as appropriate with regard to your specific situation. Although the information provided to you on this site is obtained or compiled from a source we believe to be reliable, Amalgamated Bank does not guarantee its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation by Amalgamated Bank for the purchase or sale of any securities, insurance products, investments, or other products named.