How to Finance Financial Freedom and Independence

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.shape behavior:url(#default#VML);If you want to grow a small nest egg into a million dollars in 10 years, real estate investing is an independent business that you need to seriously consider. What beginning investors often fail to understand is that real estate investing is about controlling properties rather than paying for properties. The less of your own money that you invest in each property, the more properties that you will control for no money down or small investments.

© Davi Sales -

© Davi Sales –

The Paper Buy Out

If you think zero or low down deals are difficult to come by, you’d be correct. But that doesn’t mean they are impossible to come up with. I know of one investor that arranged a deal to purchase a $66,000 house for zero down. Of course, the seller was desperate. The seller was out of state and didn’t live in the house. He had repeat problems keeping a tenant in the house because he couldn’t afford a professional management company. Because he lacked steady tenants, he had gotten behind on the property taxes and the house was no longer insured. All he wanted was to get out from under the house without losing it for the cost of back taxes. The seller agreed to carry a second mortgage of $36,000 for no interest and no payments for five years. Based on that, the buyer found a lender willing to issue a first mortgage for the balance of the purchase price. The seller was full owner of the property and walked away from the closing table with $30,000 in cash. The buyer owned a low mortgage property that he could easily pay to have managed professionally. He could pull a profit out of the house for five years before having to make payments to the seller.

As an investor, your primary goal is finding a way to deal with the seller’s equity in the property. When you can leverage the seller’s equity, you can typically find a lender that will payoff any outstanding mortgage on the property if the lender can be in first position with a spread of 30% or more between the money loaned and the fair market value. That’s what makes short sales so difficult to close. The seller has no equity in the property.

Many Ways to Structure a No Money Down Deal

Sellers always want to maximize their equity in a deal. However, the market is what determines how much equity they actually have at any given time. Some insist on holding out on a sale until they receive the high end of what they perceive to be their equity in the deal. Others are more anxious to sell and will trade part of their equity for cash today. You number one secret to putting deals together is learning what is motivating the seller.

If the seller wants cash now, you make a low ball offer that leaves plenty of meat on the bone for a new lender willing to put up money based on the loan being well below the market value of the property. If the seller wants the high end of the fair market value, it becomes a question of how long they are willing to wait for the money. As an investor, you can offer them premium dollar if they will owner finance and take the full value in installments over the next 20 years. If the property cash flows sufficiently, you can take over their existing financing and make a second mortgage payment to them that pays off their equity over multiple years.

Of course, the majority of sellers want to sell at full market value and receive the highest price at the closing table. As a no-cash or low-cash investor, these are not the sellers you should even be talking to. Your strategy is finding the 5 percent of the market that is either willing to sell at a discount or take their full equity over time.

PhotoAuthor bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.


How to Calculate Rolling Returns

How to Calculate Rolling Returns – SmartAsset

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When comparing investments in your portfolio, you may be concerned primarily with the returns a particular security generates over time. Rolling returns measure average annualized returns over a specific time period and they can be helpful for gauging an investment’s historical performance. Knowing how to calculate rolling returns and interpret those calculations is important when using them to choose investments. A financial advisor can familiarize you with several other metrics to gauge your investments’ progress.

What Are Rolling Returns?

Rolling returns represent the average annualized return of an investment for a given time frame. Specifically, rolling return calculations measure how a stock, mutual fund or other security performs each day, week or month from the time frame’s beginning to ending dates.

Essentially, rolling returns breaks a security’s performance track record into blocks. Investors can determine what return data to focus on for a particular block of time. For example, you may use rolling returns to measure a stock’s monthly performance over a five-year period or its daily returns for a three-year period.

Rolling returns calculations can measure an investment’s return from dividends and price appreciation. Typically, it’s more common to use longer periods of time such as three, five or even 10 years, to measure rolling returns versus to get a sense of how an investment performs. That’s different from annual return, which simply measures the return a security generates within a given 12-month period. It’s also different from yield.

How to Calculate Rolling Returns

If you’re interested in using rolling returns to evaluate different investments, there’s a step-by-step process you can follow to calculate them. The first step is choosing a start date and end date for which to measure returns. For example, say you want to measure rolling returns for a particular stock over a 10-year period. If you’re specifically interested in how well the stock performs in recessionary environments, you might set the tracking to extend from Jan. 1, 2006, to Jan. 1, 2016, which would include performance history for the Great Recession.

The next step is determining the return percentage generated for each year of the period you’re tracking. To do this, you’ll need to know the starting price and ending price for the stock or other security for the applicable years. Take the ending price and subtract the beginning price, then divide that amount by the beginning price to find that year’s return.

Next, you’ll use averaging to calculate rolling returns. Add up the return percentages you calculated for each year of the time period you’re tracking. Then divide the total by the number of years to get the average annualized return.

To find rolling returns, you’d simply adjust the time frame being measured. So, if you started with Jan. 1, 2006, for example, you could adjust your time frame to track the period from Feb. 1, 2006 to Feb. 1, 2016. Or you could look at rolling returns on a yearly basis, which means removing returns for 2006 and recalculating using returns for 2017.

This makes it fairly easy to customize rolling returns calculations when evaluating investments. You could use rolling returns calculations to mimic your typical holding period for a stock or mutual fund. For example, if you normally hold individual investments for five years then you might be interested in isolating rolling returns for that same time frame.

Rolling Returns vs. Trailing Returns

When comparing investments, you may also see trailing returns mentioned but they aren’t the same as rolling returns. Trailing returns represent returns generated over a given time period, e.g. one year, five years, 10 years, etc. For that reason, they’re often called point-to-point returns.

Trailing returns can be helpful if you’re interested in getting a snapshot look at an investment’s performance history. That’s useful if you want to know exactly how an investment performed at any given time. Trailing returns can be problematic, however, since it’s difficult to use them to gauge how an investment might perform in the future.

What Rolling Returns Tell Investors

Rolling returns can be useful for comparing investments because they can offer a comprehensive view of performance and returns. Specifically, examining rolling returns rather than focusing solely on annual returns allows you to pinpoint the periods when an investment had its best and worst performance. For example, you could use a five-year rolling return to determine the best five years or the worst five years a particular stock or fund offered to investors. This can help with deciding whether an investment is right for your portfolio, based on your goals, risk tolerance and time horizon for investing.

If you lean toward long-term buy-and-hold strategies versus shorter-term day-trading, for instance, then rolling returns can give you a better idea of how well an investment may pay off while you own it. Looking only at average annual returns may skew your perception of an investment’s performance history and what it’s likely to do in the future.

You may use rolling returns as part of an index investing strategy. Index investing focuses on matching the performance of a stock market benchmark, such as the S&P 500 or the Nasdaq Composite. It’s possible to calculate rolling returns for a stock index in its entirety, which can make it easier to see where the high and low points are for performance.

If you prefer actively managed funds in lieu of index funds, calculating rolling returns can also be helpful. In addition to assessing the fund’s performance over a specified time frame, rolling returns can also offer insight into the fund manager’s skill and expertise. If, for example, an actively managed fund outperforms expectations during an extended period of market volatility that can be a mark in favor of the fund manager’s strategy.

The Bottom Line

Rolling returns can make it easier to set your expectations for a particular investment, based on its best and worst historical performance. Calculating rolling returns isn’t difficult to do, and it’s something to consider if you’re focused on the long-term with your investment strategy.

Tips for Investing

  • An investment calculator can give you a quick estimate of how your investments will be doing in the years to come. Just put in the starting balance, yearly contribution, estimated rate of growth and time horizon.
  • Consider talking to your financial advisor about rolling returns and how to calculate them. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors locally. If you’re ready, get started now.

Photo credit: ©, ©, © Prasertthai

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.

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Where Should You Retire? A Comprehensive Guide To Retirement Costs In All 50 States

Studies suggest you save between $700,000 and $2 million for retirement, based on this crucial factor: location. Discover which states are cheaper and why!Studies suggest you save between $700,000 and $2 million for retirement, based on this crucial factor: location. Discover which states are cheaper and why!

The post Where Should You Retire? A Comprehensive Guide To Retirement Costs In All 50 States appeared first on Money Under 30.


Should I Move the Money in My 401(k) to Bonds?

Should I Move the Money in My 401(k) to Bonds? – SmartAsset

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An employer-sponsored 401(k) plan may be an important part of your financial plan for retirement. Between tax-deferred growth, tax-deductible contributions and the opportunity to take advantage of employer matching contributions, a 401(k) can be a useful tool for investing long term. Managing those investments wisely means keeping an eye on market movements. When a bear market sets in, you may be tempted to make a flight to safety with bonds or other conservative investments. If you’re asking yourself, “Should I move my 401(k) to bonds?” consider the potential pros and cons of making such a move. Also, consider talking with a financial advisor about what the wisest move in your portfolio would be.

Bonds and the Bear Market

Bear markets are characterized by a 20% or more decline in stock prices. There are different factors that can trigger a bear market, but generally they’re typically preceded by economic uncertainty or a slowdown in economic activity. For example, the most recent sustained bear market lasted from 2007 to 2009 as the U.S. economy experienced a financial crisis and subsequent recession.

During a bear market environment, bonds are typically viewed as safe investments. That’s because when stock prices fall, bond prices tend to rise. When a bear market goes hand in hand with a recession, it’s typical to see bond prices increasing and yields falling just before the recession reaches its deepest point. Bond prices also move in relation to interest rates, so if rates fall as they often do in a recession, then bond prices rise.

While bonds and bond funds are not 100% risk-free investments, they can generally offer more stability to investors during periods of market volatility. Shifting more of a portfolio’s allocation to bonds and cash investments may offer a sense of security for investors who are heavily invested in stocks when a period of extended volatility sets in.

Should I Move My 401(k) to Bonds?

Whether it makes sense to move assets in your 401(k) away from mutual funds, target-date funds or exchange-traded funds (ETF) and toward bonds can depend on several factors. Specifically, those include:

  • Years left to retirement (time horizon)
  • Risk tolerance
  • Total 401(k) asset allocation
  • 401(k) balance
  • Where else you’ve invested money
  • How long you expect a stock market downturn to last

First, consider your age. Generally, the younger you are, the more risk you can afford to take with your 401(k) or other investments. That’s because you have a longer window of time to recover from downturns, including bear markets, recessions or even market corrections.

If you’re still in your 20s, 30s or even 40s, a shift toward bonds and away from stocks may be premature. The more time you keep your money in growth investments, such as stocks, the more wealth you may be able to build leading up to retirement. Given that the average bear market since World War II has lasted 14 months, moving assets in your 401(k) to bonds could actually cost you money if stock prices rebound relatively quickly.

On the other hand, if you’re in your 50s or early 60s then you may already have begun the move to bonds in your 401(k). That might be natural as you lean more toward income-producing investments, such as bonds, versus growth-focused ones.

It’s also important to look at the bigger financial picture in terms of where else you have money invested. Diversification matters for managing risk in your portfolio and before switching to bonds in your 401(k), it’s helpful to review what you’ve invested in your IRA or a taxable brokerage account. It’s possible that you may already have bond holdings elsewhere that could help to balance out any losses triggered by a bear market.

There are various rules of thumb you can use to determine your ideal asset allocation. The 60/40 rule, for example, dictates having 60% of your portfolio in stocks and 40% dedicated to bonds. Or you may use the rule of 100 or 120 instead, which advocate subtracting your age from 100 or 120. So, if you’re 30 years old and use the rule of 120, you’d keep 90% of your portfolio in stocks and the rest in bonds or other safer investments.

Consider Bond Funds

Bond mutual funds and bond ETFs could be a more attractive option than traditional bond investments if you’re worried about bear market impacts on your portfolio. With bond ETFs, for example, you can own a collection of bonds in a single basket that trades on an exchange just like a stock. This could allow you to buy in low during periods of volatility and benefit from price appreciation as you ride the market back up. Sinking money into individual bonds during a bear market or recession, on the other hand, can lock you in when it comes to bond prices and yields.

If you’re weighing individual bonds, remember that they aren’t all alike and the way one bond reacts to a bear market may be different than another. Treasury-Inflation Protected Securities or TIPS, for example, might sound good in a bear market since they offer some protection against inflationary impacts but they may not perform as well as U.S. Treasurys. And shorter-term bonds may fare better than long-term bonds.

How to Manage Your 401(k) in a Bear Market

When a bear market sets in, the worst thing you can do is hit the panic button on your 401(k). While it may be disheartening to see your account value decreasing as stock prices drop, that’s not necessarily a reason to overhaul your asset allocation.

Instead, look at which investments are continuing to perform well, if any. And consider how much of a decline you’re seeing in your investments overall. Look closely at how much of your 401(k) you have invested in your own company’s stock, as this could be a potential trouble spot if your company takes a financial hit as the result of a downturn.

Continue making contributions to your 401(k), at least at the minimum level to receive your employer’s full company match. If you can afford to do so, you may also consider increasing your contribution rate. This could allow you to max out your annual contribution limit while purchasing new investments at a discount when the market is down. Rebalance your investments in your 401(k) as needed to stay aligned with your financial goals, risk tolerance and timeline for retiring.

The Bottom Line

Moving 401(k) assets into bonds could make sense if you’re closer to retirement age or you’re generally a more conservative investor overall. But doing so could potentially cost you growth in your portfolio over time. Talking to your 401(k) plan administrator or your financial advisor can help you decide the best way to weather a bear market or economic slowdown while preserving retirement assets.

Tips for Investing

  • It’s helpful to review your 401(k) at least once per year to see how your investments are performing and whether you’re still on track to reach your retirement goals. If you notice that you’re getting overweighted in a particular asset class or stock market sector, for example, you may need to rebalance to get back on track. You should also review the fees you’re paying for your 401(k), including individual expense ratios for each mutual fund or ETF you own.
  • Consider talking to a professional financial advisor about the best strategies to implement when investing in bear markets and bull markets as well. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors online. It takes just a few minutes to get your personalized advisor recommendations. If you’re ready, get started now.

Photo credit: ©, © Kavaleuskaya, ©

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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Traditional And Roth IRA Contribution Limits Announced

A few days ago I wrote a quick post giving full details about what changes we could expect to see in the 2021 401k contribution limits.

So how much was changing?

The short answer is that we saw no change in the contribution limit from last year, it remains at a limit of $19,500.

If you have an IRA in addition to or instead of a company 401k, you’ll want to make sure to stay on top of any increases in contribution limits there as well.

Contribution limits are lower in the IRA than the 401k to begin with, so if an increase happens, be sure to take advantage.

So what is happening with the IRA contribution limits this year?

The IRS has announced that the amount that you can contribute to a traditional or Roth IRA for 2021 will remain unchanged.

Don’t have a Roth IRA yet? Check out these posts talking about the best places to open a Roth IRA, or our list of best robo advisors.

Contribution Limits For Roth & Traditional IRA In 2021

The contribution limit for both Roth and Traditional IRAs will remain the same this year.

If you are under 50 years old that means you can still contribute $6,000 to your IRA accounts, same as last year.

50+ years old?  You’re also able to make a catch up contribution of $1,000 – which pushes the contribution limit to $7,000.

The limit for the Roth and traditional IRA is a shared limit, so keep in mind if you contribute to one, the limit for the other is reduced. The $6,000 is a single combined limit if you want to max out your contributions.

For example, if you contribute $4,000 to your Roth IRA, you could only contribute $2,000 to your traditional IRA (bump that up by $1,000 if you’re over 50).

Here’s a table showing the 2021 Traditional and Roth IRA contribution limits, along with the limits in years past.

Year Age 49 and Below Age 50 and Above
2002-2004 $3,000 $3,500
2005 $4,000 $4,500
2006-2007 $4,000 $5,000
2008-2012 $5,000 $6,000
2013-2018 $5,500 $6,500
2019-2021 $6,000 $7,000

AGI Based Income Phaseouts For Roth IRAs In 2021

Roth IRAs have an income phaseout. What that means is once you reach a certain level of income the amount of you can contribute goes down, and gets completely phased out at the upper level of the range.

For Roth IRAs single taxpayers, head of household, or married filing separately (IF you didn’t live with your spouse during the year) with an annual Modified Adjusted Gross Income (MAGI) over $125,000, you’ll begin to see the allowable contribution drop until at $140,000 it goes away completely. The limits for married filing jointly investors are $198,000-$208,000. Here are the limits:

Roth IRA Income Limits For Contributions (2021) Contributions are reduced if income is above this amount Contributions are not available if income exceeds this amount
Single/Married Filing Separate IF you didn’t live together during the year. $125,000 $140,000
Married Filing Jointly or qualifying widow or widower. $198,000 $208,000
Married filing separately IF you lived with your spouse at any point during the year. $0 $10,000

So what does this mean in practice?

If your income is less than the number in the first column, you can contribute the full $6,000 for those younger than 50.  If you’re 50 or older you can contribute $7,000.

If your income is higher than the amount in the second column, you aren’t able to contribute to a Roth IRA in 2021, barring something like a back door Roth IRA conversion.

In your income falls neatly into the range above, you can still contribute a prorated amount.

For single taxpayers, for every $1,500 you make above the number in the first column, you’ll lose 10% of your $6,000 max contribution.

For married taxpayers, you’ll lose 10% for every $1,000 in income above the first column amount.  Here’s an example of how this looks from Motley Fool:

As an example, say that you’re 48, married, and have a joint income of $205,000. Looking at the chart above, your income exceeds the $193,000 lower threshold by $7,000. At a rate of 10% per $1,000, that means that you’ll lose 70% of your contribution. For someone younger than 50 with a maximum of $6,000, the reduction will be $4,200, leaving you with a final allowable contribution of $1,800.

Contributions Can Be Made Until Tax Day 2021 For 2020!

If you have a Traditional IRA or Roth IRA, one thing a lot of people don’t realize is that the time to contribute to your account doesn’t end when the clock strikes midnight on December 31st. In fact, if you haven’t contributed the allowed contribution amount by December 31st, you have all the way until tax day to contribute to your account for the previous year.

In fact, you can still open a Roth IRA or a traditional IRA and contribute the fully allowed amount up until tax day. Tax day for 2021 will fall on Thursday, April 15th, 2021. So not only can you contribute at the end of this year, you can contribute right up until your taxes are due!

If you do make a contribution in 2021 before tax day, make sure you specify which tax year the contribution is being made for.

Keeping Tabs On Limits And Phaseouts

When you’re contributing to a Roth or Traditional IRA you’ll want to keep an eye on the limits and phaseouts.

If your income is reaching phaseout thresholds, you may want to consider reducing your taxable income by contributing to an account like a 401k, or reducing your taxable income by making charitable contributions, etc so that you can continue to be eligible for the account type.

Are you increasing your contributions this coming year, even though the limits haven’t increased?

Traditional And Roth IRA Contribution Limits Announced


The Coinbase IPO: What to Know

This article provides information and education for investors. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks or securities.

On Jan. 28, 2021, the U.S. cryptocurrency exchange Coinbase announced its plans to go public via a direct listing, a strategy that Slack and Spotify also used to sell shares directly to the public without an intermediary.

Reports indicate existing shareholders — such as employees and former employees with equity in the company — will have the opportunity to sell their shares pre-IPO via the Nasdaq Private Market. As for typical retail investors, they’ll have to wait until after the stock starts trading on the market to buy in.

Coinbase hasn’t yet provided an official date for its IPO, but some reports have suggested it could be early in 2021. And while it hasn’t set a price for its shares yet either, Coinbase pre-IPO contracts are currently trading around $285 on the cryptocurrency derivatives exchange FTX, and the company has a pre-IPO valuation of $69.47 billion.

Want to buy Coinbase stock? Here’s what to consider

After Coinbase has gone public, you’ll be able to buy and sell its shares on the stock market like any other public company. (Learn how to buy stocks.)

However, what’s unique about this stock is that your investment’s success is tied to the popularity and trading volume of cryptocurrencies, but you won’t have to convert your U.S. dollars into cryptocurrency, according to Randy Carver, a registered principal with Raymond James Financial and president and CEO of Carver Financial Services in Mentor, Ohio.

“Buying Coinbase [stock] could provide a way to participate indirectly. It’s like the person selling picks and shovels to the miners; you don’t have to be a prospector to make money,” Carver says.

According to Chris McAlary, CEO of bitcoin ATM operator CoinCloud, Coinbase’s IPO could be a way for more traditional investors to gain crypto exposure without feeling like they’re jumping squarely into the game of speculation.

“If they’re more comfortable investing in stocks and putting their money behind a company with cash flow, a board of directors and the whole traditional infrastructure, they’ll appreciate the opportunity to bypass crypto volatility and invest in Coinbase stocks instead,” McAlary says.

Still intrigued? Consider these factors to decide if Coinbase is right for you.

1. The future of cryptocurrency

When you invest in a company, it’s a vote of confidence in the company itself, but it also shows you expect demand for its product or service to rise, too. Do you believe there’s a future for cryptocurrencies, like Bitcoin, Ethereum and the dozens of altcoins available to trade on Coinbase? Do you believe cryptocurrency is the “future of money” that could usher in an “open financial system around the world,” as Coinbase states on its website?

Or, is this all just a fad? An exchange like Coinbase is highly susceptible to changes in demand, and if crypto loses its appeal and users stop exchanging on Coinbase, this could impact revenue.

Just as you would want a thorough understanding of the renewable energy market before investing in a renewable energy company, you’ll want to fully wrap your head around cryptocurrencies before investing in a pure-play crypto company.

2. Coinbase’s role in the future of crypto

If you believe there’s a future for cryptocurrencies, the next question to ask yourself is whether Coinbase is positioned to capitalize on cryptocurrency’s popularity. This is where investors might perform a fundamental analysis as they would with any other public company: studying the company’s revenue, earnings, user growth, competition, management and dozens of other factors.

But investing in Coinbase comes with a Catch-22: If you fully believe in cryptocurrency — that is, believe in the applications and value of a decentralized public ledger — then do you have confidence in Coinbase, which is itself a centralized company?

In addition to the Coinbase app, the company does offer its Coinbase Wallet separately, which lets users store their own cryptocurrencies and explore decentralized applications. However, Coinbase Wallet only charges fees to cover the transaction costs it incurs, not the revenue-generating per-transaction fees of the primary Coinbase app.

3. What you can afford to invest in Coinbase

When it comes to actually investing in Coinbase, the same rules apply for buying equity in any company: There’s inherent risk, and you should invest only an amount you can afford to lose. Moreover, don’t invest any cash you might need in the near future, say for at least the next five years. Building in this buffer will give you time to potentially recover from any near-term drops in the stock price.

Lastly, if you’ve yet to start a long-term, index fund-based investment plan, most financial advisors would suggest funding such an investment before diving into the stock of a company that has recently gone public — or any individual stock, for that matter.

But once Coinbase has gone public, and if you decide it’s an appropriate investment for your portfolio, you can learn how to buy stocks here.

The author owned Bitcoin and Ethereum at the time of publication.


Relax. The Reddit-Hedge Fund Battle Won’t Tank Your 401(k)

This article provides information and education for investors. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks or securities.

Amid all the freneticism of the Reddit-hedge fund battle, a simple fact seems to have gone unnoticed: It means very little to the majority of investors. Your 401(k) is probably fine, and your IRA is still doing its thing.

To fully understand why that’s the case, let’s look at how we got here, and what it means for average investors going forward.

What the hedge just happened?

Hedge funds are investment vehicles that pool money from wealthy individuals. They’re less regulated than the common mutual fund, giving the firms that manage hedge funds a bit more latitude to perform high-risk investing maneuvers.

One such strategy is short selling. When you “short a stock,” you’re betting the price of that stock will fall. You borrow shares from your broker, then sell them immediately. When the stock price falls, you buy the shares back, return them to the broker and pocket the difference in price as profit.

But if the stock price rises, you could be in serious trouble. Imagine selling the borrowed stock for $10, then watching its price rise to $50. You’re on the hook to return those shares, which means buying them back at the higher price and taking a loss. What happens if the stock surges to $400? That’s what hedge funds just found out.

GameStop + hedge funds + short selling

GameStop is a brick and mortar store that sells video games — hardly the paragon of a future-proof company. Some hedge funds believed the company was in dire straits, and that its stock price  — which was around $10 in the fall of 2020 but had been trading at around $4 for most of the year — would fall. They shorted GameStop, expecting to make money when it did.

… and then there was Reddit

Reddit is basically a chatroom broken into groups by category, called subreddits. Members of one subreddit, known as WallStreetBets, are known for irreverently, self-deprecatingly and sometimes offensively posting their investment exploits — both good and bad.

When WSB members caught wind of the shorts against GameStop, they saw it as an opportunity to take on what they perceived as Wall Street greed through what’s known as a short squeeze. They started buying up GameStop stock, driving the price higher, knowing it could cause a potentially multimillion-dollar headache for the hedge funds that shorted the stock and would be forced to buy it back at the inflated price.

Further fanning the flames of Reddit vs. Wall Street, on Jan. 28, a handful of brokers — including the investing app Robinhood — temporarily restricted retail investors from trading several stocks, including GameStop, while hedge funds and other institutional investors carried on as usual.

Should I be concerned about my investments?

This whole calamity will sting some investors, but most likely not you. The ones who will lose the most from this will be the short sellers who were forced to cover their positions and speculators who bought in at an exorbitant price, according to Aaron Sherman, president of Odyssey Group Wealth Advisors in Lancaster, Pennsylvania.

“An average retail investor should not be impacted by this if they are invested in a well-diversified portfolio that appropriately reflects their risk tolerance,” Sherman said in an email interview.

He added that this particular phenomenon, which was centered around a few individual stocks, is a clear example of why diversification is so important.

“The best way to achieve market gains while limiting volatility is to invest in diversified low-cost funds that will not be unduly influenced by pricing abnormalities in one stock or another,” he said. “Taking part in these short squeezes is pure gambling and should not be a part of anybody’s investment strategy for retirement.”

And if you’re having FOMO for missing the action, there’s no guarantee that message-board intel would have turned into profit. “The ones who will benefit the most are the Reddit users that initiated the frenzy — if and only if they manage to exit their position at the right time,” Sherman said.

Simply put, most individual investors are unlikely to benefit from this, and equally unlikely to see a negative impact on their 401(k), IRA or other long-term investment portfolio.

So, I shouldn’t let this sideline me?

If you’re not currently investing because you’re worried it’s too risky, this kind of news story doesn’t help. According to Sherman, the whole episode does offer an interesting truth: A group of people with a specific agenda can, in fact, influence the price of a stock one way or another.

The key word there is “stock.” Investing in individual stocks, especially based on an online tip, is always going to be risky. But that’s no reason to sit out the stock market.

“That doesn’t mean that the market as a whole is not safe to invest in, but rather that investors should invest in well-diversified funds (exchange-traded funds and mutual funds) rather than exposing themselves to the whims of a small group of investors in an individual stock,” Sherman said.

By putting together a long-term investment plan built on highly diversified ETFs and mutual funds, investors can take solace in knowing their retirement funds or savings won’t be wiped out by concentrated and rare market disturbances — including online stunts.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.



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First in the Family to Invest: How I Saved Almost $700K

This article provides information and education for investors. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks or securities.

Growing up in rural Missouri, money was tight for Anthony Hammond.

“I joke, I come from the type of family where they don’t read a will at the funeral, they pass the hat — sometimes we’ve had to do that,” says Hammond, a 47-year-old manager of a used car dealership.

“I come from hardscrabble folks, both my parents worked in factories their entire lives,” says Hammond, who now lives in Independence, Missouri. “My dad was never a believer in investing.”

But watching generations of his family retire poor, dependent on Medicaid and Social Security to get by, “I just knew I didn’t want that type of life,” Hammond says. Now, he and his husband have amassed nearly $700,000 in retirement savings. Here’s how they did it.

Frugality, goal-setting pay big dividends

Although his parents didn’t invest, they passed along two essential traits to Hammond that have been vital in building his investment nest egg. “Dad was all about saving money, Mom was all about paying bills on time,” he says.

So when Hammond graduated from college, he worked to pay off his student loans quickly. “That’s a poor kid’s mentality with money — what happens if it goes away?” Hammond says. “You don’t have the safety net to go to Mom and Dad when you get in trouble.”

Aside from his full-time job, Hammond did odd jobs to pay down his debts and followed a rigid budget. “You can’t go out to eat, you can’t go out and buy new shoes. For the first few years, it’s pretty crappy, to be honest,” he says.

“But it’s also the period where you’re trying to catch up with the people who had a head start, whose parents paid for their college, and you’ve got student loans,” Hammond says. “I didn’t want my student loans going on for 20 years, so I paid them off as fast as I could.”

Setting and realizing short-term financial targets help pave the road for long-term financial success, financial specialists say.

“Hitting short-term goals can be so powerful in terms of getting yourself on board with the whole [savings and investment] program,” says Christine Benz, the director of personal finance for investment research firm Morningstar. “From a personal empowerment perspective, it gives you a strong sense of control over your finances.”

Leaning on funds rather than stocks

Hammond began investing the way many investors do: through an employer-sponsored retirement plan. “I started a SIMPLE IRA with my employer in 1996, just doing the basics — if they offered a 3% match, I would do 3%,” he recalls.

In the late 1990s, as dot-com and tech stocks were all the rage, he opened his first brokerage account. “I invested in some individual stocks and did pretty well,” he says.

He continued stock picking with individual companies until the Great Recession, and in 2008 he lost $30,000.

“I got in over my head and lost quite a bit of money, and since then I haven’t gotten into a single stock position again,” he says.

Instead, he and his spouse invested primarily in index funds, a type of mutual fund that invests widely in companies on a particular index, such as the S&P 500. While index funds may increase and decrease in value over time, the risk of losing your total investment is greatly reduced.

Agreeing on savings goals with your spouse

Hammond invests 20% of his income each month, on top of the 10% of his husband’s income that goes to fund his pension.

“It’s the biggest payment I make each month, by far,” he says. “I have SIMPLE IRA, traditional IRA and Roth IRA — the full hand.”

After the recession, Hammond and his husband paid down all their debts, including their home mortgage.

“Since 2014, we’ve been debt-free, and have since ramped up our retirement savings,” he says.

While they can now afford more luxuries, frugality is a hard habit to break.

“I still drive a 15-year-old car, and my wardrobe — maybe it will come back in style some day if I wait long enough,” he says. “Any purchase over $300 or $400 is a pretty big discussion for us … what can I say, we’re cheap.”

Looking ahead, Hammond’s goal is to have more than $1 million saved by retirement.

“We’d like to travel more, that’s something we don’t do enough of and enjoy doing,” he says.

Hammond’s advice for other would-be investors? Make a budget, and start small.

“No one wants to make a budget, especially when you’re broke. But that’s exactly the time when you need a budget,” he says. “If you can put away $25 a week, and then next year put away $30 a week, every little bit helps. You have to treat savings like you don’t have a choice.”


Want to Buy Pfizer Stock? Here’s What You Should Know

This article provides information and education for investors. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks or securities.

Pfizer isn’t new to the limelight. The company’s stock is included in dozens of health care, pharmaceutical and dividend index funds and ETFs, and Pfizer regularly makes headlines for its innovations in health care. But when its COVID-19 vaccine (developed alongside German biotech company BioNTech) was given emergency use authorization by the U.S. Food and Drug Administration in December 2020, the company gained renewed interest.

Pfizer’s stock price jumped on the development, and though it corrected in the following weeks, the stock continued to trade higher than it had been prior to the vaccine news.

Pfizer’s stock price today

Stock market data may be delayed up to 20 minutes and is intended solely for informational purposes, not for trading purposes.

But the question for potential investors isn’t how Pfizer has performed recently — it’s what might come next and whether the stock is a good fit for your portfolio. Below are three things to consider before buying Pfizer stock.

1. What’s Pfizer’s future potential?

It may be tempting to buy Pfizer stock based on recent headlines, but the reality is Pfizer’s potential success is already baked into the stock price you’re paying today. In other words, as a retail investor, you’re not on the “ground floor” so to speak — you’re up against institutional investors who have the resources of an army to uncover the kind of things that move stock prices long before you do. That’s why it’s best to avoid investing in any company solely based on past performance or its current price.

Instead, you’ll want to do as the pros do: pore over Pfizer’s financial statements, revenue, earnings, projected performance and dozens of other variables to determine whether Pfizer is a sound investment. All of this data should be available through your online broker, or via an independent research site like Morningstar.

2. Does Pfizer stock fit into your portfolio?

Before purchasing any stock, consider how it fits in with your existing portfolio. Does the potential investment:

  • Add too much weight to any particular sector or industry?

  • Tilt your portfolio too far toward stocks from a particular geographic region?

All of these questions will help you determine if the stock will build diversification within your portfolio, or lead to over-concentration in one particular area.

For example, Pfizer is considered a large-cap value company, suggesting it may not see the rapid growth of, say, a relatively new tech company. However, Pfizer offers a strong dividend that has increased since mid-2009, and in 2020, its stock price was less volatile than most of its competitors.

Considering these factors, Pfizer may fit in better with a portfolio that needs a greater balance toward less-volatile, income-producing value stocks. This of course is just an example; there are dozens of factors that would go into balancing your particular portfolio.

3. How much should you invest in Pfizer stock?

To figure out how much you should invest in Pfizer, first take a broader look at your financial situation. Consider:

  • Do you have adequate emergency cash savings?

  • Are you comfortable with losing access to the money you invest in Pfizer for at least five years? That’s generally the minimum time horizon financial advisors recommend for any stock market investment.

  • Have you taken care of other financial priorities, such as paying off high-interest debt?

  • Can you afford to lose money on your investment?

If you’ve answered yes to the above questions and feel ready to invest, but you still aren’t sure how much to contribute, consider dollar-cost averaging. With this strategy, you’ll invest a specific amount at regular periods, such as weekly or monthly. This can be less stressful than investing the full amount all at once, as it can lower the chance of buying in fully at an inopportune time.

However you decide to invest, the process to buy Pfizer stock is the same for any company. If you’re ready to learn more, check out our guide on how to buy stocks.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.