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Tag: Personal Finance

  • The Top Performers: Ranking the Best S&P 500 Index Funds to Invest in 2023

    If you want to invest in the U.S. stock market and get diversified exposure, S&P 500 index funds are a great option. These funds passively track the large-cap stocks that represent about 80% of the total value of the U.S. equity market.

    Passive investing means no fund manager is actively choosing which stocks or investments to buy or sell. Instead, they just follow an index like the S&P 500. This means you’ll own a little piece of all the companies in that index, without having to pick and choose individual stocks yourself.

    Although there are many index funds that track the S&P 500, there are three options that stand out because of their ultra-low expense ratios. This means more of your money stays invested in the fund, earning greater returns. Additionally, all three funds have a historical performance that closely duplicates or even exceeds that of the benchmark index.

    Today I’ll discuss some of the best options available in the market and the benefits they offer investors. My analysis is done with the help of this Morning Star report and my research on these three funds from their websites.

    Remember, you only need one S&P 500 index fund in your portfolio, and splitting assets between two funds is unnecessary. They all give very similar returns.

    1. Fidelity’s S&P 500 index fund (FXAIX)

    This fund has the lowest expense ratio on the list of the most popular ones, charging only 0.015% annually. It has historically outperformed its benchmark index and offers a competitive dividend yield.

    The Fidelity 500 Index Fund is an excellent option for investors looking for a single-core holding. It doesn’t have a minimum investment requirement for any account type, making it an attractive option for early-stage investors.

    The only downside is its performance history is comparatively brief and it is one of the newest funds. This may deter some investors who prefer funds with a longer track record.

    2. Charles Schwab S&P 500 index fund (SWPPX)

    Moving on, Charles Schwab’s S&P 500 index fund has a slightly higher expense ratio than Fidelity’s offering, but it comes with the benefit of more than two decades of performance history. This makes it a big plus for investors who are willing to pay a bit more for a fund with a longer track record, competitive historic returns compared to the S&P 500, and a nice dividend yield.

    This fund has a $0 investment minimum for all account types. This makes it an excellent option for earlier-stage investors looking to access large-cap holdings without the stress of choosing individual stocks.

    3. Vanguard’s S&P 500 index fund (VFIAX)

    Lastly, we have Vanguard’s S&P 500 index fund, one of the biggest names in the industry. It has historically outperformed the benchmark index, offers a dividend yield of 1.63%, and has an extremely low expense ratio.

    However, this fund does have a $3,000 investment minimum, which can be steep for some investors, even when investing with individual retirement funds (IRAs). In that case, Vanguard’s S&P 500 exchange-traded fund (ETF), VOO, may be a better option for those looking for a lower-cost entry point.

    Overall, these S&P 500 index funds offer investors an excellent opportunity to get diversified exposure to the heart of the U.S. stock market, and each has its unique benefits that cater to different types of investors.

    Here is a quick comparison of these index funds in a tabular form. This data is current as of April 24, 2023.

    You will notice that Vanguard has a minimum investment of $3,000, but you can also invest in Vanguard’s counterpart S&P 500 exchange-traded fund (ETF) VOO, which has a $1 minimum investment.

    So which S&P 500 Index fund is right for you?

    When choosing an S&P 500 index fund, there are a few things to consider:

    First, look at the expense ratio, which is the fee you pay for the fund’s upkeep. As index funds are managed passively, you’ll want a fund with a low expense ratio.

    Also, consider the minimum investment required for the fund and if it fits your budget.

    The dividend yield is another factor to compare between funds, as it can boost returns.

    The fund’s inception date is important if you prefer a solid track record for the fund before investing.

    Conclusion

    I have read many best-selling personal finance books and keep reading online blogs on investing. All of those authors recommend passive investing over active investing in the current age.

    Most active investors can’t consistently beat the market even if they try to do their best. In fact, the high fees you will end up paying to them compared to the index funds mitigate any extra money you will make from them.

    Also, the process of investing shouldn’t be complicated. You shouldn’t focus on timing the market and buying and selling to make short-term gains. Instead, keep your money invested in index funds to let it grow over time.

    By investing in an index fund, you’re spreading your money around, so you’re not putting all your eggs in one basket. That way, you’re more likely to make money over time because you’re invested in a diverse group of companies.

    Index funds let you put your money into many different companies, so if one company doesn’t do well, you still have money in the other companies to help make up for it.

    So, take the emotions out of investing, invest in one of these index funds, and let compounding do its magic! You are much more likely to become a millionaire this way than by doing active trading.

  • The economics of buying versus renting a home

    Deciding whether to buy or rent a home is a big decision that can significantly impact your finances. In this post, I will discuss the pros and cons of both options and provide you with some tips on how to make the best decision for your finances.

    Pros and Cons of Buying a Home:

    1. Let’s start by discussing the pros and cons of buying a home.

    Pros:

    • Potential for long-term financial gain through property appreciation
    • Freedom to make changes to the property and customize it to your liking
    • Building Equity in your home
    • Stable housing costs (fixed mortgage payment)

    Cons:

    • High upfront costs (down payment, closing costs, etc.)
    • Responsibility for maintenance and repairs
    • Potential for the property value to decrease
    • Limited mobility (selling a home can be a lengthy and expensive process)

    Pros and Cons of Renting a Home

    1. Now let’s move on to the pros and cons of renting a home.

    Pros:

    • More flexibility and mobility
    • No responsibility for maintenance and repairs
    • Lower upfront costs (typically just the first and last month’s rent)
    • No need to worry about property value fluctuations

    Cons:

    • No equity building
    • Rent payments can increase over time
    • No control over property changes or customizations
    • Potentially less stable housing (landlord could sell or choose not to renew the lease)

    How to Make the Best Decision

    So, how do you decide whether to buy or rent a home? Here are a few tips to help you make the best decision for your finances.

    • Determine your budget and what you can afford
    • Consider your long-term goals and plans for the future
    • Think about your lifestyle and how it may change over time
    • Research the housing market in your area
    • Weigh the pros and cons of each option carefully

    Conclusion:

    In conclusion, whether to buy or rent a home is a complex decision that requires careful consideration. While both options have pros and cons, it ultimately comes down to what is best for your unique financial situation and lifestyle. By considering your budget, long-term goals, and the local housing market, you can make an informed decision that will benefit you in the long run.

    Thank you for reading this post on the economics of buying versus renting a home, and I hope you found this information helpful.

  • Stock market 101: Understanding the basics of the stock market

    A stock market is a place where people buy and sell shares of publicly traded companies. These shares represent ownership in the company and can increase or decrease in value based on various factors such as the company’s performance, economic conditions, and investor sentiment.

    When a company goes public, it issues shares of stock that investors can purchase. People can then buy and sell these shares on the stock market. The stock market provides a platform for investors to trade these shares with each other.

    How does the price of a company’s stock move?

    Supply and demand determine the price of a stock. If more people want to buy a stock than sell it, the price will go up. If more people want to sell a stock than buy it, the price will go down.

    The bull represents a growing market while the bear represents a falling market. The name comes from the way these animals attack.

    There are two main types of stock markets: primary and secondary. The primary market is where new stocks company issue and sell to the public for the first time. The secondary market is where investors trade previously issued stocks.

    Overall, the stock market plays an important role in the economy by allowing companies to raise capital and investors to participate in the success of these companies.

    How’s the stock market related to the economy?

    The performance of the stock market can be an indicator of the health of the economy, as it reflects the collective sentiment and expectations of investors about the future prospects of companies and the economy as a whole.

    When the stock market is doing well and prices are rising, it often indicates that investors have confidence in the economy and expect companies to perform well in the future. This can lead to increased investment, job growth, and economic expansion.

    But, when the stock market is performing poorly and prices are falling, it may indicate that investors are pessimistic about the economy and the future prospects of companies. This can lead to decreased investment, job losses, and economic contraction.

    In addition, changes in the economy, such as interest rates, inflation, and government policies, can also impact the stock market. For example, if the Federal Reserve raises interest rates to combat inflation, it may lead to higher borrowing costs for companies and decrease their profits, causing their stock prices to fall.

    Therefore, the stock market is an important component of the overall economy. It can be affected by, and also impact various economic factors.

    I will cover more on the main types of stock exchanges in the US and globally in my next post. Thanks for reading!

    If you want to watch my videos on the same topics, you can check out my Youtube channel here. https://www.youtube.com/channel/UC1wFKF1FTBI90qdn4HH2QhQ

    Credit: Images from Freepik

  • Stock market Investing 101

    In today’s post, I will talk about what you should consider if you haven’t started investing in stocks yet or if you are a beginner investor.

    Why do people fear investing in stocks?

    Before we do that, let’s look at the reasons why people may be afraid to invest in stocks. Here are some of the most common reasons:

    1. Lack of knowledge: Many people are afraid to invest in stocks because they don’t understand how the stock market works or how to analyze stocks. They may feel overwhelmed by the amount of information available and worry about making a mistake.
    2. Fear of losing money: Investing in stocks always carries some degree of risk, and many people are afraid of losing money. They may worry about a stock market crash or about investing in the wrong company.
    3. Past negative experiences: Some people may have had negative experiences with investing in the past, such as losing money or being scammed by a fraudulent investment scheme. These experiences can make them hesitant to invest in stocks again.
    4. Perceived lack of control: Investing in stocks can feel like a gamble to some people, and they may worry about not having control over their investments. They may feel more comfortable with traditional savings accounts, where they feel they have more control over their money.
    5. Peer pressure: Some people may feel pressure to invest in stocks because of their friends or family members, but they may not feel confident in their ability to make good investment decisions.

    So what is the solution?

    Infact, investing in stocks for long-term growth can be a great way to build wealth over time if done correctly. By following some simple tips, you will mitigate the risk associated with investing and will grow your wealth over time. Here are some tips on how to invest in stocks (and other assets) for long-term growth:

    1. Set your investment goals: Before you start investing in stocks, it’s important to define your investment goals. Do you want to save for retirement, a down payment on a home, or another long-term goal? Understanding your goals can help you create a long-term investment plan.
    2. Determine your risk tolerance: Investing in stocks comes with risk, and it’s important to understand your risk tolerance before you start investing. Conservative investors may want to focus on blue-chip stocks with a history of stable returns, while more aggressive investors may be comfortable with higher-risk, high-growth stocks.
    3. Research companies and industries: When investing in individual stocks, it’s important to research individual companies and industries to make informed investment decisions. Look for companies with strong financials, competitive advantages, and growth potential, and consider investing in industries that are poised for growth in the long term. This does require quite a bit of research by looking at companies’ financials. For conservative investors, it is best to start with a broad-based index fund or an ETF. By setting up monthly or weekly contributions, you can ignore market fluctuations. Predicting the future of a specific company is uncertain. Thus this risk is much higher compared to investing in a fund, which is a pool of many companies from different sectors.
    4. Build a diversified portfolio: Diversification is key to managing risk and maximizing returns when investing in stocks. Invest in a variety of companies and industries to spread your risk (through index funds or ETFs). Vanguard, Charles Schwab, and Fidelity are all good brokerage companies offering index funds. It’s important to research and compare the fees, historical performance, and other factors of different index funds and providers before making any investment decisions. Also, consider adding other asset classes, such as bonds and real estate, to your portfolio.
    5. Invest regularly and stay disciplined: Investing in stocks for long-term growth requires discipline and consistency. Set up automatic contributions to your investment account and stick to your long-term investment plan, even in times of market volatility. As I mentioned in my previous posts, investing in funds is a great way to do that. Also, by following a strategy called dollar cost averaging you can remove emotions from your investment decisions.
    6. Monitor and adjust your portfolio: Finally, it’s important to regularly monitor and adjust your portfolio as needed. Rebalance your portfolio periodically to maintain your desired asset allocation, and consider adjusting your investments as your financial goals or risk tolerance change over time.

    Conclusion

    Overall, investing in stocks can be a great way to build wealth over time. However, it is important to do your research and understand the risks involved. If you are feeling hesitant about investing in stocks, consider consulting with a financial advisor or taking a course on investing to gain more knowledge and confidence.

  • How do we change our mindset about investing?

    Whether investment should be done for the long term (retirement) or short term (if you are looking to pay for downpayment of a house), we should consider these key points:

    1. Short-term gains can be risky: While making quick profits through short-term investments is possible, it often involves taking on more risk. Fluctuations in the stock market can cause investments to lose value quickly, making short-term gains unsustainable.
    2. Long-term investments offer more stability: By investing for the long term, you are able to ride out market fluctuations and take advantage of compounding interest over time. This can provide more stability in your portfolio and increase your chances of achieving your financial goals.
    3. Patience is key: Investing for the long term requires patience and discipline. It is important to avoid making impulsive decisions based on short-term market movements and instead focus on the long-term potential of your investments.
    4. Diversification is important: To mitigate risk, it is critical to diversify your portfolio by investing in a mix of different asset classes and sectors based on returns and risks. This can help to offset any losses in one area with gains in another.
    5. Consider your goals and risk tolerance: Your investment strategy should be aligned with your personal financial objectives and risk tolerance. While long-term investments may be suitable for some, others may prefer a more active approach to investing. Some safe ways to make a reasonable return in the current market situation are investing in CDs and high-yield savings accounts. These are currently giving around 4%-5% interest rate annually. The US treasury bills and notes are also offering similar rates. It is essential to consider what works best for you and your financial situation and how soon you need the money.

    In summary, while short-term investments can offer quick gains, long-term investments provide more stability and the potential for compounding interest over time. By focusing on a long-term investment strategy and diversifying your portfolio, you can mitigate risk and increase your chances of achieving your financial goals.

  • What should we do when the stock market falls? Should we panic and start selling?

    In 2022, the U.S. stock market experienced what we call in finance a bear market. There was a prolonged drop in stock market prices because of the Russia-Ukraine war and tightened monetary policy. The S&P500, the U.S. broad market index kept falling by more than 20% from its high at the beginning of 2022.

    With continuous interest rate hikes, S&P 500 index showed a downward trend in 2022 and hasn’t recovered to its Jan 2022 level
    Source: Google Finance

    But if this scared you and you concluded investing in stocks is not a good idea, you must think again. 

    Financial literacy is critical for building wealth. It is important for any person to know how market trends work, but particularly important for younger adults who are in their 20s.

    Although I have taken the U.S. stock market as an example for this post, the principle applies to almost any country with a developed stock market.

    In this blog, I will highlight two key points:

    1. Investing in stocks should always be done for the long term. If you look at the data over the long run, the overall stock market gave an average annual rate of return of 10% to 14%. 

    This chart from Google Finance shows that S&P 500 index, which is the benchmark index for US stock Market has an upward trend over the long run.

    Source: Google finance S&P500 index

    Sure, there are years (including 2020, 2022 as you see in the chart below) when it has fallen sharply because of various economic reasons. However, in the long run (5 yrs or more), if you see the trend line, it is going upwards.

    Source: Google finance S&P500 index. I added my captions to explain the dips

    So, yes if you just invested at the beginning of 2022 and wanted to take out your money after that, you would lose money on your investment. But if you plan to withdraw the same money in the next 5 or 10 years, I am sure it is going to fetch a much higher return. 

    2. Business Cycles are real

    The reason for this is due to the occurrence of business cycles or sometimes what we call economic cycles. Most stable economies exhibit boom and bust. The chart below shows how there are periods of expansions and recessions where the GDP and stock market grow and contract respectively.

    Most governments including the U.S. government through their fiscal policy and the Fed, through monetary policy, take corrective measures to bring the economy back on track. For the US, the target rate of inflation is 2% and the target unemployment is around 5%.

    Over the long run, most stable countries show a pattern of economic growth as seen by the black trend line sloping upwards.

    So yes, if you invest in the stock market for a long term, greater than 5-10 years, you should get a positive return. It will still be positive even after adjusting for inflation.

    So don’t panic and start selling when the market starts falling, instead, wait and let it recover.

    This actually would be the best time to start investing or adding more towards your monthly contributions. The best way to do that is by following a safe investment strategy such as dollar cost averaging. I have discussed that in detail in my previous articles on personal finance.

    Have a balanced portfolio

    But don’t put all your money in the stock market. For any investor, it is critical to have a balanced portfolio. Make sure to have an optimal mix of riskier and safer asset classes based on your age and risk tolerance. 

    Bonds are a relatively safer investment option compared to stocks, real estate, and gold, and therefore, have low returns on them. 

    Anyone who is less than 50 years old can have more of their money invested in the stock market versus anyone who is 50 and above.  As you approach retirement age, you would like to have less money invested in the stock market and more in safer options. So, whenever you want, you can withdraw your money without worrying about market fluctuations.

    Investing in stock is done to make your money grow over time. Yes, overtime is the keyword here. It is not meant for becoming rich overnight or for short-term gains.

    Also, it is best to start investing early to reap the maximum benefits. Although, starting at any age is better than not starting at all unless you are close to your retirement age. Ideally, as soon as you get your first job you should think about investing a portion of your salary. You can start with 10-15%.

    Create an emergency fund and pay off debt first

    But before you start any type of investment, ensure you have enough cash to cover at least 3-6 months of expenses in an emergency fund. Usually, people like to keep it safe in an FDIC-insured high-yield savings account. This is the liquid money that will cover any type of contingency, which you can withdraw whenever you want to.

    So it is essential you save enough money to cover the downpayment of your house, job loss, car breaking down, or any unforeseen event where you need immediate cash.

    This is especially true if people fear a recession coming in 2023. Having a buffer in a safe place such as a savings account will give you peace of mind.

    Also, don’t forget to clear all the high-interest loans (over 5%), such as credit cards. Western countries have taught the world to live on credit. We buy almost every single day so many things on credit cards. But sometimes people don’t realize it and by living above their means, go into a debt spiral.

    The interest rate that you are paying on credit card loans is usually higher than what you earn from savings.

    We must remember that we do most investments for the long run. We won’t get a 10%-12% guaranteed return from investing in stocks the very next year. It takes at least a couple of years to average out market fluctuations.

    Cherry-picking stocks is not worth it

    As I mentioned in my other article, it’s always best not to invest too much money in individual stocks. It’s too much work to go through the company’s financials, thoroughly reading their annual reports (10-Ks) and quarterly reports (10-Qs) to understand the company’s fundamentals and prospects.

    Even professionals and seasoned investors cannot time when to buy or sell stocks based on the earnings call of the companies. The reason is simple. The stock price that we see on the market has already incorporated any type of news that is available to the public. Thus everybody already knows and you won’t know any better story. 

    You will not know any insider news about the company’s prospects unless you are the owner of that company or in the senior management. Speculating what the price is going to be tomorrow will be nearly impossible to do. 

    Diversification is the answer

    Index funds or ETFs in this case are the best and safe options because they diversify your risk across so many different stocks. So even if one or a few companies underperform, you will be still fine. 

    With ETF you have to set reminders for periodic contributions. Which type of fund is right for you depends on many factors. I have a detailed article on this topic here if you want to learn more.

    My two cents

    So, after you have saved for an emergency fund and paid off high-interest debt, start by investing at least 10%-15% of your paycheck every month. You can put this money in some type of broad-based index fund on an ETF. You make monthly contributions so that your investment grows over time. The good thing about index funds is that they are automated. Money automatically transfers to your brokerage account from your checking account.

    The key takeaway from this article is that do not panic if you see the stock market going down in a particular year. This is not the time to sell. In the current scenario, it is a good idea to invest the money that you have sitting idle in your bank account. Do it after paying off your high-interest debt and establishing an emergency fund to meet your 6 months’ expenses.

    Spend wisely and realize the importance of saving and investing. Most millionaires are not just born wealthy. They just make good investment decisions early in their life and build wealth. Instead of spending a lot of money on things that actually depreciate in value, such as buying a fancy car, they save and invest that money from the beginning. As their investment grows, they begin to reap its benefits for a substantial part of their life. Investment in a diversified portfolio is an easy passive way of getting rich, where money does the work for you.

  • What are funds?

    A fund is a collection of money from many investors. This pool of money can be invested in stocks, bonds, in a specific sector, or a combination of them. The main advantage of investing in a fund is the diversification it provides to us by spreading our risk. So, a fund can invest in places where an individual investor may not be able to.

    Depending on how much money you invest in the fund, you’ll get a share in the fund. In investing theory, we call them units. So, the value of your units can go up or down based on the performance of the fund.

    Funds can be actively managed or passively managed. In my next post, we will learn about these in more detail.

    Where do funds invest?

    A fund can invest in a variety of asset classes or in specific assets like only stocks or only bonds. The name of the fund usually states its purpose.

    Equity funds, as the name suggests, invest in stocks, while fixed-income funds will invest in bonds – both corporate and government bonds.  Some balanced funds invest in both stocks and bonds together.

    Growth funds only want to invest in growth companies because they see a high potential for growth in these companies. Most technology companies are growth companies.  This is the fast and furious approach to investing, where the fund manager will try to find companies with growing revenue, cash flows, and profits. These companies generally tend to be new companies, with a few exceptions.

    On the contrary, Value funds invest in stocks of undervalued companies that pay high dividends. This approach is the slow and steady approach.  Value fund tends to invest in companies that are well-established and mature. They usually offer investors a steady stream of income.

    Funds could also be sector-specific, like energy funds that only invest in energy companies.

    Some funds only invest in large-cap companies like those in S&P 500 index. So, when you invest in those index funds you are investing in many large-cap companies without bearing the risk of owning stocks of individual companies.

    Investing in a fund that mimics a broad-based index will save you a lot of money. Also, most large-cap companies’ stock price trade at a very high value, and it will require a lot of money to buy several different stocks of different companies. Something that a lot of us can’t do.

    You don’t need a lot of money to invest in a fund!

    Did I tell you that you don’t need a lot of money to invest in a fund? Most funds like ETFs and index funds do not have minimum requirements.

    A pool of money from many investors

    So, hopefully, you got an idea about the purpose of the funds.

    There are mainly four types of funds you will most often hear about

    • Mutual funds (actively managed by professionals)
    • Exchange-traded funds or ETFs (similar to mutual funds and stocks, could be active or passively managed)
    • Index funds (passively managed, my favorite)
    • Hedge funds (need a lot of money to invest in these, so many of us don’t qualify)

    I will cover each of these in detail in my next post. So stay tuned if you want to know the advantages and disadvantages of each of these four and which one could be a better choice for a new investor.

  • Where do I invest and when do I start?

    In my previous post, I wrote about the various types of assets you can use for investment. To have a diversified portfolio, you should invest in a variety of assets.

    Diversification can mean two things:

    The first is diversifying within the same asset class.
    The second is having different asset classes in your investment portfolio.
    We all need a diversified portfolio

    So, for example, if you are investing in fixed-income securities, you need to invest in different types of those such as government bonds, corporate bonds, CDs etc.

    Similarly, if you are investing in stocks, you should invest in multiple companies from different industries and sectors. But when you invest in individual company stocks, you may only be able to invest in 5, 10, or maybe 15 companies.

    To achieve diversification using individual stocks, you will need to do a lot of research and invest a lot of money buying stocks from different companies in different industries.

    Thus, if stocks comprise a majority of your investment portfolio, then your investment is risky because it is based on the performance of those companies you bought shares of.

    So what’s the solution?

    For a beginner investor, who doesn’t want to put too much money in several individual stocks, the best way is to start with investing in an index fund or a passively managed mutual fund.

    What’s an index fund?

    Index fund is a fund whose portfolio are built to mimic the constituents of a stock market index. The most widely used indices in the US are S&P 500 index or Dow Jones Industrial Average, or the Nasdaq Composite index.

    Generally, Index funds should give you the same return as the index they follow. These funds buy all the stocks that are part of the index in the same proportion. So, it is like you have invested a little bit in each of those companies that comprise that market index. So yes, that would give you a very well diversified investment portfolio.

    Also, index funds are less volatile and therefore are a good investment compared to individual stocks, esp. for long-term investing. So, they are a great option for investment for your retirement.

    In my next post, I will argue why I like index funds more than actively managed mutual funds. I feel if you are sticking to read my post this far, you will be interested to know more.

    Don’t put all your eggs in one basket!

    The main point is to diversify so that if one sector or asset class doesn’t perform well, you don’t lose all your money.

    The second key thing for diversification is having different asset classes in your portfolio, such as stocks, bonds, real estate, commodities, etc.

    This brings us to the concept of asset allocation. Asset allocation simply means you decide what percentage of your money you want to put into each type of asset class.

    Asset allocation will vary from person to person, depending upon their savings, age, risk tolerance and financial circumstances.

    Finance theory suggests that generally, your investment in stocks should be 100 minus your age. So, if you are 25 years old, it should be 75% stock and 25% fixed income.

    So yes, it means you need to keep changing your asset allocation as you grow older. Later in life, your investment in stocks should be less, and high in other fixed-income assets.

    Now comes the million-dollar question.

    When should you start investing?

    The easy answer is now if you haven’t started already.

    You can start investing as early as when you first start earning. Even kids can start investing their allowance money and add to it periodically.

    Time plays a huge role in making your money grow, more than the dollar amount you invest. This is due to the power of investing!

    Your money grows overtime exponentially!

    If you are not convinced, you can take a look at my post here, where I explain this concept by using some simple examples.

    How much money do I need to invest?

    In the past, you would need a substantial amount of money to start investing. But things are much more simple now. With no minimum, no commission brokerage accounts, and fractional ownership of shares, you can start investing with as little as $10 a month.

    You can set aside $1-$5 a day and make monthly contributions of $30-$150 a monthly.

    These are some of the top brokerage firms in the U.S. – Charles Schwab, Fidelity, TD Ameritrade, and Vanguard. Stay tuned for my post on how to open a brokerage account!

    I hope you found this information useful, I will cover Real estate and commodity investment in another post! But this is useful info to start investing now.

    Disclaimer: The information presented here is for educational purposes only. I am not a financial advisor and do not provide investment advice on an individual basis. 

    Credits:

    Images- https://www.freepik.com

  • Investment basics, you should know: part 1

    After we have established 6 months’ worth of saving in a bank for our emergency fund, what do we do with our remaining savings? Finance experts will tell us that if we want our money to grow, leaving the extra money in a bank will not take us anywhere. So, the best strategy is to invest your extra money.

    Now the question arises, without proper financial literacy, how do we know where can we invest our money? In this post, I will tell you some of the asset types where you can invest your money.

    Also, you will learn why diversification is very important for investing. By diversification, we mean, having a variety of assets so that if one asset doesn’t do well, you don’t lose all your money. This will also allow you to minimize risks from fluctuations in return from each asset class.

    Let’s begin by understanding an asset class!

    Asset class means a group of assets that display similar features. These assets will have similar risks and give you similar returns. They are also usually subject to similar tax laws.

    There are several types of asset classes, such as

    • stocks or equities,
    • fixed income assets (bonds and CDs),
    • mutual funds, ETFs
    • Cash and cash equivalents like money market funds
    • commodities like gold and silver, oil, etc
    • real estate (property)

    Asset class and allocation are very important concepts in investing. They help you diversify your investment, so you can have a well-balanced portfolio. I will cover more on asset allocation in another post.

    In this post, I will cover the first two types of assets

    Stocks

    Stocks are the shares in a company. People who buy a company’s stock actually get a share of ownership in that company. Companies typically issue their stock in the Initial public offering (IPO) to raise money (capital) for its growth.

    Stocks or shares mean the same and I am using them interchangeably throughout this post. Similarly, you can either say stockholders or shareholders, they are the same.

    When we buy stocks, we get payments in the form of dividends. When the company is doing well and earning profits, it pays its stockholders a share in the profit called dividends.

    Another way we get earnings from stocks is when the share price of that company increases, also called capital appreciation. This could be due to the company’s good earnings or any positive news in the company. The company’s share price reacts to the news as the market values its worth more now.

    Is there a safer way to invest in stocks?

    The answer is yes if you follow certain rules.

    The first thing to understand is that finance theory and the supporting research show that no one can beat the market. Even seasoned investors, like, Warren Buffet don’t recommend cherry-picking a few stocks, esp. for someone who is not a very risk-taking person.

    A company’s shares can fluctuate a lot due to various reasons. People who think they can predict a company’s performance and hence its share price doesn’t know finance theory that well.

    Most of the time, people don’t have enough time to research individual companies. Also, investing in a variety of companies to make a truly diversified portfolio may require a lot of money.

    A good strategy for a new investor is to invest in an index fund that mimics the market such as an S&P 500 in the US. An index fund is a type of mutual fund that buys all the stocks that make up the market index in the same proportion. So, the money that you earn from investing in an index fund will be very similar to the return on the index it mimics.

    Another key feature of Index funds is that they generally follow a passive, rather than active, style of investing. This means they maximize returns over the long period by not buying and selling securities very often. 

    Because index funds are diversified, you don’t lose money when some stocks don’t do well. Index funds mimic the market and are less volatile and over the long term (like 10 years or more), they give good returns. Don’t put all your eggs in one basket rule should be the most important thing to follow when investing.

    The second way to minimize risks is to use a strategy called dollar cost averaging, where you invest a fixed $ amount every period, monthly, weekly, etc.

    I didn’t want to make this post super long that you loose interest, so if you want to learn about dollar cost averaging, you can read my post here.

    Let’s quickly turn to our fixed-income assets. The first one is bonds.

    Bonds

    Unlike stocks, if you buy a bond of a company, it doesn’t give you ownership in that company. Bonds are actually a loan a company takes to raise capital.

    Both individual companies and the government need to raise money and thus, issue bonds. Thus, when we buy bonds, we get interest payments on the money we loan to a company or the government. Along with interest payments, at the end of our loan period called “term”, we also get our Principal amount back. 

    Bonds are part of fixed-income investments. As the name suggests, they give a fixed amount of income with regular interest payments until maturity.

    Other fixed income assets include Certificates of deposits (CDs), municipal bonds, t-bills and t-bonds.

    Just like stocks, we can invest in fixed-income securities directly, or through Electronically traded funds called ETFs and mutual funds or index funds.

    As a bond owner, you bear less risk and you will get the interest amount, irrespective of how the company performs.

    Thus, a good part of owning a bond is that, if a company does bad and goes bankrupt, the bondholders still will get their money back. The company can pay them by selling their assets such as their buildings, factories, etc.

    However, this is not the case with shareholders. During bankruptcy, the stock price of the company crashes to a very low mark, and shareholders could lose all of their investments.

    Treasury bonds are considered very safe investment options. It is like lending money to the US government.

    Stocks usually pay more than a bond, but owning a stock is riskier than owning a bond. So, your decision to invest in stocks or bonds should depend on how quickly you want to grow your money and how much risk you are willing to take.

    So which one should we invest in?

    The answer is in everything. We all should have a diversified portfolio, consisting of stocks, bonds, and other assets, like commodities, real estate as well. Although this post covered investment in stocks and bonds, we can have a portfolio with more types of assets.

    Your age and risk tolerance will determine the percentage of each asset you should keep in your portfolio. For younger people, investments in bonds shouldn’t be the main part of the portfolio, simply because they don’t pay as much as stocks do.

    However, as we approach retirement age, our ability to bear risks falls. So, more investments in fixed-income assets like bonds, should be done later in life.

    I hope you found this post useful. Stay tuned for my next post on asset allocation and diversification.

    Disclaimer: The information presented here is for educational purposes only. I am not a financial advisor and do not provide investment advice. I recommend you consult a qualified financial advisor to make investment decisions.

  • What is a 529 plan in the U.S.?

    In my earlier post, I wrote about ways to fund your child’s college education. One of them was opening a 529 account. In this post, I will talk about what these plans are.

    529 plan is a tax advantage account, where people invest money to fund the college education of their kids. You can open an account for your education as well.

    529 plans are state government-sponsored plans and each state has its plans.

    Advantages of 529 plans

    The first advantage is that you invest your post-tax money and it grows tax-free. This is similar to a Roth IRA or 401 K. The other advantage is that there is no maximum contribution limit.

    Additionally, if the original beneficiary can’t use his account for any reason, there is an option to change the beneficiary anytime.

    Who can open the account?

    Mostly parents or grandparents open this account to fund money for their child or grandchild’s higher education.

    Anyone with a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) can open this account. Though non-U.S. citizens living outside the U.S. can’t open the account, they can still contribute to a child’s 529 plan.

    Also, anyone can contribute to a 529 plan, a grandparent, a friend, or a relative.

    Only U.S. citizens or resident aliens with a Social Security Number or Individual Taxpayer Identification Number can be the beneficiary.

    Also, you don’t have to be a resident of that state to apply for that plan. Most states offer it to both residents and nonresidents. However, there are six 529 plans that are only available to in-state residents:

    Two types of 529 plan

    • Savings plans: This is where you are building up money, which you can use toward almost any college tuition and related expenses in the US. This can also be used for K-12 education as well.
    • Prepaid tuition plans: This lets parents lock in today’s tuition rates for a child’s future education (but may limit where a child can go to school). The money can’t be used for room and boarding.

    Choosing the right 529 plan

    Savings plans tend to be more popular than prepaid tuition ones, as they are less restricting. Not all states offer prepaid tuition plans.

    Many families choose their state’s plan because their state can offer more tax benefits to them. However, you are free to choose any state’s plan. One tip is to compare different plans and choose the one with a low expense ratio.

    Disadvantages of 529 plan

    Since the money invested should only be used for education purposes, if you use it for anything else, you pay a 10% penalty and will owe taxes on the capital gains.

    Also, you can’t control which assets these plans invest in.

    Should you invest in 529 plan?

    Despite these limitations, it is still a great plan for funding college education if you think your child will go to college.

    Disclaimer: The information presented here is for educational purposes only. I am not a financial advisor and do not provide investment advice.