Investing Archives | Page 86 of 191

Jan

2024

Understanding Value Investing: Principles, Strategies, and Risks

By Samuel Becker | Growing Wealth, invest, Investing, Terminology | Comments Off

Value investing is an investment philosophy that takes an analytical approach to selecting stocks based on a company’s fundamentals — such as earnings growth, dividends, cash flow, book value, and intrinsic value. Value investors don’t follow the herd when it comes to buying and selling, which means they tend to ignore tips and rumors they hear from coworkers and talking heads on TV.

Instead, they look for stocks that seem to be trading for less than they should be, perhaps because of a negative quarterly report, management scandal, product recall, or simply because they didn’t meet some investors’ high expectations.

What Is Value Investing?

A value investor’s goal is to find stocks that the market may be undervaluing. And after conducting their own analysis, an investor then decides whether they think the targeted stocks have potential to accrue value over time, and to invest.

In effect, value investing is an investment strategy that involves looking for “deals” in the market, and taking portfolio positions accordingly.

Historical Background and Evolution

Value investing has been championed and used by some of the most storied investors in history. For example, Warren Buffett, the CEO of Berkshire Hathaway, also known as the “Oracle of Omaha,” is probably the most famous (and most quoted) value investor of all time.

From 1965 to 2017, Buffett’s shares in Berkshire Hathaway had annual returns of 20.9% compared to the S&P 500’s 9.9% return.

Buffett’s mentor was Benjamin Graham, his teacher at Columbia Business School and later his employer, who is known as “the father of value investing.” Columbia professor David Dodd, another Graham protegee and colleague, is recognized for helping him further develop several popular value investing theories.

Billionaire Charlie Munger, vice chairman of Berkshire Hathaway Corp., was another super-investor who followed Graham and Dodd’s approach. And billionaire investor Seth Klarman , chief executive and portfolio manager of the Baupost Group, is a longtime proponent.

Joel Greenblatt, who ran Gotham Capital for over two decades and is now a professor at Columbia Business School, is the co-founder of the Value Investors Club.

The Core Principles of Value Investing

The main goal of value investing is to buy a security at a price that is near or less than its intrinsic value. That is, the investor is not paying a premium or markup on the stock — they’re getting a “deal” when they invest in it. There can be many elements at play when determining a value stock, including intrinsic value, margin of safety, and market inefficiencies.

Intrinsic Value and Margin of Safety

Intrinsic value refers to a stock’s “true” value, which may differ from its “market” value. It can be a difficult concept to wrap your head around, but at its core, determining a stock’s intrinsic value can help an investor determine whether they’re actually finding a value stock, or if they’d potentially be overpaying for a stock. That’s why the concept of intrinsic value is critical to value investors.

Similarly, investors need to incorporate a “margin of safety,” which accounts for some wiggle room when they’re trying to determine a stock’s intrinsic value. In other words: Investors can be wrong or off in their calculations, and calculating a margin of safety can give them some margin of error when making determinations.

Belief in Market Inefficiencies

Value investors also tend to believe that the market is rife with inefficiencies. That means that the market isn’t perfect, and doesn’t automatically price all stocks at their intrinsic values — opening up room to make value investments. If you, conversely, believe that the market is perfectly efficient, then there wouldn’t be any stocks that are priced below their intrinsic value.

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Strategies and Techniques in Value Investing

Value investing isn’t about finding a big discount on a stock and hoping for the best, or making a quick buck on a market trend.

Value investors seek companies that have strong underlying business models, and they aren’t distracted by daily price fluctuations. Their decisions are based on research, and their questions might include:

• What is the potential for growth?

• Is the company well managed?

• Does the company pay consistent dividends?

• What is the company doing about unprofitable products, projects, or divisions?

• What are the company’s competitors doing differently?

• How much do I know about this company or the business it’s in?

Investors who are familiar with an industry or the products it sells (either because they’ve worked in that business or they use those goods or services) can tap that knowledge and experience when they’re analyzing certain stocks.

The same line of thought can be applied to companies that sell products or services that are in high demand. That brand might be expected to remain in demand into the future because the company has a reputation for evolving as times (and challenges) change.

Identifying Undervalued Stocks

Identifying undervalued stocks requires time, patience, and some good, old-fashioned analysis. That mostly includes fundamental analysis, which is a method of evaluating securities by looking at its underlying financial health. That typically involves digging into financial statements and records.

Analyzing Financial Statements and Reports

Investors who are time-crunched or still learning the basics might find the homework daunting. Deep diving into earnings reports, balance sheets, and income statements, and pondering what the future might hold isn’t for everyone.

Understanding Market Dynamics and Herd Mentality

Doing what feels right on a personal level instead of going with the flow is a big part of value investing. And it isn’t always easy.

If everyone around you is talking about a particular stock, that enthusiasm can be contagious. Which is why a typical investor’s decision making is often heavily influenced by relatives, co-workers, friends, and acquaintances.

For an investor who believes the pursuit of market-beating performance is more about randomness than research, emotions (fear, greed, FOMO) can be their worst enemy. Behavioral biases can lead to knee-jerk reactions, which can result in investing mistakes. It takes patience and discipline to stick with a value investing strategy.

This is all to say that investors should do their best to get a handle on overarching market dynamics, rather than investing emotionally or going with the crowd.

Value investors don’t follow the herd. They eschew the efficient market hypothesis, which states that stock prices already reflect all known information about a security (market inefficiencies!).

Value investors take the opposite approach. If a well-known company’s stock price drops, they look for the reasons why the company might be undervalued. And if there are strong signs the company could recover and even grow in the future, they consider investing.

Value vs Growth Investing

Value investing is often discussed alongside growth investing. Value versus growth stocks represent different investment styles or approaches.

Differences and Performance Comparisons

In a general sense, value stocks are stocks that have fallen out of favor in the market, and that may be undervalued. Growth stocks, on the other hand, are shares of companies that demonstrate a strong potential to increase revenue or earnings thereby ramping up their stock price.

In terms of performance value stocks may not be seeing much price growth, whereas growth stocks may be experiencing rapid price appreciation.

Pros and Cons of Each Approach

Both value and growth investing have their pros and cons.

Value investing, for instance, may see investors experience lowering volatility when investing, and also getting more dividends from their investments. But their portfolio might accrue value more slowly — if at all. Conversely, growth investing may see investors accrue more gains more quickly, but also with higher levels of volatility and risk.

The Process of Value Investing

As noted, value investing is a type of investing strategy, but it’s similar to how a value shopper might operate when hoping to buy a certain brand of a smartwatch for the lowest price possible. If that shopper suddenly saw the watch advertised at half the price, it would make them happy, but it also might make them wonder: Is there a new version of the watch coming out that’s better than this one? Is there something wrong with the watch I want that I don’t know about? Is this just a really good deal, or am I missing something?

Also as discussed, their first step would likely be to go online and do some research. And if the watch was still worth what they thought, and the price was a good discount from a reliable seller, they’d probably go ahead and snap it up.

Investing in stocks can work in much the same way. The price of a share can fluctuate for various reasons, even if the company is still sound. And a value investor, who isn’t looking for explosive, immediate returns but consistency year after year, may see a drop in price as an opportunity.

Value investors are always on the lookout to buy stocks that trade below their intrinsic value (an asset’s worth based on tangible and intangible factors). Of course, that can be tricky. From day to day, stocks are worth only what investors are willing to pay for them. And there doesn’t have to be a good reason for the market to change its mind, for better or worse, about a stock’s value.

But over the long run, earnings, revenues, and other factors — including intangibles such as trademarks and branding, management stability, and research projects — do matter.

Finding and Evaluating Value Stocks

Value investors use several metrics to determine a stock’s intrinsic value. A few of the factors they might look at (and compare to other stocks or the S&P 500) include:

Price-to-earnings Ratio (P/E)

This ratio is calculated by dividing a stock’s price by the earnings per share. For value investors, the lower the P/E, the better; it tells you how much you’re paying for each dollar of earnings.

Price/earnings-to-earnings Ratio (PGE)

The PEG ratio can help determine if a stock is undervalued or overvalued in comparison to another company’s stock. If the PEG ratio is higher, the market has overvalued the stock. If the PEG ratio is lower, the market has undervalued the stock. The PEG ratio is calculated by taking the P/E ratio and dividing it by the earnings growth rate.

Price-to-book Ratio (P/B)

A company’s book value is equal to its assets minus its liabilities. The book value per share can be found by dividing the book value by the number of outstanding shares.

The price-to-book ratio is calculated by dividing the company’s stock price by the book value per share. A ratio of less than one is considered good from a value investor’s perspective.

Debt-to-equity Ratio (D/E)

The debt-to-equity ratio measures a company’s capital structure and can be used to determine the risk that a business will be unable to repay its financial obligations. This ratio can be found by dividing the company’s total liabilities by its equity. Value investors typically look for a ratio of less than one.

Free Cash Flow (FCF)

This is the cash remaining after expenses have been paid (cash flow from operations minus capital expenditures equals free cash flow).

If a company is in good shape, it should have enough money to pay off debts, pay dividends, and invest in future growth. It can be useful to watch the ups and downs of free cash flow over a period of a few years, rather than a single year or quarter.

Over time, each value investor may develop their own formula for a successful stock search. That search might start with something as simple as an observation — a positive customer experience with a certain product or company, or noticing how brisk business is at a certain restaurant chain.

But research is an important next step. Investors also may wish to settle on a personal “margin of safety,” based on their individual risk tolerance. This can protect them from bad decisions, bad market conditions, or bad luck.

Long-Term Considerations and Patience

An important thing to remember when it comes to value investing is that investors are likely on the hook for the long term. Many value stocks are probably not going to see huge value increases over short periods of time. They’re fundamentally unsexy, in many respects. For that reason, investors may do well to remember to be patient.

Risks and Challenges in Value Investing

As with any investment strategy, value investing does have its risks. It tends to be a less-risky strategy than others, but it has its risks nonetheless.

For one, investors can mislead themselves by making faulty or erroneous judgments about certain stocks. That can happen if they misunderstand financial statements, or make inaccurate calculations when engaging in fundamental analysis. In other words, investors can make some mistakes and bad judgments.

Investors can also buy stocks that are overvalued – or, at least overvalued compared to what the investor was hoping to purchase it for. There are also concerns to be aware of as it relates to diversification in your overall portfolio (you don’t want a portfolio overloaded with value stocks, or any other specific type of security).

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

The Takeaway

Value investing is a type of investment strategy or philosophy that involves buying stocks or securities that are “undervalued.” In effect, an investor determines that a stock is worth more than the market has valued it, and purchases it hoping that it will accrue value over time. While it’s a strategy that has its risks, it’s been used by many high-profile investors in the past, such as Warren Buffett.

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FAQ

What are the pros and cons of value investing?

Pros of value investing include that it tends to be a less risky investing strategy, and that value stocks may experience less volatility. Some of the cons are that value stocks may not see sizable value increases over short periods of time, and that it’s possible investors can make a mistake and purchase an overvalued stock, rather than an undervalued one.

Is value investing high risk?

Value investing is generally considered to be a lower-risk investment strategy, as investors tend to buy securities that they perceive to be undervalued, rather than overvalued.

Can you make money value investing?

Yes, investors can make money utilizing a value investing strategy. Many of the most successful investors in history, such as Warren Buffett, used a value investing strategy to great success.

How do you do value investing?

Value investing involves purchasing stocks or other securities that an investor has determined to be “undervalued” by the market. Investors purchase those securities, with the hope that they’ll accrue value over time.

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Jan

2024

Complete Guide to Investing in Foreign Currency

The Essential Guide to Investing in Foreign Currency

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

Investing in foreign currency involves purchasing money, or currency, in another country. The market for foreign currency investing is the largest and most liquid in the world. There are some differences between investing in foreign currency and investing in stocks or bonds, though, that investors should be aware of.

Further, foreign currency investing can be somewhat confusing to new investors, and it also entails its own unique risks. For that reason, it can be beneficial to learn the basics before folding it into an investment strategy.

Understanding Foreign Currency Investment

As noted, investing in foreign currency means purchasing another country’s currency, or money, as a means of investment. You’re not planning on spending it, in other words, and are hoping that it accrues value to generate a return. It’s also different from exchanging foreign currency, though it may feel similar.

Foreign currency investment is often, or typically done via “forex” trading. Forex is short for “foreign exchange market,” and refers to trading fiat currencies, or those that are backed by the government that uses them. For example, an investor could trade their United States dollars (USD) for Euros. Or, they can trade their Japanese yen for New Zealand dollars.

Key Takeaways for New Investors

Forex trades can happen at any time throughout the day, since there’s always a foreign currency market open somewhere in the world. Foreign currency investors are typically institutional investors, although it is possible for individual investors to participate.

Investors should also know that currencies tend to trade in pairs — more on that below.

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Exploring the Benefits of Investing in Foreign Currencies

Like other types of investments, forex trading, or investing in foreign currencies, can offer up some benefits.

Diversification of Portfolio

For one, investing in foreign currencies can add a degree of diversification to an investor’s portfolio. That means that while an investor may have built a portfolio with a number of other investments, such as stocks, bonds, and ETFs, foreign currency can be another element in the mix. Note, though, that it’s likely foreign currency should only comprise a small portion of a portfolio’s overall holdings.

Convenience and Accessible Markets

The forex markets operate 24 hours per day, 365 days per year, unlike the standard stock exchanges. So, for investors who want to trade around the clock, the markets are almost always accessible.

There are four major forex trading sessions in a 24-hour period, split up by international region:

• Sydney (Australia)

• Tokyo (Asia)

• London (Europe)

• New York (The Americas)

There are minor sessions, too, but these are the four major sessions, and markets can be busy (when the Americas’ session overlaps with Europe’s), or less busy, depending on the time of day, and how many people are actively trading.

Hedge Against Domestic Currency Inflation

It’s possible that while a domestic currency is losing value due to inflation, foreign currencies could retain their value at the same time. That would, theoretically, provide investors with a hedge against inflation — but there’s no guarantee prevailing market forces would work to an investor’s advantage in such a scenario.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Ways to Invest in Foreign Currencies

Foreign currency investment doesn’t typically involve using physical money, so you’ll have to find something else to do with the foreign currency left over from your last international vacation. There are several ways to get started in currency exchange investment.

1. Standard Forex Trading Account

First, you can work with a foreign exchange brokerage to trade the currency you’re holding (such as U.S. dollars) for another currency (Euros, Yen, etc.). The goal is that the currency you’re trading for, or buying, will increase in value relative to the currency you’re trading away, or selling.

So, if you buy, or trade U.S. dollars for Euros, you’re hoping that in the future, you’d be able to trade the Euros back for more U.S. dollars than you originally used to make the purchase. You’re looking to make a profit, in other words.

While the goal is straightforward, the process can get more complicated. For instance, there are a few ways traders can execute trades, such as spot trading, forward trading, and future trading. Spot trading is an instant trade, whereas forward and future trading may involve settling on terms at a time in the future (similar to trading options).

Further, investors should understand the concept of the spread, which represents the difference between a trader’s cost and the dealer’s profits.

Beyond that, investors should also have a working knowledge of currency pairs, which is how much of the forex market trades. More on that below.

2. Currency CDs and Savings Accounts

Investors can also look into foreign currency CDs (certificates of deposit), which work more or less like traditional CDs but might offer higher yields. Foreign savings accounts are another potential option, and can serve as investment vehicles by accruing interest and currency appreciation, though nothing is guaranteed.

3. Foreign Bond Funds

Investors can look at the possibility of purchasing foreign bonds, which are issued in other countries by foreign governments or foreign companies. There are many types of foreign bond investment types, so investors would do well to do a bit of research to figure out if it’d be a good addition to their portfolio.

4. Currency ETFs

As mentioned, investors may want to look at currency ETFs. These ETFs are similar to foreign bond funds, there are also foreign currency ETFs on the market, which offer many of the same advantages of domestic or traditional ETFs, but can give investors exposure to the forex market. Likewise, exchange-traded notes, or ETNs, which are similar to bonds, are another potential investment investors can check out.

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The Risks Associated with Foreign Currency Investment

Foreign currency investment isn’t without risk, and in fact, can introduce some types of risk that investors may not otherwise encounter — such as political and interest rate risks.

Market Volatility and Political Risks

Since forex markets are so active, prices can change quickly, which means it’s a fairly volatile asset class. The news cycle (including economic, political, or social news) can cause sudden and drastic changes to prices. That means it may be a better fit for investors with a relatively high risk tolerance than those who are more risk averse.

Political risk is something to consider, too, as currencies are backed by governments. If a foreign government is unstable or otherwise involved in some sort of political drama, it can affect the price of a currency. That can pose a risk to investors.

Interest Rate Risk

Some investments incur interest rate risk, which is when an investment loses value due to a fluctuation in interest rates. Foreign currencies may be subject to such risk, though interest rate risk is more commonly associated with bonds.

Currency Conversion and Transfer Costs

There may also be additional costs associated with currency trading and investing, including currency conversion and transfer costs. These may not always be applicable, but are something that investors should at least be aware of in the event that they do encounter them.

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How to Approach Foreign Currency Safely

In order to invest in foreign currency investing as safely as possible — remember, no investment is completely safe or risk-free — investors should brush up on the mechanics of the forex market, and know what they’re getting into.

Education is Key: Understanding the Mechanics of Currency Investment

A couple of things investors should also know about are “pips,” and the use of leverage in forex trading.

A “pip” is a unit of measure that represents the smallest unit of value in a currency quote. Using the above quote as an example, the difference between the “bid” (1.2100) and the “ask” (1.2104) is four pips.

Why does this matter? Because currency values fluctuate very slightly during the trading day, perhaps only several pips. That means that to make a significant return, traders deal with large quantities of currencies.

And as for leverage? To get to those large quantities, traders often use leverage. For example, you may give your broker $100 to trade with $10,000 on the markets (using, or borrowing the broker’s $9,900 to make trades is called “margin”). Most forex trading is done this way, using leverage and margin in order to generate returns.

That, of course, has its risks, since traders may incur losses, and end up owing money to their brokers. For beginners, it may be best to use lower margins for that very reason.

The Importance of a Bid-Ask Spread

Also noted previously, the bid-ask spread is another important concept to know and incorporate if you’re trading or investing in foreign currency. Effectively, the spread refers to the difference between a trader’s cost and the dealer’s profits. There’s a slight difference in what you’re willing to pay, and what a seller is willing to sell for. In forex trading, the spread can be important to calculating overall potential returns.

Evaluating Risks Versus Rewards

Above all, it’s critical that investors keep their own personal risk tolerances in mind, and weigh that against the potential gains they could see from foreign currency investing. It may not be a good fit for everyone’s investment strategy.

Currency Investment Strategies for Beginners

Forex trading is different from other types of investing or trading. Generally, investing in or trading foreign currency involves pairs of currencies. That’s because two different currencies are quoted based on their relative value to each other. On an exchange, that may appear as “USD/EUR,” or something similar, while a pairing of Japanese yen and Euros, it may be represented as such: “JPY/EUR.”

Some currencies are more widely traded than others and are “paired” with one another or grouped as “major” currencies:

• U.S. dollars

• Euros

• Japanese yen

• British pounds

• Swiss francs

• Australian dollars

• Canadian dollars

• New Zealand dollars

There are also “minor” and “exotic” currency pairs. These are not traded as widely as the majors, but are still often swapped on exchanges. They may include pairings with the Hong Kong dollar, the Mexican peso, the Singapore dollar, or the Norwegian krone, among others.

Additionally, investors should know about foreign currency quotes. These quotes are similar to stock quotes, which list the current value, or price of a stock. Forex quotes display the bid and ask prices for a currency pair, since one currency’s value is relative to another currency. Here’s an example of a quote for a common pairing, Euros and U.S. dollars:

EUR/USD = 1.2100

In this example, Euros are the “base” currency, and U.S. dollars are the “quote” currency. What does the quote say, exactly? That a single Euro is equal to 1.21 U.S. dollars. Or, €1 = $1.21.

So, in terms of a basic trading strategy for a beginner? It may be best to choose a pair and stick to it — at least for a while, until you get the gist of it. After that, you can look at other, more in-depth trading strategies.

Broadening Your Investment Horizon With Currency ETFs

Advanced Currency Investment Options

While investors can trade currency itself, they can also look at more advanced ways of investing in the forex markets. That can include trading futures and options, or other types of relevant derivatives.

Foreign Currency Futures and Options — An Introduction

First and foremost, investors should be aware of the unique risks that financial derivatives can introduce into their portfolios. Trading options contracts is a whole different beast from choosing stocks, so before you dive headfirst into forex options, it may be worth it to speak to a financial professional.

But at their core, currency options are derivatives, with currency itself as their underlying asset. There are calls, puts, and futures — if you’re not familiar with traditional options, it may be a good idea to review the basics before looking at forex options.

In effect, though, these options allow investors to hedge against unfavorable fluctuations of foreign currencies, or to speculate on volatility in the forex market. Again, it’s fairly high-level stuff, so if you feel like it’s over your head, it may be best to bone up on your investment knowledge before including options trading in your overall strategy.

The Takeaway

Trading or investing in foreign currency is yet another avenue that investors can explore in an attempt to generate returns. As discussed, it involves actually purchasing money with money — foreign currencies — with the hopes that the price differences will work in the investors’ favor, and they’ll generate returns. Foreign currency markets are also extremely liquid, which is another potential upside for some traders.

As always, though, there are risks to consider, and learning the ropes of the foreign currency markets may be tricky. If investors feel like they want to get their feet wet in the market, though, without diving straight in, it may be worthwhile to discuss their plans with a financial professional.

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Jan

2024

What Is an ETF? ETF Trading & Investing Guide

By Samuel Becker | Growing Wealth, invest, Investing | No Comments

Table of Contents

What Is an ETF?
How Do ETFs Work?
What Are the Advantages of ETFs?
What Are the Disadvantages of ETFs
What Are Common Types of ETFs?
What Is ETF Trading?
3 Steps to Invest in ETFs
How to Build an ETF Portfolio

An exchange-traded fund, or ETF, bundles many investments together in one package so it can be sold as shares and traded on an exchange. The purchase of one ETF provides exposure to dozens or even hundreds of different investments at once, and there are numerous types of ETFs on the market.

ETFs are generally passive investments, i.e. they don’t have active managers overseeing the fund’s portfolio. Rather most ETFs track an index like the S&P 500, the Russell 2000, and so forth.

ETFs are an investment vehicle that allows even small and less-established investors to build diversified portfolios, and to do so at a relatively low cost. But before you start buying ETFs, it’s important to understand how they work, the risks of investing in ETFs, as well as other pros and cons.

What Is an ETF?

An ETF is a type of pooled investment fund that bundles together different assets, such as stocks, bonds, commodities, or currencies, and then divides the ownership of the fund into shares. Unlike mutual funds, ETFs give investors the ability to trade shares on an exchange throughout the day, similar to a stock.

Unlike investing in a single stock, however, it’s possible to buy shares of a single ETF that provides exposure to hundreds or thousands of investment securities. ETFs are often heralded for helping investors gain diversified exposure to the market for a relatively low cost.

This is important to understand: Just like a mutual fund, an ETF is the suitcase that packs investments together. For example, if you are invested in a stock ETF, you are invested in the underlying stocks. If you are invested in a bond ETF, you are invested in the underlying bonds. Thus you are exposed to the same risk levels of those specific markets.

Recommended: Active vs Passive Investing

Passive vs Active ETFs

Most ETFs are passive, which means to track a market index. Their aim is to provide an investor exposure to some particular segment of the market in an attempt to return the average for that market. If there’s a type of investment that you want broad, diversified exposure to, there’s probably an ETF for it.

Though less popular, there are also actively managed ETFs, where a person or group makes decisions about what securities to buy and sell within the fund. Generally, active funds charge a higher fee than index ETFs, which are simply designed to track an index or segment of the market.

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

How Do ETFs Work?

As discussed, most ETFs track a particular index that measures some segment of the market. For example, there are multiple ETFs that track the S&P 500 index. The S&P 500 index measures the performance of 500 of the biggest companies in the United States.

Therefore, if you were to purchase one share of an S&P 500 index fund, you would be invested in all 500 companies in that index, in their proportional weights.

What Is the Difference Between an ETF and a Mutual Fund?

ETFs are similar to mutual funds. Both provide access to a wide variety of investments through the purchase of just one fund. But there are also key differences between ETFs and mutual funds, as well as different risks that investors must bear in mind.

• ETFs and mutual funds have different structures. A mutual fund is fairly straightforward: Investors use cash to buy shares, which the fund manager, in turn, uses to buy more securities. By contrast, an ETF relies on a complex system whereby shares are created and redeemed, based on underlying securities that are held in a trust.

• ETFs trade on an open market exchange (such as the New York Stock Exchange) just as a stock does, so it is possible to buy and sell ETFs throughout the day. Mutual funds trade only once a day, after the market is closed.

• ETF investors buy and sell ETFs with other ETF investors, not the fund itself, as you would with a mutual fund.

• ETFs are typically “passive” investments, which means that there’s no investment manager making decisions about what should or should not be held in the fund, as with many mutual funds. Instead, passive ETFs aim to provide the same return for the benchmark index they track. For example, an ETF for environmental stocks would mimic the returns of green stocks overall.

What Are the Advantages of ETFs?

There are a number of benefits of holding ETFs in an investment portfolio, including:

• Ease of trading

• Lower fees

• Diversification

• Liquidity

Trading

ETFs are traded on the stock market, with prices updated by the minute, making it easy to buy and sell them throughout the day. Trades can be made through the same broker an investor trades stocks with. In addition to the ease of trading, investors are able to place special orders (such as limit orders) as they could with a stock.

Fees

ETFs often have lower annual fees (called an expense ratio) — typically lower than that of mutual funds — and no sales loads. Brokerage commissions, which are the costs of buying and selling securities within a brokerage account, may apply.

Diversification

Using ETFs is one way to achieve relatively cheap and easy diversification within an investment strategy. With the click of a button, an investor can own hundreds of investments in their portfolio. ETFs can include stocks, bonds, commodities, real estate, and even hybrid funds that offer a mix of securities.

Liquidity

Thanks to the way ETFs are structured, ETF shares are considered more liquid than mutual fund shares.

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

What Are the Disadvantages of ETFs

There are some potential downsides to trading ETFs, too, including:

Trading Might Be Too Easy

With pricing updated instantaneously, the ease of ETF trading can encourage investors to get out of an investment that may be designed to be long term.

Understanding ETF Costs

Even if ETFs average lower fees than mutual funds, a brokerage might still charge commissions on trades. Commission fees, plus fund management fees, can potentially make trading ETFs pricier than trading standalone stocks.

In addition, some ETFs can come with higher bid/ask spreads (depending on trading volume and liquidity), which can increase the cost of trading those funds.

Lower Yield

ETFs can be great for investors looking for exposure to a broad market, index, or sector. But for an investor with a strong conviction about a particular asset, investing in an ETF that includes that asset will only give them indirect exposure to it — and dilute the gains if it shoots up in price relative to its comparable assets or the markets as a whole.

What Are Common Types of ETFs?

The ETF market is quite varied today, but much of it reflects its roots in the equities market. The first U.S. ETF was the Standard & Poor’s Depository Receipt, known today as the SPDR. It was launched on the American Stock Exchange in 1993. Today, ETFs that cover the S&P 500 are one of the most common types of ETFs.

Since the SPDR first debuted, the universe of exchange-traded funds has greatly expanded, and ETF trading and investing has become more popular with individual investors and institutions. Although index ETFs — those that passively track an index — are still the most common type of fund, ETFs can be actively managed. In addition, these funds come in a range of different flavors, or styles.

Because of the way these funds are structured, ETFs come with a specific set of risk factors and costs — not all of which are obvious to investors. So, in addition to the risk of loss if a fund underperforms (i.e., general market risk), investors need to bear in mind that some ETFs might get different tax treatment; could be shut down (dozens of ETFs close each year); and the investor may pay a higher bid/ask spread to trade ETFs, as noted above.

With that in mind, ETFs can offer an inexpensive way to add diversification to your portfolio. Here are some common types of ETFs.

Index ETFs

These provide exposure to a representative sample of the stock market, often by tracking a major index. An index, like the S&P 500, is simply a measure of the average of the market it is attempting to track.

Sector ETFs

These ETFs track a sector or industry in the stock market, such as healthcare stocks or energy stocks.

Style ETFs

These track a particular investment style in the stock market, such as a company’s market capitalization (large cap, small cap, etc.) or whether it is considered a value or growth stock.

Bond ETFs

Bond ETFs provide exposure to bonds, such as treasury, corporate, municipal, international, and high-yield.

Caveats for Certain ETFs

A handful of ETFs may require special attention, as they may incur higher taxes, costs, or expose investors to other risks.

Foreign Market ETFs

These ETFs provide exposure to international markets, both by individual countries (for example, Japan) and by larger regions (such as Europe or all developed countries, except the United States). Note that ETFs invested in foreign markets are subject to risk factors in those markets, which may not be obvious to domestic investors, so be sure to do your homework.

Commodity ETFs

Commodity ETFs track the price of a commodity, such as a precious metal (like gold), oil, or another basic good. Commodity ETFs are governed by a special set of tax rules, so be sure to understand the implications.

Real Estate ETFs

Real estate ETFs provide exposure to real estate markets, often through what are called Real Estate Investment Trusts (REITS). Dividends from REITs also receive a different tax treatment, even when held within the wrapper of a fund.

Additional ETFs

In addition, there are inverse ETFs, currency ETFs, ETFs for alternative investments, and actively managed ETFs. (While most ETFs are passive and track an index, there are a growing number of managed ETFs.) These instruments are typically more complicated than your standard stock or bond ETF, so do your due diligence.

What Is ETF Trading?

ETF trading is the buying and selling of ETFs. To trade ETFs, it helps to understand how stocks are traded because ETF trades are similar to stock trades in some ways, but not in others.

Stocks trade in a marketplace called an “exchange,” open during weekday business hours, and so do ETFs. It is possible to buy and sell ETFs as rarely or as frequently as you could a stock. You’ll be able to buy ETFs through whomever you buy or sell stocks from, typically a brokerage.

That said, many investors will not want to trade ETFs frequently. The bid-ask spread — the difference between the highest price a buyer is willing to pay and the lowest price a seller will accept — can add to the cost of every trade.

A simple ETF trading strategy is to buy and hold ETFs for the purpose of long-term growth. Whether you choose a buy and hold strategy or decide to trade more often, the ease of trading ETFs makes it possible to build a broad, diversified portfolio that’s easy to update and change.

Risks of Trading ETFs

As noted in the discussion about common types of ETFs, it bears repeating that some ETFs can expose investors to more risk — but all exchange-traded funds come with some degree of risk. For example, investing in one of the most common types of ETFs, an S&P 500 ETF which tracks that index, still comes with the same risk of loss as that part of the market.

If large-cap U.S. stocks suddenly lose 30%, the ETF will also likely drop significantly.

This caveat applies to other asset classes and sectors as well.

3 Steps to Invest in ETFs

If you want to start investing in ETFs, there are a few simple steps to follow.

1. Do Your Research

Are you looking to get exposure to an entire index like the S&P 500? Or a sector like technology that may have a different set of prospects for growth and returns than the market as a whole? Those decisions will help narrow your search.

2. Choose an ETF

For any given market, sector, or theme you want exposure to, there is likely to be more than one ETF available. One consideration for investors is the fees involved with each ETF.

3. Find a Broker

If you’re already trading stocks, you’ll already have an investment broker that can execute your ETF trades. If you don’t have a broker, finding one should be relatively painless, as there are many options on the market. Once your account is funded, you can start trading stocks and ETFs.

How to Build an ETF Portfolio

Are you willing to take on more investment risk to see more growth? Would you prefer less risk, even if it means potentially lower returns? How will you handle market volatility? Understanding your personal risk tolerance can help you choose ETFs for your portfolio that round out your asset allocation.

For example, if you decide that you would like to invest in a traditional mix of stocks and bonds at a ratio of 70% to 30%, you could buy one or several stock ETFs to gain exposure to the stock market with 70% of your money and some ETFs to fulfill your 30% exposure to the bond market.

The risk factors of equity and bond ETFs are relatively easy to anticipate, but if you venture into foreign stock ETFs, emerging markets, or gold and other commodities, it’s wise to consider the additional risk factors and tax implications of those markets and asset classes.

Once you’ve determined your desired allocation strategy and purchased the appropriate ETFs, you may want to take a hands-on approach when managing your portfolio throughout the year. This could mean rebalancing your portfolio once a year, or utilizing a more active approach.

The Takeaway

ETFs bundle different investments together, offering exposure to a host of different underlying securities in one package. There’s likely an ETF out there for every type of investor, whether you’re looking at a particular market, sector, or theme. ETFs offer the bundling of a mutual fund, with the trading ease of stocks, although the total costs and tax treatment of ETFs require some vigilance on the part of investors.

Though a DIY approach to investing using ETFs is doable, many investors prefer to have the help of a professional who can provide guidance throughout the investment process.

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

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Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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

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Dec

2023

How to Pick Stocks: Essential Steps for Investors

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

You’re ready to start buying stocks. But as you look at all the stocks available, you may be wondering which ones to choose. What’s the best way to pick a stock? And how do you know which stocks might be right for your portfolio?

This guide will walk you through what you need to know about how to pick stocks.

Step 1: Define Your Investment Goals

Before you start exploring different stocks, think about what you’re investing for. Of course you’re investing to make money, but what do you want to accomplish overall? In other words, what are your investment goals? Figuring out your purpose can help you when you’re choosing investments and determining how to pick stocks.

Understanding Your Financial Objectives

What are you hoping to achieve with your investments? Think about this carefully. Is it retirement? Are you saving for a downpayment on a home or your child’s college education? Knowing your financial goals is very important to your investment strategy.

Also, consider your timeframe. Will you need access to the money in the next several years? If so, you may want to be more conservative with your investments. Or are you investing for the far-off future? In that case, you may be interested in stocks that have higher growth potential — with the understanding that higher-growth investments can also carry more risk.

Identifying Your Investor Profile

There are different types of investors. Pinpointing which type you are can help as you’re building your portfolio.

Investors who are looking for income (for instance, retirees who want to supplement their retirement funds) may want to buy stocks in companies that pay regular dividends. Investors who want to safeguard their money will likely want to look for stocks in companies that are stable. And investors who want to try to increase their earnings as much as possible might focus on buying higher-risk, higher-growth stocks.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Step 2: Learn the Art of Diversification

Diversifying your portfolio may help mitigate investment risk and may even improve investment performance, studies show. However, diversification is no guarantee and there is still risk when you invest.

The Role of Diversification in Risk Management

When you choose stocks, your inclination might be to stick to just a few companies you’ve researched and feel good about. This approach might seem like it could protect you from losses. But, in fact, limiting your portfolio could actually increase your chances of losing money.

Here’s why: Unsystematic risk is a risk that’s unique to a particular company or industry. So if you invest in the stocks of food manufacturers, for instance, and extreme weather damages some of the crops they use for their products, their stock prices could plummet, which could cause investment losses for you. But if your portfolio is diversified and holds a range of stocks from different sectors or industries, it helps mitigate risk. That’s because while one stock might drop, others could remain stable.

Techniques for Effective Portfolio Diversification

To build a diversified portfolio, there’s something known as the 60/40 rule that calls for investing 60% of your portfolio in equities like stocks, and 40% in fixed income vehicles like bonds and cash.

However, even if you’re building a strictly stock portfolio, you can still diversify it. Instead of owning shares in just one company, for example, you can buy shares in a number of different companies.

You can also choose stocks in different sectors, such as consumer goods, energy, and agriculture. And you can vary the types of stocks by buying stocks in a mix of small-, mid-, and large-cap companies.

If this sounds too complicated and involved, you might be interested in investing in mutual funds or exchange-traded funds (ETFs) that contain assets from many different companies. This is another way to diversify your portfolio.

Step 3: Research and Select Potential Stocks

Now you can start considering which stocks to buy. How to pick stocks? One strategy could be to go with a company for which you have an affinity or one that you’re quite familiar with. Think of the brands that are household names, for instance.

Once you have a few companies in mind, it’s time to find out more about them.

Conducting Company Research

When doing research on companies, these are some of the things you’ll want to look into: Are the companies profitable? How do they perform against others in their industry? Has there been bad news recently about them?

Here are some resources to discover more.

Company filings. The U.S. government requires most companies to file financial data on their performance and notable changes in the corporation. Look for the company’s quarterly and annual balance sheet, income statement, and the cash-flow statement. It’s also a good idea to look at each company’s retained-earnings statement and its shareholders’ equity.

You can find these on the company’s website under the Investor Relations section, or you can go to the Securities and Exchange Commission website to find any required filing. You’ll need to get acquainted with financial ratios. They will help you contrast and compare different companies so you can make a final decision. You’ll find them invaluable for selecting your first stock to buy.

Market news sites. Plenty of sites devote pages of content on what companies are doing, where sectors are heading, and how the market is reacting. Get in the habit of browsing a few every day. You can even set up alerts. That way, when you learn how to buy your first stock, you can keep up with all the news.

Deep analysis sites. Many companies offer stock-market research and make the task of evaluating stocks easier. Some offer information at no cost, others charge a subscription. Zacks Stock Screener and Stock Rover are examples of sites that do not charge. The sites that offer even deeper analysis, like Morningstar, may charge a fee. Many online brokerages also offer analysis content you can use.

Step 4: Analyze Stock Value and Performance

Next, you can look at the performance of the stock over time and its price to see if it represents a good value. Here’s how to do that.

Assessing Financial Health and Earnings

To evaluate a stock’s price, you can look at its price-to-earning ratio (you can generally find this information on the company’s website), which is a company’s share price divided by its earnings per share over the past year. If a stock’s PE is below its historic average, this typically indicates the stock is at a good price.

Another metric to check out is a stock’s dividend yield. If the dividend yield is above average, that could be an indication that the stock is at a good price.

These types of metrics can give you an idea of how profitable and efficient a company might be.

💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

Step 5: Learn Risk Management in Stock Picking

A risk management strategy can help protect you from big losses. That involves never risking more money than you can afford to lose and knowing what your risk tolerance level is.

Balancing Risk and Potential Returns

How comfortable are you with risk? Are you the aggressive type who is willing to accept higher risk if it means you have the potential for higher returns? Or are you a conservative investor whose priority is to safeguard their money, so you are willing to accept lower returns for investments with lower risk?

In general, higher-growth stocks tend to be riskier, which aggressive investors may gravitate to. Stocks that are more stable and offer lower returns might appeal to a conservative investor.

Understanding how much risk you can tolerate, and balancing that risk with the potential rewards it might offer, is key to choosing which stocks to invest in.

Strategy for Long-Term vs Short-Term Investments

Investors who have a longer investment timeframe — for instance, those investing for retirement, which is 20 or more years away — may be willing to choose higher growth, higher risk stocks because they have time to try to recoup any losses they suffer.

Investors who are investing for the short-term — perhaps they want to buy a new house in two years, or their child will soon be heading off to college — may do best choosing a more conservative investment strategy to help maximize their savings and minimize their losses.

Step 6: Utilize Tools for Effective Stock Selection

There are tools that help you screen stocks. They’re available on many brokerage trading platforms, usually for free.

In addition, when selecting stocks, it can be a good idea to keep on top of news regarding the market in general as well as any specific sector or industry you might be interested in.

Navigating Stock Screeners and Tools

Stock screeners are tools that let you filter through many different stocks using criteria you choose based on your personal investment goals. You could screen by the industry or sector you’re considering, for instance, and by such data as on return on investment (ROI) or earnings per share (EPS). Look for these tools on brokerage trading platforms.

Keeping Up-to-Date with Market Trends

As discussed earlier, there are a number of market news sites you can follow to stay on top of the latest trends and happenings in the market. There are also financial podcasts you can listen to.

Step 7: Seek Answers to Your Stock-Picking Questions

Finally, before buying a stock, there are some key questions you should ask. These questions include:

• What does the company do?

• What is the company’s profit or revenue?

• What is the market for the company and who are the customers?

• What is the company’s price-to-earnings (PE) ratio?

• How does it differentiate itself from competitors?

• Why are you investing in this stock? What do you want it to do for your portfolio?

Once you research the answer to these questions, if the stock seems profitable and well-positioned for the future, you may want to consider it for your portfolio.

The Takeaway

Picking stocks involves a number of steps, such as determining your investment goals, understanding your risk tolerance, and researching companies and stocks that are a good fit with your purpose for investing.

Consider carefully which stocks look strong and could help you meet your investment objectives. And remember to look for stocks that can help you diversify and balance your portfolio as you work to set yourself up for financial success.

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

FAQ

What is the best formula for picking stocks?

There is no one best formula for picking stocks. One strategy you can use involves several steps, such as: figuring out your investing goals, researching companies to make sure they are a good fit with your goals and that they’re profitable and have a good business plan in place for the future, and evaluating the stock’s price to make sure it’s a good value.

How does Warren Buffett pick a stock?

Warren Buffet’s strategy for picking a stock includes looking for stocks that are undervalued by the market in order to maximize returns. Buffet tends to buy stocks in businesses he understands and those that make sense to him. He also looks at a company’s management to see how it performs.

How do you know if a stock is good?

To help determine if a stock might be a good investment, get answers to questions about the way the company operates. For instance, how does it make money? How has it performed in the past? Are its products in demand? Is the company positioned for growth? Does it have a good management team in place?

Additionally, look at key metrics such as the price-to-earning (PE) ratio to help measure a stock’s value, and earnings per share (EPS) for an indication of its financial strength.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

Dec

2023

The Savvy Investor’s Guide: Top 10 Ways to Aim to Build Your $1,000

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

If you’re looking for ways to invest $1,000, particularly in 2024, there are numerous options available to you, including stocks, bonds, treasuries, and even your own skill set. While investing has always been crucial to growing wealth, these days, it’s probably more important than ever as prices rise and many people struggle to sock enough money away to reach their financial goals.

Fortunately, there is an array of options available to investors, as mentioned, who are looking for ways to invest $1,000 — or any other amount.

1. Dive Into the Stock Market With Index Funds

Investors may want to dip their toes into the stock market and invest in index funds. Investing in index funds comprises a passive investing strategy, which can be less risky than buying individual stocks or securities. These types of funds track or follow a market index, or benchmarket, and track it so as to mimic the performance of the larger market, or a segment of it.

Why S&P 500 Index Funds Make Sense

If you’re looking at investing $1,000, it may make sense to check out S&P 500 index funds, which track the S&P 500 index — more or less, most of the stock market. These index funds give investors exposure to 500 of the biggest stocks on the market.

Notably, investing in one of these index funds can be advantageous because it’s easy, gives investors immediate and broad exposure in the markets, and offers a degree of built-in diversification into their portfolios. That’s not to say that investing in S&P 500 index funds is foolproof, of course, as they do have their risks. In the event of a broad market downturn, for instance, your portfolio would likely take a significant hit, depending on the specific makeup of the portfolio.

As such, index fund investing has some advantages, such as ease of management, relatively low entry costs in some cases, and the ability to quickly diversify a portfolio. But there can be disadvantages, too: Index funds don’t necessarily directly follow indexes, it’s a form of passive investing (which may be disappointing to investors who want a more active approach), and depending on your overall strategy, they may not be the best fit – they may be better for long-term investors, for instance.

The Long-Term Benefits of Market Matching

The true magic of broad index funds is that many of them will track the larger performance of the market over time. Which, if you’ve looked at the historical run of the market, tends to go up. As for the S&P 500, specifically? It has grown significantly over time — but not without some hiccups along the way. The S&P 500 has annualized approximately 10% over time.

2. Embrace Diversification With ETFs

Exchange-traded funds, or ETFs, are another good option for investors looking at how to invest $1,000. They can also serve as an alternative to index funds, as ETFs can be a great tool for some new and experienced investors to gain broad exposure to a wide variety of different asset classes. These days, there are ETFs for almost anything.

How ETFs Offer Accessibility to Beginners

Purchasing shares of an ETF works just like purchasing shares of an individual company’s stock. Which means it can be easy for beginners.

ETF trading, like other types of trading or investing, has its pros and cons, though. As for the pros, ETFs can be easy to trade (again, good for beginners), offer a degree of built-in diversification, tend to have lower associated costs, and may be more tax-efficient than other investment types, like mutual funds. As for cons, ETFs may lack personalization, suffer from tracking errors, introduce counterparty and market risks, and may incorporate complex trading strategies (like leveraged or inverse ETFs).

So, keep in mind that while ETFs may be beginner-friendly, there are advantages and disadvantages.

Comparing Popular ETF Options

As mentioned, investors can look at broad index-focused ETFs, or any number of others. An internet search will yield many options, no matter an investor’s interest.

Imagine an investor who wants exposure to gold mining stocks. But researching all of the many different mining companies out there, examining their plans, management, profitability and more all seems overwhelming. What could such an investor do? They may want to consider buying shares of any number of different ETFs that include a basket of gold mining stocks. There are ETFs for real estate, oil, bonds, and stocks of different companies in many different industries.

💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

3. Bet on Yourself: Invest in Personal Development

If you’re wondering how to invest $1,000 outside of traditional financial securities, look inward! An investment in yourself and your own personal development can also pay dividends.

Education as an Investment

Earning a degree, certificate, or otherwise investing in education is, for many people, a first step toward a brighter financial future. While there are risks and significant costs associated with going to college or earning a degree, it may increase your earning potential significantly, and over the years, that should add up in a big way.

If this is something you’re seriously considering, you could also compare the pros and cons of attending a community college versus a four-year institution, and look at programs that tend to lead to more career opportunities. But remember that there’s no guarantee that a degree or certificate will lead to future job opportunities, or additional earnings.

4. Secure Your Future With Retirement Funds

Another way to invest $1,000 is to sock it away in a retirement account or retirement fund, and there are several options available to investors. For instance, you could open an IRA, or enroll in an employer-sponsored account, like a 401(k).

The Advantage of IRAs

Individual retirement accounts, or IRAs, come in different varieties, such as traditional and Roth IRAs. It’s worth checking out the differences to see which may be the best fit for you and your specific situation or goals, but the general idea is that you can invest money in these accounts, and they’re tax-advantaged. Plus, anyone can open one — they’re not employer-sponsored.

The Magic of 401(k) Matches

Maximizing a 401(k) retirement plan can be another option for investors who are looking to grow their money. Some employers will match employee contributions to 401(k) accounts, effectively supercharging their ability to save. While there are annual contribution limits, investors who have a little extra money to invest may want to see if they can or should put it in their 401(k).

While both IRAs and 401(k)s have some advantages for investors, you’ll want to keep the potential downsides in mind, too. Depending on the type of account you open (Roth versus traditional, for instance), there may not be any immediate tax benefits, for one. Further, it may be difficult to withdraw money quickly if you need it, and there are fees and penalties for doing so depending on your age. You may also be required to take distributions at one point, which some investors may not want to do.

5. Step Into Tech With Robo-Advisors

Robo-advisors are algorithms that pick investments for investors automatically. That may be of interest to some investors looking to put some extra money to work. And letting technology take the reins when it comes to making investment decisions can be appealing to many investors, as it takes much of the guesswork, calculation, and research out of the investing process.

Simplifying Investments With Technology

As for how they work? Generally, an online robo-advisor will ask the investor some simple questions about their investment goals, risk tolerance, and where they are in their wealth-building journey (basically, current age and desired retirement age). Then, based on those answers, a portfolio will be generated, and the amount of money the investor would like to invest will be allocated accordingly.

There are typically several different model portfolios that will be recommended to investors, ranging from conservative risk-off, to moderately risk-on, to aggressively risk-on.

The various model portfolios usually provide a mix of assets according to how much risk an investor ought to take, which is determined by the answers given to the robo-advisor’s questions.

For example, traditional wisdom dictates that younger investors can take more risk because they have more time to make up for potential losses. On the other hand, older investors who find themselves closer to retirement are generally urged to take as little risk as possible, since steep losses could ruin their retirement plans.

Also keep some of the downsides of using a robo-advisor in mind, too. For example, there may be limited personalization and flexibility when using one, which may be a turn-off for some investors who want to take a more active hand in their portfolio. There’s also a lack of human contact, so you won’t be able to speak with someone at your brokerage as easily as you might like. The fees and costs, too, may be more than some investors want to pay.

6. Pay Down High-Interest Debts

While paying down debt may not seem like an “investment” in the traditional sense, it can serve as a sort of investment in your financial future by freeing up money that might go toward interest payments. Instead, you may be able to repurpose that money and funnel it into index funds, your retirement account, or more.

While how or if you choose to target your debt balances will depend on any number of factors, in most cases, it may be wise to try and pay down your debts with the highest applicable interest rate first — that will end up saving you the most money in the long run, as you save the most in interest.

As for how to do it? There are a lot of strategies to pay down debt out there, but it can start with some simple steps: Create a budget, set goals, utilize balance transfers, and more.

A couple of common debt-payoff strategies are the “snowball” and “avalanche” methods, which involve either paying off your debts with the lowest overall balance first, or your debts with the highest applicable interest rate – as mentioned. One or the other may work better for you, and it may be a good idea to try different strategies out to see what works.

Paying down debt is generally a good idea, but if there’s a downside to it, it’s the opportunity costs associated with the money you’re using to pay balances down. Think about this: If you instead invested or saved the money you’re using to pay down debt with, that money could grow or appreciate in the meantime – though there are no guarantees. Again, lowering debt burdens isn’t a bad thing, but opportunity costs may be something to keep in mind.

7. Create a Safety Net With High-Yield Savings Accounts

As interest rates shot up in 2022 and 2023, another potential avenue for growing your money is by putting it in a high-yield savings account. These accounts tend to offer higher interest than standard checking or savings accounts, and many banks offer them. It’s been some time since interest rates were actually attractive to investors, but heading into 2024, it may be worth seeing what your options are.

Finding the Best High-Yield Accounts

You’re likely to find numerous options for high-yield savings accounts out there, but some things you’ll want to look for include annual percentage yields (APY), required initial deposits, minimum balance requirements, applicable fees, and whether there’s a penalty for withdrawing your money.

What makes one account more attractive to you versus another will depend on your personal preferences. But generally, you’re looking for the highest APY, and lowest fees or costs associated with an account.

8. Explore Passive Income Opportunities

Why not invest in a passive income venture? That could be a side hustle, side gig, small business, or something similar. A lot of those opportunities will likely require at least a little startup capital, and many can be started for less than $1,000 — much less, in some cases.

Getting Started With Passive Ventures

There are dozens and dozens of ways to put your money to work and start a passive venture. Consider some of these ideas: Lend your money through a peer-to-peer lending platform, advertise using your personal vehicle, become a pet sitter, become a house cleaner, or even use some money to start a blog or publish an ebook.

Again, some of these will require a little startup cash, but if the chips fall in the right way, they could end up being lucrative passive income ventures.

Low-Investment Ideas for Passive Earnings

If you’re looking for investment opportunities, specifically, you can look at crowdfunding opportunities, buying an ETF or index fund, or even experimenting with a robo-advisor — all as mentioned. These may not provide passive “earnings” in the same way a small business venture would, but if the market sways in the right way, could provide some returns over time.

But, as always, do consider that all investing involves risk, as discussed. Not only that, but business ventures involve risk, as does lending out your money. These may be ways to earn or generate some passive income, but they all do have their associated risks.

9. Invest in Your Child’s Education with a 529 Plan

If you have children, or children in your life, you can also look at the possibility of investing in a 529 college savings plan. With education costs increasing every year, they’ll likely be thankful you did.

The Basics of 529 Plans

A 529 plan, or qualified tuition plan, allows parents or others to essentially pre-pay for a student’s tuition expenses, or contribution to an education-focused savings account. The contributions aren’t tax-deductible, but the distributions are tax-free for beneficiaries if they’re used on a qualified expense, such as tuition, books, and more.

Long-Term Benefits for Your Family

There are other options out there that can be used for saving or investing for education expenses. But the whole point is that these types of accounts can be used to ease the financial burden of college, offering tax-free growth. With student debt remaining a huge issue in the U.S., saving and investing for tuition earlier rather than later may be beneficial.

While 529 plans have benefits, there can be disadvantages as well. Funds can only be used for education purposes, for one, and there may be limited tax advantages depending on where you live and your specific financial situation. There are also fees and costs to consider, and investors should know that they won’t be able to take much of a hand in directing investments, either.

10. Consider Safe Bonds and T-Bills

If stocks, index funds, ETFs, or other investments seem a bit too risky, you can always look at relatively safe investments — which could include bonds and treasuries, or T-bills.

The Stability of Government Bonds

Treasuries, which are bonds that are issued by the federal government, and are generally considered to be one of, if not the safest investment on the market. That’s not to say that they aren’t without risk, but if treasuries become risky investments, there’s likely bigger issues to deal with in the economy than worrying about the value of your bond holdings. They can also be purchased directly from the government.

While Treasuries are relatively safe investments, they’re not without risk or downsides. For most investors, the primary disadvantage of Treasuries are that they provide low returns compared to other investments – but that’s typically the trade-off investors make to assume less risk.

Making Your Investment Work Harder

Investing your money — however you choose to do it — requires at least some research and consideration. At first, that is, depending on how you choose to invest or save it. But the point is to put the money away in a savings or investment account, allowing the market and time to work its magic, and hopefully seeing your balance or holdings accrue value over time.

When to Pivot Your Investment Strategy

Many investors may want to take a hands-off approach to investing, and that can work. Others may want to be more active. While you should perhaps consult with a financial professional to get a sense of what might work best for you, there are going to be times where you’ll want to consider pivoting your strategy.

As you move through life, your goals, risk tolerance, and time horizon will change – and so will your investment strategy. It may be difficult to tell when it’s time to adjust your strategy, but it can be a good idea to keep the fact that your strategy will change, at some point, in mind.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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Understanding Value Investing: Principles, Strategies, and Risks

What Is Value Investing?

Historical Background and Evolution

The Core Principles of Value Investing

Intrinsic Value and Margin of Safety

Belief in Market Inefficiencies

Strategies and Techniques in Value Investing

Identifying Undervalued Stocks

Analyzing Financial Statements and Reports

Understanding Market Dynamics and Herd Mentality

Value vs Growth Investing

Differences and Performance Comparisons

Pros and Cons of Each Approach

The Process of Value Investing

Finding and Evaluating Value Stocks

Price-to-earnings Ratio (P/E)

Price/earnings-to-earnings Ratio (PGE)

Price-to-book Ratio (P/B)

Debt-to-equity Ratio (D/E)

Free Cash Flow (FCF)

Long-Term Considerations and Patience

Risks and Challenges in Value Investing

The Takeaway

FAQ

What are the pros and cons of value investing?

Is value investing high risk?

Can you make money value investing?

How do you do value investing?

The Essential Guide to Investing in Foreign Currency

Understanding Foreign Currency Investment

Key Takeaways for New Investors

Alternative investments, now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

Exploring the Benefits of Investing in Foreign Currencies

Diversification of Portfolio

Convenience and Accessible Markets

Hedge Against Domestic Currency Inflation

Ways to Invest in Foreign Currencies

1. Standard Forex Trading Account

2. Currency CDs and Savings Accounts

3. Foreign Bond Funds

4. Currency ETFs

The Risks Associated with Foreign Currency Investment

Market Volatility and Political Risks

Interest Rate Risk

Currency Conversion and Transfer Costs

How to Approach Foreign Currency Safely

Education is Key: Understanding the Mechanics of Currency Investment

The Importance of a Bid-Ask Spread

Evaluating Risks Versus Rewards

Currency Investment Strategies for Beginners

Broadening Your Investment Horizon With Currency ETFs

Advanced Currency Investment Options

Foreign Currency Futures and Options — An Introduction

The Takeaway

What Is an ETF? ETF Trading & Investing Guide

What Is an ETF?

Passive vs Active ETFs

How Do ETFs Work?

What Is the Difference Between an ETF and a Mutual Fund?

What Are the Advantages of ETFs?

Trading

Fees

Diversification

Liquidity

What Are the Disadvantages of ETFs

Trading Might Be Too Easy

Understanding ETF Costs

Lower Yield

What Are Common Types of ETFs?

Index ETFs

Sector ETFs

Style ETFs

Bond ETFs

Caveats for Certain ETFs

Foreign Market ETFs

Commodity ETFs

Real Estate ETFs

Additional ETFs

What Is ETF Trading?

Alternative investments,
now for the rest of us.

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