Investing Archives | Page 96 of 194

Nov

2024

Federal Reserve Interest Rates, Explained

By Michael Flannelly | invest, Investing, Terminology | No Comments

The Federal Reserve, or “Fed,” can change the federal funds rate as a tool to sway the economy. For instance, when inflation is high, it can raise interest rates to attempt to curb overall demand in the economy, hopefully lowering prices. As of November 2024, the current federal funds rate is between 4.75% and 5.00%. That rate can affect other interest rates throughout the economy, such as those tied to mortgages, auto loans, and more.

There’s a connection between the Fed’s interest rate decisions, the national economy, and your personal finances. The Fed works to help balance the economy over time — and its actions and influence on monetary policy can affect household finances. Here’s what consumers should know about the Federal Reserve interest rate and how it trickles down to the level of individual wallets.

What Is the Federal Funds Rate?

The federal funds rate, or federal interest rate, is a target interest rate assessed on the bank-to-bank level. It’s the rate at which banks charge each other for loans borrowed or lent overnight.

The federal funds rate is not directly connected to consumer interest rates, like those that might be paid on a personal loan or mortgage. But it can significantly influence those interest rates and, over time, can impact how businesses and individuals access lines of credit.

How Is the Federal Funds Rate Set?

The Federal Open Market Committee (FOMC) sets the federal funds rate. The FOMC is a 12-member group made up of seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.

The FOMC meets a minimum of eight times per year — though the committee will meet more often than that if deemed necessary. The group decides the Fed’s interest rate policy based on key economic indicators that may show signs of inflation, rising unemployment, recession, or other issues that may impact economic growth.

The FOMC often slashes rates in response to market turmoil as an attempt to boost the economy. Lower rates may make it easier for businesses and individuals to take out loans, thus stimulating the economy through more spending. The Federal Reserve enacted a zero-interest rate policy in 2008 and maintained it for seven years to boost the economy following the Great Recession, for example.

On the other hand, the FOMC may raise interest rates when the economy is strong to prevent an overheated economy and keep inflation in check. Higher interest rates make borrowing more expensive, disincentivizing businesses and households from taking out loans for consumption and investment. Because of this, higher interest rates, theoretically, can cool the economy.

Current Federal Funds Rate

As noted above, the current federal funds rate is between 4.75% and 5.00% as of early November 2024. The FOMC raised interest rates rapidly throughout 2022 in an effort to bring down inflation, which was at the country’s highest levels since the 1980s. But in the fall of 2024, it issued a rate cut for the first time since the start of the pandemic in early 2020.

The federal funds rate is a recommended target — banks can ultimately negotiate their own rate when borrowing and lending from one another. Over the years, federal fund targets have varied widely depending on the economic outlook. The federal funds rate was as high as 20% in the early 1980s due to inflation and as low as 0.0% to 0.25% in the post-pandemic environment, when the Fed used its monetary policy to stimulate the economy.

How Does the Fed Influence the Economy?

The Federal Reserve System is the U.S. central bank. The Fed is the primary regulator of the U.S. financial system and is made up of a dozen regional banks, each of which is localized to a specific geographical region in the country.

The Fed has a wide range of financial duties and powers to take measures to ensure systemic financial and economic stability. These duties include:

• Maintaining widespread financial stability, in part by setting interest rates

• Supervising and regulating smaller banks

• Conducting and implementing national monetary policy

• Providing financial services like operating the national payments system

The Fed has authority over other U.S. banking institutions and can regulate them in order to protect consumers’ financial rights. But perhaps its most famous job is setting its interest rate, otherwise known as the federal funds rate.

How Does the Federal Funds Rate Affect Interest Rates?

Although the federal funds rate doesn’t directly influence the interest levels for loans taken out by consumers, it can change the dynamics of the economy as a whole through a kind of trickle-down effect.

The Fed’s rate changes impact a broad swath of financial areas — from credit cards to mortgages, from savings rates to life insurance policies. The Fed’s rate change can affect individual consumers in various ways. They can also affect the stock market, which may have an outsized impact on those who are online investing or otherwise have money in the markets.

The Prime Rate

A change to the federal funds rate can influence the prime interest rate (also known as the Bank Prime Loan Rate). The prime interest rate is the rate banks offer their most creditworthy customers when they’re looking to take out a line of credit or a loan.

While each bank is responsible for setting its own prime interest rate, many banks choose to set theirs mainly based on the federal funds rate.

Generally, the rate is set approximately three percentage points higher than the federal funds rate—so, for example, if the rate is at 5.00%, a bank’s prime interest rate might be 8.00%.

Even for consumers who don’t have excellent credit, the prime interest rate is important; it’s the baseline from which all of a bank’s loan tiers are calculated.

That applies to a wide range of financial products, including mortgages, credit cards, automobile loans, and personal loans. It can also affect existing lines of credit that have variable interest rates.

Savings Accounts and Certificates of Deposit

Interest rates bend both ways. Although a federal rate hike may mean a consumer sees higher interest rates when borrowing, it also means the interest rates earned through savings, certificates of deposit (CDs), and other interest-bearing accounts will increase.

In many cases, this increase in interest earnings influences consumers to save more, which can help as an incentive to build and maintain an emergency fund that one can access immediately, if necessary.

How Does the Federal Funds Rate Affect the Stock Market?

While the federal funds rate has no direct impact on the stock market, it can have the same kind of indirect, ripple effect that is felt in other areas of the U.S. financial system.

Generally, lower rates make the market more attractive to investors looking to maximize returns. Because investors cannot get an attractive rate in a savings account or with lower-risk bonds, they will put money into higher-risk assets like growth stocks to get an ideal return. Plus, cheaper or more available money can translate to more spending and higher company earnings, resulting in rising stock performance.

On the other hand, higher interest rates tend to dampen the stock market since investors usually prefer to invest in lower-risk assets like bonds that may offer an attractive yield in a high-interest rate environment.

Recommended: How Do Interest Rates Impact Stocks?

What Other Factors Affect Consumer Interest Rates?

Although the Federal Reserve interest rate can impact personal finance basics in various ways, it may take up to 12 months to feel the full effect of a change.

On a consumer level, financial institutions use complex algorithms to calculate interest rates for credit cards and other loans. These algorithms consider everything from personal creditworthiness to loan convertibility to the prime interest rate to determine an individual’s interest rate.

The Takeaway

The federal funds rate — or federal interest rate — set by the Federal Reserve is intended to guide bank-to-bank loans but ends up impacting various parts of the national economy—down to individuals’ personal finances.

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SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).

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As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Eligible Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

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Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
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SOBNK-Q424-024

Nov

2024

Tips for Investing in Tech Stocks

By Matthew Zeitlin | Growing Wealth, invest, Investing | No Comments

It’s almost become a trope at this point: Your friend’s aunt bought some tech stocks a long time ago, and generated massive returns over the years. Or, your cousin knows somebody who knows somebody who bought some tech stock for a few dollars per share in the 1980s, and now they’re a multimillionaire.

While these anecdotes are enticing, if you’re looking to buy a first tech stock or want to add some diversity to your portfolio, you may find the reality to be slightly different from the stories. There are many kinds of tech stocks, each with its own performance trends, pros, and cons. Here are a few things to know about investing in tech stocks.

Why Investors Are Investing in Technology

In recent decades, much of the growth in the stock market overall has been concentrated in the shares of technology companies. That’s one of the main reasons that investors may be particularly interested in investing in tech stocks or related securities.

As of July 2024, the top five most valuable companies in the S&P 500 are in the tech sector. These firms — Apple, Microsoft, Nvidia, Amazon, and Meta — have an average market capitalization, or overall stock value, more than $1 trillion.

Five Largest Companies in the S&P 500 Index
Company	Ticker	Market Cap^*	5-year growth^*
Apple	AAPL	$3.375 trillion	110%
Microsoft	MSFT	$3.17 trillion	294%
Alphabet	GOOGL	$2.7 trillion	233%
Amazon	AMZN	$1.91 trillion	140%
Meta	TSLA	$1.18 trillion	211%
^*As of July 30, 2024

Investors flock to technology companies, especially the previously mentioned tech giants, because they’re often considered solid businesses.

The products of technology companies — especially software companies — are relatively cheap to reproduce but can be quite expensive to buy. Apple, for example, prices iPhones ahead of their competitors, sells a lot of them, and then operates an ecosystem of apps and services that generate steady revenue. Amazon’s success is attributed to the effectiveness of its operations and low prices. For Alphabet, the sheer scope of its networks and the popularity of its services allows them to sell more ads than its competitors.

Aside from the giants that have established business models, many investors pour money into tech companies due to the promise of future earnings. Even when tech companies are not profitable or see regular cash flows, investors will still support the stocks because of the potential for future earnings. Companies like Amazon and Tesla took years before they turned steady profits.

Popular Technology Stocks to Own

The technology industry is incredibly diverse. Beyond the five companies mentioned above, there are many others, including several that comprise the S&P Technology Select Sector Index, a popular market index that tracks the tech space. Below are some of the largest companies that comprise that specific Index, outside of the five tech stocks mentioned above.

Companies in the S&P Technology Select Sector Index
Company	Ticker	Technology Sector	Market Cap^*	5-year growth^*
Broadcom	AVGO	Semiconductors	$684.13 billion	570%
Salesforce	CRM	Software	$248.34 billion	204%
Adobe	ADBE	Software	$238.22 billion	160%
Advanced Micro Devices	AMD	Semiconductors	$221.81 billion	610%
Cisco Systems	CSCO	Communications Equipment	$194.13 billion	-20%
^*As of July 30, 2024

How Can You Invest in Tech Stocks?

At the most basic level, you can invest in tech stock by buying the individual stocks of an appealing company. That can be done in the same way as buying any other type of stock or security through a brokerage or investing platform.

Another way to invest in tech is by trading technology-focused exchange-traded funds (ETFs) or mutual funds. Tech ETFs and mutual funds allow investors to diversify their investments in a single security, which may be less risky than buying a specific company’s stock.

If you are interested in a particular tech sector — like artificial intelligence or green tech — you can invest in more targeted funds rather than broad-based technology-focused ETFs.

Different Sectors for Technological Investment

The technology industry is vast, filled with companies specializing in different areas of the market. For an investor, this means it’s possible to diversify, investing in tech stocks across various sectors.

Artificial Intelligence

Artificial intelligence (AI), which refers to ways that computers can process data and automate decision-making that humans would otherwise do, is a burgeoning tech sector. Many companies are operating in this sector, using new technologies to support fields like finance and healthcare. Artificial Intelligence, along with the related field of Machine Learning (ML), has long been one of the most exciting technology areas.

Transportation

Another bustling sector of the industry is transportation. Tech underlies all transportation, and some of the most exciting companies are building electric cars, creating the batteries and software that support the navigation and operational systems in automobiles, or using software to connect drivers and passengers.

💡 Recommended: Investing in Transportation Stocks for Beginners

Streaming

Streaming companies have completely revolutionized the entertainment industry. These companies offer direct-to-consumer content, including shows and movies, that is bundled in a monthly subscription. There are standalone streaming companies, companies that include streaming as an ever-growing part of their business, and companies that build digital and physical infrastructure to support streaming services.

Information Technology

Information technology (IT) is one of the broadest and most valuable sectors of the technology industry. It typically refers to how businesses store, transmit, and use information and data within and between networks of computers.

Semiconductor Technology

Semiconductors are arguably the foundation of all technology. Semiconductor companies make components found in phones, computers, and other electronic devices. The manufacturing process for semiconductors is incredibly precise and expensive, making the industry ruthlessly competitive.

Web 3.0

In recent years, cryptocurrency, blockchain technology, and Web 3.0 have been the focus of many investors. That’s because computer engineers and companies are now developing new technologies that will allow users to interact with the web in a more interactive, personal, and secure way. These new technologies may usher in new opportunities for investors.

💡 Recommended: Web 3.0 Guide for Beginners

Evaluating a Tech Stock Before Investing

When investing, you must carefully evaluate the stocks you’re interested in.

Technology companies, in particular, tend to have high price-to-earnings (P/E) ratios, meaning that the company’s profits may seem low compared to the price of their shares. This is often because investors are expecting rapid future growth.

Other key metrics include price-to-sales, which compares the stock price to the company’s revenue. This is something to consider in the case of a fast-growing company that doesn’t yet have substantial profits.

Another critical factor is the company’s overall revenue growth — the pace at which revenue increases year-over-year or even quarter-over-quarter.

A more detailed metric that can be useful for tech companies is “gross margins,” which is the difference between a company’s revenue or sales and the cost of generating those sales, divided by total revenue. The resulting percentage indicates whether the company can make money on the actual product it sells and how much. If the company’s other costs can go down as a percentage of total revenue, profits can grow more quickly.

💡 Recommended: The Ultimate List of Financial Ratios

Pros of Adding Tech Stocks to a Portfolio

There are many benefits to investing in tech stocks, most notably attractive returns. With artificial intelligence, blockchain, and Web 3.0 technologies on the horizon, there are increasing opportunities to invest in this sector. These are some possible benefits of adding tech stocks to a portfolio.

• There are many blue chip tech companies. Blue chip stocks typically refer to stocks from long-established companies with good returns. Today’s blue chips include huge tech companies like Apple, Alphabet, and Amazon.

• Some tech stocks pay dividends. There can be benefits to dividend-paying stocks, including consistent earnings, which might indicate that the company is positioned to deliver strong performance.

• Investors can buy shares in things they use. Most people use some tech in their daily routines. You might have a smartphone, or a laptop, hop on a social network, or order groceries or clothing online. With a tech stock, investors can buy a little piece of the companies they know and like.

• It’s easy to diversify in tech. Tech stocks aren’t a monolith. Investors can add diversity to their portfolio by purchasing different aspects of the tech sector, for example, buying stock in social media companies, smartphone glass manufacturers, hardware makers, software companies, and even green tech companies.

A great thing about the tech sector investing space is that there’s so much of it out there, and investors should be able to find something that works for their goals, ambition, and knowledge base.

💡 Recommended: How to Invest in Web 3.0 for Beginners

Cons of Investing in Technology

All stocks come with their own risks and potential downsides. Tech stocks are no different. As with any stock purchase, it’s helpful to do a good amount of research before buying a stock. Take these considerations into account before deciding to pull the trigger on a tech stock.

• Potential losses. Though the tech sector has been an area of focus for investors as it’s grown in recent decades, investors should also be aware that there’s always the potential for sizable losses, too. Certain segments of the tech space can be volatile, and technology is always changing and falling out of favor. As such, it’s possible that tech stocks could see significant declines in value – sometimes rapidly.

• The potential for tech backlash. Some experts think increased regulation and government scrutiny could lead to a backlash against tech stocks that could affect their prospects. They cite 2018’s passage of the European Union’s General Data Protection Regulation (GDPR) and Facebook’s hearings before Congress as evidence that even more regulation might be coming in the future. But like many other sectors of the stock market, various tech stocks react differently in the face of volatility.

• Buying what you know can be complicated. You might have a solid grasp on some social media giants, for example, but some of the nuances of emerging semiconductor firms might be a little harder to wrap your head around. You may have to ask yourself if you want to invest in a company that you might not fully understand.

• Stocks may be priced too high. Some tech companies, like Amazon and Google, often have shares that venture into the four figures, so for a first-time tech stock investor, those companies may feel out of reach. However, many tech companies occasionally engage in a stock split to decrease their share prices.

How Frequently Should You Invest in Tech Stocks?

The frequency you invest in tech stocks will depend on your individual investment goals and risk tolerance. Some investors may choose to trade tech stocks monthly or quarterly to take advantage of any short-term price fluctuations. Others may invest in tech stocks on a more long-term basis, holding onto their shares for several years to benefit from any potential long-term growth.

What Percentage of Your Portfolio Should Be Tech Stocks?

The percentage of a portfolio allocated to tech stocks differs for every investor. For instance, some specialists might recommend that investors allocate no more than 20-30% of their investment portfolio to tech stocks, but this percentage may be higher or lower depending on the investor’s risk tolerance, investment goals, and other factors.

Mistakes to Avoid When Investing in Tech Stocks

Many investors are drawn to tech stocks because of the potential for a significant return. But the allure of large gains may cause investors to take on too much risk or lose sight of their overall investment goals.

For example, you don’t want to invest in a tech stock just because it’s popular. It’s easy to fear you are missing out when you see a particular stock’s price skyrocket. You may hear about a tech stock lot in the financial media, and you know many people who say they own it, but that doesn’t mean it’s a good investment.

Additionally, you should avoid investing in a stock just because the company is a household name. While sometimes the stocks of well-known companies do well, there are other cases of these companies not being well run and thus not being a good investment.

The Takeaway

The tech sector is vast and getting bigger by the moment as blockchain, artificial intelligence, and other technologies push boundaries. New founders are working on startups in garages and basements, potentially developing the next new thing that could change the world. Investors looking to invest in tech stocks can find a stock or ETF out there that could meet their needs.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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.

Get started trading technology stocks and ETFs with SoFi Invest® today

FAQ

Why is investing in tech stocks so popular?

Tech stocks are popular because they are some of the largest and best-performing assets in the financial markets in recent years. As a whole, the technology sector has been one of the fastest growing sectors in the economy. This means that there are a lot of new and innovative companies that are constantly coming out with new products and services. This provides investors with a lot of growth potential.

How can you start investing in tech stocks today?

You can start investing in tech stocks by trading individual stocks, invest in a tech-focused mutual fund or ETF, or invest in a more general stock market index fund that includes a mix of tech and non-tech companies.

SoFi Invest®

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SOIN-Q324-019

Nov

2024

What Is ESG Reporting?

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

Key Points

• ESG reporting is separate from financial reporting, but formal ESG disclosures are more common owing to the relevance of ESG standards to business outcomes.

• Over time, many organizations have sought to establish ESG criteria and metrics that would enable companies to be evaluated in terms of their progress toward ESG goals.

• Although a single set of ESG standards doesn’t exist, there are over a dozen frameworks that companies use for ESG reporting worldwide.

• ESG reporting is important because it helps companies to be accountable for their progress, and can enable investors to compare companies in terms of how well they meet ESG standards.

When a company decides to embrace certain environmental, social, and governance (ESG) standards, ideally the company will adhere to a set of ESG criteria and metrics that help the organization report its progress toward these ESG goals.

ESG reporting is considered separate from standard financial reporting. But investors are increasingly interested in understanding a company’s progress and risk mitigation efforts in light of ESG factors.

Investors can use a company’s ESG reporting to gauge whether it is indeed making positive changes in these areas. Unfortunately, while there are more than a dozen ESG frameworks that can be used for corporate ESG reporting, no one system has been universally adopted.

However, there are a handful of ESG frameworks that are commonly used for ESG reporting. By understanding the current state of ESG reporting and how it works, investors can be in a better position to decide which investments reflect their own values.

ESG Basics

Like many types of sustainable investing, ESG may be referred to in different ways, including green investing, socially responsible investing (SRI), and impact investing.

The three pillars of ESG are based on specific environmental, social, and governance factors. Environmental standards help assess the ways a company works to preserve and protect the physical environment. Social factors include the treatment of workers, communities, customers, suppliers, and vendors. Governance criteria track issues of leadership, fraud prevention, accounting practices, data privacy, and more.

Common ESG Criteria Companies Use

As a rule of thumb when learning about ESG frameworks and metrics, it’s important for those interested in green investing to consider how these may or may not apply to different companies across various industries. A retail company may commit to reporting certain metrics that are relevant to its products and manufacturing, whereas a biotech firm would likely embrace other standards.

Following are some ESG factors commonly used as standards in in ESG frameworks:

Environmental factors: These can help ESG investors assess a company’s energy use and carbon emissions; management of air, water, and ground pollutants; efforts to preserve biodiversity (e.g., limiting deforestation); environmental initiatives, and more.

Social factors: These reflect a company’s commitment to fair labor practices; safe working conditions; equitable hiring; engagement with local communities; product safety; sustainability throughout the supply chain (e.g., sustainable material sourcing, green shipping), and more.

Governance factors: These can include fair and transparent accounting methods; committing to a diverse board and management; avoiding conflicts of interest in leadership; being accountable to shareholders; upholding shareholder rights, and so forth.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

ESG Reporting Frameworks

As mentioned above, there are more than a dozen ESG reporting frameworks. These have been created by business organizations, nonprofits, and others. It’s not mandatory that companies use these frameworks when doing ESG reporting, although there are ongoing efforts by the Securities and Exchange Commission as well as the European Union to create required reporting standards.

Existing frameworks are generally voluntary guidelines for which metrics should be reported, how they should be disclosed, and how often.

Although the frameworks can be useful tools, the fact that there are so many of them means it’s hard to compare companies to one another and gauge which data and ESG metrics are most meaningful.

Nonetheless, a number of governmental and non-governmental organizations have worked to develop standards to help companies be more transparent about their commitment to meeting certain ESG criteria. Here is a summary of three of the most commonly used ESG frameworks:

Global Reporting Initiative (GRI)

GRI is an independent entity that helps businesses, and also governments, evaluate and report their progress in terms of certain ESG standards.

Although this is a voluntary framework, according to a 2022 report by global accounting firm KPMG, some 78% of the world’s biggest companies by revenue have adopted the GRI reporting standards, making it the most widely adopted framework.

International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards

The IFRS Foundation set up the International Sustainability Standards Board (ISSB) in 2021, largely because a growing number of companies were looking for a more efficient method for ESG reporting. The ISSB then built upon several existing sustainability standards, in order to create the voluntary IFRS Sustainability Disclosure Standards that many companies now follow.

Sustainability Accounting Standards Board (SASB) Standards

Related to the IFRS Sustainability Disclosure Standards are the SASB Standards, which were established in 2018 to provide a way for companies across 77 different industries to report key ESG metrics. Although the SASB Standards were absorbed by the IFRS Foundation, they are still maintained as a separate set of standards by the ISSB, for companies that prefer to use this method.

Benefits of ESG Metrics

There are several upsides of ESG reporting for both companies and investors. These include:

• Companies can track and report their progress towards ESG goals using a common set of standards.

• This layer of transparency incentivizes companies to be accountable for their progress (or lack thereof).

• Companies may save money by adhering to certain ESG standards, which may improve efficiency or reduce waste.

• Companies that abide by ESG standards may help mitigate certain risk factors.

• Adhering to an ESG framework helps build trust and a positive image with investors, communities, and other stakeholders.

Key ESG Metrics

Environmental, social, and governance standards encompass a large number of potential issues that companies can be responsible for. Here are a few:

Carbon Footprint

Measuring a company’s carbon footprint and their progress toward reducing it is one of the most common ESG metrics. Lowering carbon emissions can help companies become more efficient, compliant with emissions regulations, lower pollutants, and more.

Steps that a company might be taking to reduce their footprint include:

• Switching factories and offices to renewable energy

• Switching to electric transport or reducing the use of conventional transport

• Reducing waste

• Switching to raw materials that result in fewer emissions

• Reusing and recycling materials

• Purchasing carbon offsets and carbon removal to cancel out any emissions they aren’t able to eliminate.

Energy Efficiency

Another important ESG metric is energy efficiency. Energy efficient companies not only seek to minimize the use of fossil fuels and conventional forms of energy, but to shift to a meaningful use of renewable energy sources.

In addition to the environmental benefits, companies using less energy may save money, which may increase profits and benefit both the companies and investors.

Ways that companies can improve their energy efficiency include:

• Using energy-efficient bulbs; utilizing natural light when possible

• Turning off lights and appliances/equipment when not in use

• Increasing the reliance on electric or hybrid vehicles

• Minimizing air travel and shipments; investing in green shipping options

• Managing the use of heat, refrigeration, and air conditioning

Employee and Worker Health and Safety

The health and safety of workers is a key social metric in light of ESG standards. Companies that go beyond legal compliance with federal Occupational Health and Safety Standards (OSHA) may demonstrate a deeper commitment to protecting its workforce in terms of total worker health, physically, mentally, and environmentally.

Efforts may include providing:

• Proper equipment and training

• Fire protection and emergency procedures

• Abatement of safety hazards

• Psychological support systems

Evaluations of employee health and safety can indicate to investors how good a company is at managing risk and operational procedures that can impact the bottom line. But it also includes a holistic take on how the workforce is faring, in order to ensure low turnover and avoid burnishing a company’s reputation.

Product Manufacturing and Safety

The way products are made and their safety are also important ESG metrics. There is greater awareness of whether materials are sourced responsibly, as well as a focus on supply chain transparency. In addition to meeting standards for sourcing and supply chain transparency, reporting can include:

• Number of product recalls

• Product certifications

• Adherence to federal and state regulations

• Disclosing any fines or legal action related to product manufacturing

Product safety is also essential in a financial sense, because a commitment to reliable products builds consumer trust and fosters bottom line stability.

Composition of the Board of Directors

The structure, makeup, and practices of the board of directors are a vital ESG metric relating to governance. Having a diversity of voices and opinions on the board, and checks and balances in place to prevent corruption, is key to the success and sustainability of a business.

Companies that disclose their leadership practices may be more accountable than those that don’t. Either way, it’s incumbent on investors to consider a company’s governance structure within a meaningful context: i.e., the relevant industry, as well as the company’s mission and goals.

Diversity and Inclusion

In terms of meeting social standards, companies must foster diversity amongst employees, as well as leadership. Adhering to clear standards around equitable hiring and labor practices can support a stronger, potentially more effective workforce.

Establishing a positive and inclusive company can range from hiring to education to including multiple languages in the workplace.

The Takeaway

ESG standards and reporting frameworks, while far from perfect, can provide investors with metrics for evaluating companies’ ability to uphold certain environmental, social, and governance factors.
Although there isn’t one set of standards for ESG reporting as yet, thousands of companies worldwide use various ESG frameworks to support their disclosures. It’s important for investors to look into the metrics companies report, and make decisions for themselves about the criteria that are important to them.

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Nov

2024

What Is Sustainable Shipping?

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

Sustainable shipping refers to the practice of reducing carbon emissions and environmental pollutants that are typically the result of maritime shipping and transportation.

Although maritime shipping tends to have a lower carbon footprint than shipping via air, rail, or road, it still accounts for about 2.1% of global CO2 emissions because most vessels still rely on fossil fuels. In addition, shipping via the ocean is responsible for pollutants such as nitrogen oxides, sulfur oxides and particulate matter.

Sustainable shipping practices seek to reduce greenhouse gas emissions through fuel efficiency, use of renewable energy sources, and redesigning ocean-going vessels of all types. The use of sustainable packaging and containers also plays a role in sustainable shipping.

Key Points

• Sustainable shipping aims to lower carbon emissions and environmental pollutants that often result from maritime shipping and transportation.

• Maritime shipping tends to have a lower carbon footprint than other types of shipping, but it still accounts for about 2.1% of global CO2 emissions.

• Shipping via the ocean is also responsible for pollutants such as nitrogen oxides, sulfur oxides and particulate matter, in addition to disrupting species’ natural habitats.

• There is a growing interest from global shipping concerns and financial institutions in supporting sustainable shipping technologies, but there are also obstacles.

• Sustainable packaging can be a factor in green shipping: the use of renewable and biodegradable packaging options may support efficient and environmentally responsible shipping practices.

Why Does Green Shipping Matter?

In light of global warming trends, the need to reign in greenhouse gases from all sources has emerged as a priority across industries, and shipping is no exception.

Investors who take an interest in green investing goals are likely aware that shipping emits a small but significant amount of the world’s CO2, which contributes to global warming, ocean acidification, loss of biodiversity, and climate change.

In addition to these emissions, shipping can cause air and water pollution, harm wildlife and destroy habitats through dredging, collisions, oil spills, and vessel routes.

Green shipping practices matter because they may help mitigate some of these climate risk factors. Sustainable shipping may also help protect the oceans themselves, which have long been part of the earth’s natural system for absorbing excess carbon dioxide.

Also, making maritime vessels more energy efficient and sustainable overall has certain business implications. Green shipping practices may help shipping companies lower operational costs and become more competitive, perhaps generating some reputational benefits as well.

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Green Shipping Initiatives

Mirroring socially responsible investing (SRI) trends across many industries today, the maritime shipping sector has seen a steady interest in making shipping more environmentally responsible. Consumer demand for greenhouse gas emissions reduction and decarbonization has accelerated in recent years, which has put pressure on the shipping and transportation sector, and created some momentum.

New Technology, New Targets

For example, the International Maritime Organization (IMO) has set a target of reducing carbon emissions from global shipping by 50% by 2050 versus 2008 levels. Reaching this ambitious goal will require the development and implementation of zero-carbon vessels by 2030, according to the World Shipping Council (WSC).

To accelerate what is in effect a technological revolution in shipping, WSC itself has proposed a $5 billion research and development program that would be funded by key players in the industry.

The Role of Financial Institutions in Green Shipping

Financial institutions are likewise finding ways to get on board with green shipping. For instance, 35 financial institutions have adopted the Poseidon Principles, a framework designed to meet the decarbonization goals of the International Maritime Organization (IMO). Collectively the 35 signatories represent 80% of the global portfolio of ship financing.

Recommended: What Is ESG Investing?

Barriers to the Adoption of Green Shipping

Although there is considerable interest in reducing greenhouse gas emissions in the shipping industry, there are also barriers that make implementation difficult. There can be hurdles when it comes to investment and financing in green shipping options, as well as challenges around ESG reporting and sustainability targets.

Some examples:

• Maritime shipping vessels are expensive, making it hard for companies to build or switch to new ones with lower carbon emissions. Also, there are emissions associated with manufacturing new vessels, canceling out a certain amount of the emissions reduction.

• Shipping is a cyclical and volatile market, making it hard to have a stable cash flow available for investment into decarbonization.

• The cost of R&D and developing new technologies to make shipping more sustainable is often high, and there’s no guarantee of commercial adoption.

• There is an increased shipping demand in developing countries, but it’s more difficult to get financing for green shipping. Investments in green shipping in developing nations tend to come with currency risks, cash flow risks, and other potential risk factors.

• The shipping sector has traditionally kept its data private, but stakeholders are now demanding more data and sustainability disclosures. Given the inconsistencies of ESG disclosure frameworks, it remains difficult to assess progress in terms of sustainability factors, and thus instituting regulations for widespread adoption is challenging.

• There is a lot of focus on easy or short-term improvements, such as using renewable energy, but less focus on the harder areas to decarbonize, such as steel and concrete production, which are material to vessel manufacturing and port construction.

• Used vehicles and vessels are often sent to developing countries. So although developed nations may be adopting lower-emission vessels, those high-emission vehicles may still be in use.

What Is Sustainable Packaging?

Sustainable packaging refers to the shift away from materials that are considered toxic for the environment (e.g., traditional petroleum-based plastics, non-recyclable cardboard, styrofoam), toward recyclable, reusable, and biodegradable types of packaging.

Sustainable packaging can include:

• Recyclable packaging such as paper, glass, and recyclable cardboard.

• Packaging made from reusable materials like recyclable paper, bamboo, wood, and others.

• Biodegradable and compostable materials like polylactic acid (PLA)-based bioplastics, often made from corn, potato, and other organic substances that biodegrade.

Why Sustainable Packaging Matters

Reducing carbon emissions is challenging in any industry owing to the various channels, direct and indirect, that can contribute to emissions. For example, the use of packaging in the shipping sector is also responsible for various types of waste and pollution.

First, because traditional packaging materials are often not biodegradable or recyclable they can add to the environmental impact of maritime shipping and other industries. While it’s nice to imagine a container ship sailing from one port to another, loading and unloading goods without any mishaps, accidents can and do occur — putting plastics, styrofoam, and other toxic materials in waterways.

Also, some materials and packaging that are labeled as recyclable or compostable don’t really get recycled, and can only degrade under specific conditions.

Thus, sustainable packaging may offer additional benefits to the shipping industry, in that recyclable and biodegradable packaging options may support greater efficiency in shipping products overall.

Sustainable Packaging Initiatives

The good news is that there are proposals to increase transparency in packaging labels, as well as the development of new materials and packaging options that are more environmentally friendly. Some ways that packaging can become more sustainable are:

• Transparent labeling

• Eliminating single-use plastic from packaging

• Removing toxic chemicals such as dyes, fragrances, and solvents

• Shipping in bulk when possible

• Switching to refillable packaging options

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Opportunities in the Green Shipping Sector

Individuals interested in ESG investing strategies can explore various investment options in the green shipping sector. Categories of green stocks to look for within the shipping sector include:

• Low- or zero-emission fuels such as green hydrogen, biodiesel, ammonia, and methanol

• Renewable energy technologies such as solar energy and wind energy.

• Exchange-traded funds (ETFs) and index funds that are focused on sustainable or ESG investments.

• In addition to investing in stocks and ETFs, choosing consumer or commercial end products from companies that are embracing sustainable or ESG principles.

• Investing in companies that use sustainable packaging, such as recycled packaging and alternative materials to plastic.

• Investors looking for fixed-income options can consider green bonds.

The Takeaway

As one of the biggest sectors in the world, there are both significant challenges and opportunities for green shipping and decarbonization of transportation. As an individual, you can participate in green shipping by investing in companies working to embrace sustainable fuel, technology, infrastructure, and supply chain alternatives.

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Nov

2024

Should I Pull My Money Out of the Stock Market?

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

When markets are volatile, and you start to see your portfolio shrink, there may be an impulse to pull your money out and put it somewhere safe — but acting on that desire may actually expose you to a higher level of risk. In fact, there’s a whole field of research devoted to investor behavior, and the financial consequences of following your emotions (hint: the results are less than ideal).

A better strategy might be to anticipate your own natural reactions when markets drop — or when there’s a stock market crash — and wait to make investment choices based on more rational thinking (or even a set of rules you’ve set up for yourself in advance). After all, for many investors — especially younger investors — time in the market often beats timing the stock market. Here’s an overview of factors investors might weigh when deciding whether to keep money in the stock market.

Investing Can Be an Emotional Ride

An emotion-guided approach to the stock market, whether it’s the sudden offloading or purchasing of stocks, can stem from an attempt to predict the short-term movements in the market.

This approach is called timing the market. And while the notion of trying to predict the perfect time to buy or sell is a familiar one, investors are also prone to specific behaviors or biases that can expose them to further risk of losses.

Giving into Fear

When markets experience a sharp decline, some investors might feel tempted to give in to FUD (fear, uncertainty, doubt). Investors might assume that by selling now they’re shielding themselves from further losses.

This logic, however, presumes that investing in a down market means the market will continue to go down, which — given the volatility of prices and the impossibility of knowing the future — may or may not be the case.

Focusing on temporary declines might compel some investors to make hasty decisions that they may later regret. After all, over time, markets tend to correct.

Following the Crowd

Likewise, when the market is moving upwards, investors can sometimes fall victim to what’s known as FOMO (fear of missing out) — buying under the assumption that today’s growth is a sign of tomorrow’s continued boom. That strategy is not guaranteed to yield success either.

Why Time in the Market Matters

Answering the question, “Should I pull my money out of the stock market?” will depend on an investor’s time horizon — or, the length of time they aim to hold an investment before selling.

Many industry studies have shown that time in the market is typically a wiser approach versus trying to time the stock market or give in to panic selling.

One such groundbreaking study by Brad Barber and Terence Odean was called, “Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors.”

It was published in April 2000 in the Journal of Finance, and it was one of the first studies to quantify the gap between market returns and investor returns.

• Market returns are simply the average return of the market itself over a specific period of time.

• Investor returns, however, are what the average investor tends to reap — and investor returns are significantly lower, the study found, particularly among those who trade more often.

In other words, when investors try to time the market by selling on the dip and buying on the rise, they actually lose out.

By contrast, keeping money in the market for a long period of time can help cut the risk of short-term dips or declines in stock pricing. Staying put despite periods of volatility, for some investors, could be a sound strategy.

An investor’s time horizon may play a significant role in determining whether or not they might want to get out of the stock market. Generally, the longer a period of time an investor has to ride out the market, the less they may want to fret about their portfolio during upheaval.

Compare, for instance, the scenario of a 25-year-old who has decades to make back short-term losses versus someone who is about to retire and needs to begin taking withdrawals from their investment accounts.

Is It Okay to Pull Out of the Market During a Downturn?

There is nothing wrong with deciding to pull out of the markets if they go south. But if you sell stock or other assets during a downturn, you run the risk of locking in your losses, as they say. Depending on how far values have declined, you might lose some of your gains, or you might lose some or all of your principal.

In a perfect world if you timed it right, you could pull your money out at the right moment and avoid the worst — and then buy back in, just in time to catch the rebound. While this sounds smart, it’s very difficult to pull off.

Benefits of Pulling Out of the Market

The benefit of pulling out of the market and keeping your money in cash is that cash isn’t volatile. Generally speaking, your cash won’t lose value over night, and that can provide some financial as well as psychological comfort.

As noted above if you make your move at the right time, you might prevent steeper losses — but without a crystal ball, there are no guarantees. That said, by using stop-limit orders, you can create your own guardrails by automatically triggering a sale of certain securities if the price hits specific lows.

Disadvantages of Pulling Out of the Market

There are a few disadvantages to pulling cash out of the market during a downturn. First, as discussed earlier, there’s the risk of locking in losses if you sell your holdings too quickly.

Potentially worse is the risk of missing the rebound as well. Locking in losses and then losing out on gains basically acts as a double loss. When you realize certain losses, as when you realize gains, you will likely have to deal with certain tax consequences.

And while moving to cash may feel safe, because you’re unlikely to see sudden declines in your cash holdings, the reality is that keeping money in cash increases the risk of inflation.

Using Limit Orders to Manage Risk

A market order is simply a basic trade, when you buy or sell a stock at the market price. But when markets start to drop, a limit order does just that — it puts a limit on the price at which you’re willing to sell (or buy) securities.

Limit orders are triggered automatically when the security hits a certain price. For sell limit orders, for example, the order will be executed at the price you set or higher. (A buy limit order means the trade will only be executed at that price or lower.)

By using certain types of orders, traders can potentially reduce their risk of losses and avoid unpredictable swings in the market.

Alternatives to Getting Out of the Stock Market

Here’s an overview of some alternatives to getting out of the stock market:

Rotating into Safe Haven Assets

Investors could choose to rotate some of their investments into less risky assets (i.e. those that aren’t correlated with market volatility). Gold, silver, and bonds are often thought of as some of the safe havens that investors first flock to during times of uncertainty.

By rebalancing a portfolio so fewer holdings are impacted by market volatility, investors might reduce the risk of loss.

Reassessing where to allocate one’s assets is no simple task and, if done too rashly, could lead to losses in the long run. So, it may be helpful for investors to speak with a financial professional before making a big investment change that’s driven by the news of the day.

Having a Diversified Portfolio

Instead of shifting investments into safe haven assets, like precious metals, some investors prefer to cultivate a well-diversified portfolio from the start.

In this case, there’d be less need to rotate funds towards less risky investments during a decline, as the portfolio would already offer enough diversification to help mitigate the risks of market volatility.

Reinvesting Dividends

Reinvesting dividends may also lead the long-term investor’s portfolio to continue growing at a steady pace, even when share prices decline temporarily. Knowing where and when to reinvest earnings is another factor investors may want to chew on when deciding which strategy to adopt.

(Any dividend-yielding stocks an investor holds must be owned on or before the ex-dividend date. Otherwise, the dividend won’t be credited to the investor’s account. So, if an investor decides to get out of the stock market, they may miss out on dividend payments.)

Rebalancing a Portfolio

Sometimes, astute investors also choose to rebalance their portfolio in a downturn — by buying new stocks. It’s difficult, though not impossible, to profit from new trends that can come forth during a crisis.

It’s worth noting that this investment strategy doesn’t involve pulling money out of the stock market — it just means selling some stocks to buy others.

For example, during the initial shock of the 2020 crisis, many stocks suffered steep declines. But, there were some that outperformed the market due to certain market shifts. Stocks for companies that specialize in work-from-home software, like those in the video conferencing space, saw increases in value.

Bear in mind, though, that these gains are often temporary. For example, home workout equipment, like exercise bikes, became in high demand, leading related stocks higher. Some remote-based healthcare companies saw share prices rise. But in some cases, these gains were short-lived.

Also, for newer investors or those with low risk tolerance, attempting this strategy might not be a desirable option.

Reassessing Asset Allocation

During downturns, it could be worthwhile for investors to examine their asset allocations — or, the amount of money an investor holds in each asset.

If an investor holds stocks in industries that have been struggling and may continue to struggle due to floundering demand (think restaurants, retail, or oil in 2020), they may opt to sell some of the stocks that are declining in value.

Even if such holdings get sold at a loss, the investor could then put money earned from the sale of these stocks towards safe haven assets — potentially gaining back their recent losses.

Holding Cash Has Its Benefits

Cash can be an added asset, too. Naturally, the value of cash is shaped by things like inflation, so its purchase power can swing up and down. Still, there are advantages to stockpiling some cash. Money invested in other assets, after all, is — by definition — tied up in that asset. That money is not immediately liquid.

Cash, on the other hand, could be set aside in a savings account or in an emergency fund — unencumbered by a specific investment. Here are some potential benefits to cash holdings:

First, on a psychological level, an investor who knows they have cash on hand may be less prone to feel they’re at risk of losing it all (when stocks fluctuate or flail).

A secondary benefit of cash involves having some “dry powder” — or, money on hand that could be used to buy additional stocks if the market keeps dipping. In investing, it can pay to a “contrarian,” running against the crowd. In other words, when others are selling (aka being fearful), a savvy investor might want to buy.

The Takeaway

Pulling money out of the market during a downturn is a natural impulse for many investors. After all, everyone wants to avoid losses. But attempting to time the market (when there’s no crystal ball) can be risky and stressful. For many investors, especially younger investors with a longer time horizon, keeping money in the stock market may carry advantages over time.

One approach to investing is to establish long-term investment goals and then strive to stay the course — even when facing market headwinds. As always, when it comes to investing in the stock market, there’s no guarantee of increasing returns. So, individual investors will want to examine their personal economic needs and short-term and future financial goals before deciding when and how to invest.

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FAQ

Should you pull out of the stock market?

Ideally, you don’t want to impulsively pull your money out of the market when there is a crisis or sudden volatility. While a down market can be unnerving, and the desire to put your money into safe investments is understandable, this can actually expose you to more risk.

When is it smart to pull out of stocks?

In some cases it might be smart to pull your money out of certain stocks when they reach a predetermined price (you can use a limit order to set those guardrails); when you want to buy into new opportunities; or add diversification to your portfolio.

What are your options for getting out of the stock market?

There are always investment options besides the stock market. The ones that are most appealing depend on your specific investing goals. It may be a good idea to speak with a financial professional to get an idea of what specific investment options may be best for your specific goals and situation.

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Current Federal Funds Rate

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The Prime Rate

Savings Accounts and Certificates of Deposit

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The Takeaway

Tips for Investing in Tech Stocks

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The Takeaway

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Why is investing in tech stocks so popular?

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ESG Basics

Common ESG Criteria Companies Use

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ESG Reporting Frameworks

Global Reporting Initiative (GRI)

International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards

Sustainability Accounting Standards Board (SASB) Standards

Benefits of ESG Metrics

Key ESG Metrics

Carbon Footprint

Energy Efficiency

Employee and Worker Health and Safety

Product Manufacturing and Safety

Composition of the Board of Directors

Diversity and Inclusion

The Takeaway

What Is Sustainable Shipping?

Why Does Green Shipping Matter?

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Green Shipping Initiatives

New Technology, New Targets

The Role of Financial Institutions in Green Shipping

Barriers to the Adoption of Green Shipping

What Is Sustainable Packaging?

Why Sustainable Packaging Matters

Sustainable Packaging Initiatives

Opportunities in the Green Shipping Sector

The Takeaway

Should I Pull My Money Out of the Stock Market?

Investing Can Be an Emotional Ride

Giving into Fear

Following the Crowd

Why Time in the Market Matters

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Is It Okay to Pull Out of the Market During a Downturn?

Benefits of Pulling Out of the Market

Disadvantages of Pulling Out of the Market

Using Limit Orders to Manage Risk

Alternatives to Getting Out of the Stock Market

Rotating into Safe Haven Assets

Having a Diversified Portfolio

Reinvesting Dividends

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