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Navigating Volatility: Investing Strategies for Uncertain Times

03.15.2020 by admin // Leave a Comment

Investing during a volatile market is not for the faint of heart. Some days there will be wild swings up and other days there will be wild swings down. News will come out that you think will drive a stock or stocks higher and instead the exact opposite will happen. A Morningstar study found that investors had better returns during times of less volatility, but if you want to keep investing in 2020 you’ll have to accept you’ll be investing during volatility. How should you invest during times of volatility? Accumulate extra cash to invest, stick with what you know, don’t try to time the market and leverage financial resources.

Accumulate Extra Cash To Invest

To invest in a volatile market, you need to have money to invest. Don’t sell investments for the sole purpose of getting cash to invest in another stock. Continue to stick to your investment plan (assessing rebalancing if needed), and look for other ways to generate more cash. This could be cutting back on spending in the short term, starting a side hustle to generate a little extra cash or looking for ways to advance your career and get a raise. COVID-19 has made it harder in the short term to generate extra cash so your best bet is cutting back spending as much as possible.

Don’t “spend” too much cash buying stocks though. And, definitely don’t empty your emergency fund. You should always have an emergency fund on hand in case something comes up. Especially with the recent events we are already seeing businesses temporarily shutter and uncertain economic times. Your paycheck may not be as guaranteed as you thought back in January. You don’t want to find yourself in a situation where you’re short on cash and have to sell stock.

Stick To Investments You Know

Don’t be a long term investor turned day trader in volatile markets. It can be alluring to identify a stock that you think is beaten down and will pop. But if that doesn’t happen you now have a stock you likely wouldn’t have bought otherwise for the long term or you have to sell it in the short term for a loss. Even then, there is no guarantee you’ll make money off it in the short term.

I bought Bank of America stock back in 2010 thinking that the stock was way down and it had to pop. I ended up losing money when I finally sold it a few years later! What I should have done was added to my position in Apple. I was very familiar with Apple and felt confident in the long term it would continue to rise. Buy the stocks you’ve always valued and wanted to own but were too expensive for you to buy before.

If you don’t know anything about stocks and are now interested in buying stocks here are a few things to get you started. You inevitably will lose money on a few of your positions and feel like you bought or sold at least one of your stock positions at the wrong time. That happens to everyone and is completely normal. Like everything you need to start somewhere and you’ll learn as you go. Don’t put all of your eggs in one basket. Buy ETFs which track the market and hold a variety of stocks which help you diversify. Or, buy a little bit of multiple stocks that you like. It’s important to diversify your portfolio, no matter how small it is.

Find a friend you trust that invests in stocks already and ask to pick their brain. If they tell you about a stock they like and have made a bunch of money on be cautious though. They bought that stock at a different time and it’s always possible a stock that has done well recently may not do well moving forward.

Consider Buying Dividend Stocks

There is no guarantee that the underlying stock will rise in value but you’re at least getting a cash flow in uncertain times by investing in dividend stocks. Can companies stop paying dividends? Yes, companies can stop or reduce their dividend payments to shareholders. Market conditions may result in temporarily dividend reductions or eliminating them all together. At this point we don’t know what the economic repercussions will be for the recent events but seeing that cities are announcing temporary lockdowns and the travel restrictions you should expect there is some risk to dividend payments. If that makes you uneasy before you buy a dividend stock check to see how much cash the corporation has. This is from November 2019, but at the time CNBC reported that Microsoft, Berkshire Hathaway, Alphabet and Apple all had more than $100 billion of cash. Both Microsoft and Apple are dividend stocks.

When Should You Buy Stocks

Charles Schwab compared the returns of a disciplined investor that sat tight and stayed the course no matter how the market performed, a reactive investor that pulled their money out in 2008 and kept it out and a waffler investor that would move money out during negative returns and add money in during years of positive returns. Not surprisingly the disciplined investor made the most money.

Be a disciplined investor by setting aside a little money from each paycheck to invest and continuously investing that money. Stay the course and don’t let the daily, weekly or monthly swings phase you. If you see a stock crater one day and you want to invest more that day absolutely go ahead and buy it. But, don’t then try to time the pop and sell it at a near term high. If that doesn’t sway you, don’t forget, the taxes on long term capital gains are much better than the taxes on short term capital gains.

One example of when I did this personally was when I started buying Zoom ($ZM). I started buying Zoom at $89.17 a share on June 24, 2019. It jumped to $97.18 on July 18, 2019 and I bought more. The stock then went down all the way to $64.05 on December 6, 2019. It was hard to buy a stock continually declining, but I continued to buy all the way down to $64 because I believed in the company. I could never have predicted the recent events and in retrospect I should have bought more in December! You could say I got lucky buying in December, but I felt very unlucky from July to January.

Financial Resources To Leverage

The media writes clickbait titles. They are meant to sound the alarm and get you to click the title. I browse CNN Money, CNBC but I base most of my investing decisions on other pieces of information. For stocks I’m interested in, I closely follow the earnings announcements and 10-Ks filed. I use the stock app on my phone and add all the stocks I currently own and potentially want to own to the watch list. That way, I can see how the stock is trending, EPS, P/E ratio and dividend yield all in one place. When I want to see more information and see how the stock has trended I usually go onto my laptop and leverage Yahoo Finance.

These last few weeks the market has had wild swings and has been very volatile. Have you changed your investment strategy and if so, how?

How to Generate Passive Income

01.20.2020 by admin // 6 Comments

Generating passive income isn’t always the easiest to start, but it’s a great way to help you build wealth. It’s important to note that most income isn’t passive income. This is because most income requires someone giving their time and effort to generate the income. So, what exactly is passive income and how can you generate passive income?

What Is Passive Income?

Before we get started on how to build a passive income stream, what is passive income? Passive income is income that requires little or no effort to earn, maintain and grow that income. Passive income examples include dividends from dividend stocks, interest from high yield savings account and dividends from REITs.

There are additional activities that sometimes are considered passive income but do require more time and effort. The amount you make driving for Uber depends on how many hours or how many trips you drive for Uber. Flipping items on eBay require some time to find the items, post and price the items and then ship the items once sold. Becoming a landlord takes time to identify the right property, get the right contacts, find a renter and then both maintain the house and the relationship with the renter.

There are other activities which require upfront work but can turn into passive income. A good example is blogging or creating your own e-book. It takes quite a bit of work up front but eventually you can turn it into passive income. What are ways you’ve found to generate passive income streams?

See Also: How to Start Investing

How to Create Passive Income With No Money

Many passive income streams require money to get started. You put your money in a high yield savings account for example and every month you’ll automatically earn interest. In order to invest, you need to have money. What if you want to create a passive income with no money today? Passive income ideas with little money include selling stuff you own that you don’t use or get a cash back or rewards credit card. If these aren’t options for you, you can still start a passive income stream. However, you’ll need to put in a bit more effort to get a little extra money to get started. Starting a side hustle is the best option here.

Sell Stuff You Own That You Don’t Use

Do you have household items, clothing or other stuff you don’t use lying around? Make additional cash by selling it on Poshmark, eBay, OfferUp or another site online. Will you make as much as you originally paid for it? Likely not if you paid full price. But, if you have no use for it anymore you might as well get some cash for it and use that cash to start a passive income stream.

Get A Cash Back or Rewards Credit Card

One very easy way to start a passive income stream is to get a cash back or rewards credit card. This doesn’t mean spending additional money. What it does mean is to generate dollars, or rewards points, from the money you are spending anyways. Putting every purchase on a credit card will also help track your expenses. Sometimes with cash it’s harder to remember where exactly you spent the money. This approach won’t put actual cash in your pocket. Instead, it’ll either help reduce your spending because you can now use points to buy things or it’ll help reduce your credit card bill with cash back. Instead of spending more money, save the money you would have spent.

Make More Money Than You Spend

It takes money to make money passively. The more money you have, the more money you can make through passive income streams. Luckily you don’t need a lot of money to start building a passive income stream. Whether you increase your income or cut your spending it doesn’t matter, but you need to start saving money to build a passive income stream. Even if you only have enough money to generate $1 of passive income, it’s something. It’ll slowly grow over time, and grow quicker as you save more money to put toward your passive investments.

There are two ways to get the money to start a passive income stream. You can start making more money or start spending less money. You can make more money through advancing your career or a side hustle and eventually through your passive investments.

The other way to get enough money to generate a passive income stream is to spend less money and be smart with your spending. Ultimately you need to do a combination of both but your top focus should be earning more money. Eventually you’ll reach a point where you can’t save any more money whereas with making money the sky is the limit. It is much easier to save money to invest when you have a higher salary.

Put Your Savings in a High Yield Savings Account

The easiest way to start building a passive income stream is to put your cash in a high yield savings account. Every dollar you save, whether for investing or for an emergency fund, should be generating additional income for you. Any money you have saved for an emergency fund or for investing later should be held in a high yield savings account. Most of the online only banks tend to have higher interest rates (such as Marcus by Goldman Sachs and Ally Bank). Right now the highest interest rates are around 1.7% APY (annual percent yield). This means if you put $100 in the account in 12 months you will have made $1.70 in interest. Not sure where to put your money? Nerd Wallet shares the top 10 best high yield savings accounts.

Look for Sign Up Bonuses at Banks

Sometimes banks run promotions where you can make $100 by signing up for a checking account or savings account! Usually there are conditions like a minimum deposit amount, setting up direct deposit or holding the money in the account for a set amount of time. Money Crasher’s has a list of 31 bonuses banks are running now, with bonuses up to $300!

Invest in Passive Investments

Once you have some money to invest, you can start investing in different types of passive investments. The least amount of effort required for building a passive income stream is to select an investment with a guaranteed return. However, those options with the lowest risk and lowest effort also tend to be the lowest yielding.

There are many different types of passive investments. Passive investment examples include Certificates of Deposit, Stocks, Dividend Stocks, Mutual Funds, ETFs, Crowdfunded REITs, Private Companies and more. Stay tuned for part 2 where I go into detail about the different types of passive investments!

If you’re ready to start generating passive income, check out the ultimate list of passive income ideas to get started.

Benefits of a Roth IRA

08.26.2019 by admin // 2 Comments

There are several retirement account options available in the United States including Traditional IRAs, Roth IRAs and 401(k) plans. Even if you already contribute to a 401(k) plan at work, there are many benefits unique to a Roth IRA. You should contribute to a Roth IRA as part of your retirement savings strategy.

What Is A Roth IRA

A Roth IRA is a retirement account that offers you a tax benefit when you retire. Unlike traditional IRAs and 401(k) plans Roth IRA contributions are not tax deductible but you also do not pay taxes when you withdraw money at age 59 ½ +. There are certain Roth IRA rules such as income requirements and contribution limits you need to follow.

Broad Variety of Roth IRA Investment Options

In a Roth IRA account you can select what you want to invest in such as stocks, bonds and mutual funds. You can invest in nearly any financial asset but you cannot invest in other assets like artwork for example. Any financial asset offered by the financial institution you have your Roth IRA with can be invested in through your Roth IRA. This is a benefit offered by a Roth IRA that you don’t have in your 401(k) plan. A 401(k) plan offered by your employer typically only has a few options of what you can invest in.

Roth IRA Tax Benefits

Roth IRAs are funded with post tax contributions. This means you pay taxes on your Roth IRA contributions before you put it in the account. This is different from a 401(k) plan where you contribute money that hasn’t been taxed yet. Once the money is in your Roth IRA account the earnings grow tax free.

Borrowing Money from Roth IRA Earnings

It’s not recommended that you borrow money from a Roth IRA. However, if you get in a bind, there are a few benefits to taking out a loan / distribution from a Roth IRA. With a Roth IRA, you may have to pay a 10% penalty for an early withdrawal but there are a few exceptions. You can withdraw all or part of your money penalty free for 60 days as part of a Roth IRA rollover but you must pay back the full amount in that time frame.

You can also request a qualified distribution that you don’t have to pay back for a few reasons including buying or building your first home (up to $10,000 cap), certain education expenses or if you become disabled. Investopedia shares more details here about withdrawing from a Roth IRA. If this is something you are considering, it is best to contact your financial institution first. However, when you withdraw money from your Roth IRA you lose the tax benefits of those contributions earning capital gains and dividends tax free.

With a 401(k) loan, you can only take a loan out for a current 401(k) plan. You also may have to pay taxes on your loan and interest which is typically an interest point or two above the prime rate. Your loan is also limited to $50,000 or 50% of your balance, whichever is lower.

Roth IRA Contribution Withdrawals At Any Time

With a Roth IRA you are always able to withdraw your contributions penalty free (note: contributions, not earnings). You’ve already paid taxes on your Roth IRA contributions. Therefore, you can withdraw your contributions at any time with no restrictions. If you withdraw earnings on those contributions though, you may be taxed or penalized on withdrawing this money.

Once you hit 59 ½, as long as you’ve held the account for at least five years, you can take distributions on all money within the account and do not have to pay taxes on that money. Both 401(k) plans and Traditional IRA plans require you to pay taxes when you withdraw the money.

No Minimum Required Distribution for Roth IRAs

There are no required minimum distributions for Roth IRA accounts. Both 401(k) plans and Traditional IRA plans have required minimum distributions beginning at age 70 ½. If these plans are your only retirement saving strategy this could mean you’re in a high tax bracket depending what your required minimum distribution is. You don’t have the option to withdraw less to end up in a lower tax bracket. Since there is no required minimum distribution beginning at 70 ½ with a Roth IRA you don’t ever have to withdraw from this account. You can opt to pass this money onto your heirs.

Roth IRA Benefits Summary

It is a good retirement strategy to have a Roth IRA along with a 401(k) or traditional IRA to reduce the amount of taxes you’ll have to pay once retired and also to take advantage of the tax benefits offered by a 401(k) plan while you’re working. Having a mix of both will help reduce your taxes both now and in retirement. You’ll also have more flexibility with investment options and flexibility to borrow money from the account if you’re ever in a desperate situation.