Investing your money is one of the smartest ways to increase your income. Big names, like Warren Buffett, made their fortune by investing in stocks. And many everyday people make smaller windfalls through investments.
Investing is a way to make your money work for you. You put your money towards something expecting to receive more in the future. While you go to your day job, your invested money is making a side income. That helps with saving up for college, retirement, or a house.
You see the wisdom of investing, but where do you begin? A good place to start is knowing yourself. That’s where this post comes in. If you plan on investing, you need to ask yourself 5 questions ahead of time. This way you have a battle plan going into the investment world.
Are you financially prepared to invest?
There are 3 financial steps you need to take before you start investing.
One, you need to pay down your debts. It’s almost always better to pay off your loans before investing your money. The interest rates on your loans could be higher than the interest rates on your investments. In the long run, you’ll make more money by paying off your debt first.
Two, you want an emergency fund. There are bad investments out there. If you make a mistake, you want some money to fall back on. Also remember that things in life happen. Sometimes you lose your job or sustain an injury. An emergency fund gives you a safety net so you can invest money with peace of mind.
Three, you need to save up for an initial investment. Different investments require different amounts of money to get started. There are ways to invest if you only have a little money. Other investments require a lot upfront. Depending on how you want to invest your money, you’ll need to save up an appropriate amount for the initial investment.
1. What are your goals with investing?
Are you aiming for a short term or long term goal? A short term goal could be getting enough money for an engagement ring. A long term goal could be saving up for retirement.
How much do you want to make? When do you need that money by? Knowing your goals will help you choose what kind of investments to make.
2. What will you invest in?
There’s a lot of options out there:
• Real estate
• Cash flow from a business
• Savings accounts with high-interest rates
And there’s more. Researching your options will help you make a decision. Some investments are riskier but offer higher returns. Conversely, some investments are safer but yield lower returns.
3. What’s your approach to investing?
Different people have different circumstances. A young, single man will make different investments than a mother nearing retirement.
Another factor to consider is personality. One person might prefer taking on riskier investments to gain higher returns. But someone else may be more comfortable investing conservatively. They can go for a low risk, low return investment.
What about you? Do your circumstances affect what kind of investments you can make? Based on your personality, do you see yourself making certain kinds of investments?
4. Who will help you invest?
Are you a do-it-yourselfer? Or do you want a financial advisor? Some don’t mind paying a fee to have face-to-face conversations with a professional. Advisors can be a powerful ally and resource in understanding investment options. Others prefer to do it alone.
Robo-advisors are becoming more popular. They are easy-to-use apps for investing your money. There are a lot of options on the internet. Two popular choices are Betterment.com and E*TRADE.com. These platforms allow you to manage money online.
5. What do you want out of investing?
The most important part of investing is knowing yourself and what you want to get out of investing. Ask yourself if you’re financially ready to start investing. Ask yourself what goals you hope to accomplish.
Answering these questions will give you direction as you navigate the complex world of investing. It will give you clarity on what decisions are right for you.
Will you make mistakes along the way? Sure. But you can make fewer mistakes by answering these questions ahead of time. Save yourself money and time by knowing yourself first.
Thinking About Annuities? Here Are 10 Things You Need To Know
Most people think annuities are simple: you hand over a lump sum payment, agree to wait a certain amount of time, and then you start receiving monthly checks. But annuities are complex investments that come in many different packages. They can offer tremendous benefits if set up correctly and provide a steady stream of income during retirement.
If you are thinking about an annuity, here are 10 things to know before you buy.
1. Deferred Annuities Offer Tax-Advantaged Savings For Retirement
A deferred annuity has two parts: the accumulation phase and the payout phase. In the accumulation phase, your money sits and grows over time, building up the value the longer you wait. You are in control of when you decide to start drawing income from the annuity. Therefore, you are also in control of when you will start paying taxes. During the payout phase, you will likely be in a lower tax bracket than during your working years, allowing you to keep a larger portion of your income.
2. There Are Ways to Reduce The Taxes You Pay
One of the potential drawbacks of a deferred annuity has to do with the way you withdraw money and the taxes owed on the payments you receive. Essentially, you are receiving earned interest first, which is taxable, before being paid back your principal, which is tax-free. A way around this is to convert a deferred annuity into an immediate deferred income or immediate income annuity. With these types of annuities, the monthly payment you receive is a mix of principal and interest, so only a portion of the payment is taxable.
3. You Can Switch Out Of One Annuity And Into Another
If you decide that your current annuity no longer fits your needs, under most circumstances you can switch into a different annuity without any tax consequences as a “1035 exchange.” For example, if you invested in one type of annuity in your 40’s or 50’s and now find that in your retirement years you prefer a fixed-rate annuity, you can make the switch, and as long as you had your original annuity long enough, there would be no surrender fees.
4. A Life Insurance Policy Can Be Swapped For An Annuity
If you have a cash-value life insurance policy that is no longer needed, you can use a “1035 exchange” to switch the life insurance policy into an annuity tax-free. As an example, if you convert a life-insurance policy into an income annuity, your policies’ cash value immediately becomes a stream of income when converted. And by converting to an annuity, you decide how long you want to receive that income by setting the terms of the annuity.
5. Red Flag: Fixed Index Annuities Have Some Drawbacks
The allure of a fixed index annuity is strong. You get to participate in the gains from a rising stock market without any worries of losing money in down markets. But the upside gains are capped, and depending on those caps, you may be losing a considerable amount. For example, a fixed index annuity may have a 6% cap rate. If the index gains 5% in a year, you may get all 5% credited to your account. But if the index gains considerably more, like 10%, you would only get 6% since your gain is capped. The annuity could also carry a participation rate, meaning you’ll get even less of the actual index gain. Be sure to read the fine print and shop for the best deal.
Come back to The Capitalist tomorrow for part 2 of the list.
Stocks Soar Again, Yet Doubt Remains That This Rally is Real
Stocks climbed across the board on Monday, at least temporarily reversing the losses the market experienced last week.
The Dow Jones Industrial Average gained 1,627 points to close 7% higher, following a 7% gain for the S&P 500 and a 7.3% gain for the Nasdaq.
Coming off a week that saw the Dow lose ground for the third time in a month, Monday’s market rally was due to positive news in the fight to contain the coronavirus pandemic.
Stocks and Coronavirus Peak
Newly reported cases fell to 28,200 on Sunday. This reversed a trend that saw 30,000 new cases on Thursday, 32,100 on Friday and 33,260 on Saturday according to the latest data from Johns Hopkins.
While it is far too early to tell if the number of new cases has peaked, the market took the decline in new cases on Sunday as an indication that things could get back to normal much sooner than even the most optimistic predictions.
New York State reported the first daily decline in coronavirus-related deaths, with 594 new coronavirus deaths on Sunday after a reported 630 on Saturday.
“Incoming data suggests NY state might peak sooner than (Governor) Cuomo’s optimistic case,” said Tom Lee, head of research at Fundstrat. “With better visibility on the healthcare crisis in the US, particularly, on a potential to model a national peak, we believe buyers are now taking control.”
Billionaire Bill Ackman, who famously bet the coronavirus outbreak would tank the stock market and turned $27 million into $2.6 billion, has now turned bullish on stocks.
“I am beginning to get optimistic,” said Pershing Square’s Bill Ackman in a tweet on Sunday. “Cases appear to be peaking in NY. Almost the entire country is in shutdown.”
Peter Boockvar, chief investment officer at Bleakley Advisory Group added “It seems that each day that passes we seem to be getting to a better place on containment. It’s still a long road ahead, but some of the more dangerous places seem to be getting some control of it.”
Doubt Still Remains
Despite the growing optimism, many investors believe there’s still plenty of trouble to come for the markets.
Citigroup’s chief global equity strategist Robert Buckland says corporate earnings could fall by 50% in 2020 due to the coronavirus pandemic. He also mentioned that stock prices should drop an equal amount to reflect the expected decrease in profits.
“Typically, stock markets fall the same as EPS in a recession, but with a lead/lag relationship. With global equities currently down around 30%, we are not convinced they are pricing in the likely EPS collapse.”
Matt Maley, chief market strategist at Miller Tabak, believes another significant drawdown is in the cards.
“This is more a bear market trap. I just think we’ve had a first period of liquidation. But I think we could have more of it,” he told Yahoo Finance.
“We’re in a de-risking process and now we have to have the companies, which have loaded up to the gills in terms of debt over the last 12 years. As they de-risk and deleverage themselves, that is going to keep the economy from picking back up the way it did following the 2018 deep correction” he added.
For investors who do not worry about another significant decline, Maley does have some advice.
“With the market already down as much as it is, you can start dipping your toe back in. You just want to be able to go into the the high-quality companies with great management … that have great balance sheets.”
Investors Are Bullish Right Now, and That’s a Bad Sign for the Market
A recent survey by Royal Bank of Canada showed that 58% of institutional investors are “bullish” or “very bullish” on the market right now. This could spell bad news for those hoping the worst of the drawdown is behind us.
The survey, conducted between March 25 and 31, shows that even after last month’s tumultuous ride, investors are more bullish today than they were back in December when everything was sailing along smoothly.
Even more concerning, 57% of investors say stock valuations are “attractive” or “very attractive” today. This is a new record for RBC’s survey.
“I’m concerned that we have not seen the lows yet,” said Lori Calvasina, RBC’s head of U.S. equity strategy.
“This surprisingly high level of bullishness supports our own view that we haven’t yet seen investor capitulation, echoing what we’ve seen in other data sets. We view capitulation as a necessary, though not sufficient condition for stock market bottoms in major drawdowns” she added in a note to clients last week.
These bullish investors believe that the Federal Reserve will continue supporting the economy with its zero-interest-rate policy and the $700 billion quantitative easing plan. They also believe that the economic impact of the coronavirus pandemic will be “manageable.”
The 58% “bullish” or “very bullish” reading is the highest the RBC U.S. Equity Investor Survey has had since it debuted in early 2018.
Perhaps the most surprising data from the survey shows that despite the record-level of bullish optimism, a significant number of respondents believe there’s still plenty of pain to be doled out by the market.
Only 19% of those surveyed believe the market hit bottom in the first quarter. Meanwhile, 57% believe that we are going to see the market head lower and reach a new bottom this quarter. Additionally, 15% don’t anticipate stock bottoming until Q3 2020. The 9% of those surveyed believe we won’t see the bottom until Q4 2020 or later.
And despite all the chatter in the news about a quick economic recovery once new cases of coronavirus plateau, the RBC survey shows that investors aren’t quite as optimistic as some may hope.
Only 19% of respondents believe we will get a “V”-shaped recovery. 41% believe that we will see a ‘W’-shaped recovery and 35% see the country going through a slower “U”-shaped recovery.
Some banks on Wall Street are expecting massive GDP contracting as high as 30% during the second quarter. Those responding to the survey, however, weren’t quite so bearish.
Most believe that the country’s GDP won’t contract by more than 20% in any quarter. They also think that if we do get a recession, it will end in the fourth quarter.
It could be more bad news for the market if those numbers end up worse than predicted.
“If evidence that the most negative GDP quarter will be worse than 20% and that the contraction will last beyond 3Q emerges, it is likely to destabilize the market,” the RBC strategists wrote. “If evidence emerges that the impact will be less severe, it can help the stock market stabilize and move higher” they added.
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