Finances get tight, especially now as prices seem to continue to go up.
Increased costs out of pocket mean less money to invest in saving for your goals.
So, how do you handle saving for long-term goals, let alone short-term goals, plus maintaining retirement savings without going broke?
Follow these simple steps:
Start with a budget. Make sure you are covering the cost of living, i.e. mortgage/rent, food, utilities, and any other essentials such as transportation.
Next, you have to make sure you set money aside for emergency funds, rainy day funds, and of course, retirement.
Once you have those bases covered, you need to prioritize your goals: First by long-term, midterm, and short-term. Then by importance. Saving for college may outweigh that cross-country European adventure.
With priorities set and savings goals determined, you need to figure out how to divide up the money you have left over. The key here is to make sure the things that are necessities are funded consistently, without exception. Decide what amount of money you can afford each paycheck and have it automatically put into a high-yield savings account.
Speaking with a financial professional can help you work through the math of longer-term, higher-ticket items. They can help you budget and map out a plan that works for you and your family.
If you need help, please reach out, we love being able to assist people with reaching their financial dreams.
Every year millions of people set new year’s resolutions. However, very few can stick to their resolutions long-term. A study done by the University of Scranton found that 23% of people quit their resolution after 1 week. Only 19% stick to their resolution for at least 2 years.
As advisors, we want to help you succeed, not just financially, but with everything in life. So here are some tips for sticking to your resolutions.
Know Your “Why”. Many people set a goal but their why is “just because”. If you don’t know why you are doing something, and that why is not a driving force, you are less likely to do it. An example of a resolution with a good why is: I want to lose weight and be in shape so that I can play with my kids/grandkids without being out of breath quickly. Your kids/grandkids are now motivating factors in your goal, and you are more likely to do it for them.
Setup Accountability. In our experience, you are more likely to succeed at anything if someone, or something, is there to hold your feet to the fire. Partner with a family member or friend that can help nudge and push you to your goal.
Plan, Plan, Plan. We can all agree that one of the biggest reasons for not reaching a goal is that we don’t plan how to get the goal. We want to lose weight, but don’t have a diet and exercise plan. We want to go on a big vacation, but don’t plan how to save up for it. Take the time to plan out the details of how to reach your goal.
We wish you all a Happy New Year and may we all be in the 19% to accomplish our resolutions.
Have you ever gotten a present you didn’t really want but knew that you kinda sorta needed? (For example, socks.) Just before Christmas, that’s exactly what the Federal Reserve decided to give the country. Except the present wasn’t socks, but another interest rate hike meant to combat inflation.
Suddenly, socks don’t seem so bad, do they?
The markets reacted predictably, with the Dow dropping over 750 points the following day.1 So, in this message, we want to ensure you know what’s currently going on during the last few weeks of this year and what’s potentially on the table for next. We also want to assure you that our team has expected this. That way, armed with both understanding and assurance, you can focus on enjoying the holidays and spending time with your family.
In short, all the things that matter.
Understanding the Fed’s Most Recent Move
On December 14, the Federal Reserve announced their seventh and final interest rate hike of 2022, bringing the Federal Funds Rate to a range of 4.25% to 4.50%.1
Now, what’s interesting about this move isn’t that it happened. Everyone knew another rate increase was coming. What’s interesting is the number the Fed chose: 0.50%.1
It’s easy to forget, but interest rates were barely above zero less than twelve months ago. Back then, the Fed was still trying to stimulate the post-COVID economy by keeping rates low and buying billions of dollars in bonds every month. Unfortunately, while this was going on, inflation was starting to ramp up, too.
Think of it like hitting the accelerator on your car…right before you hit that patch of ice.
The Fed began reversing course in March, but it wasn’t until June that they began hiking rates in earnest. What followed was the fastest rise in interest rates since the 1980s, all designed to slow the economy and bring prices down. Over the next several months, the Fed raised rates by 0.75% at a time.2 That may not sound like much on its own, but the full scope becomes clear when you realize that rates have gone from 0% to over 4% in just nine months.
The Fed’s latest increase, however, was only 0.50%, which we haven’t seen since back in May. It’s the first sign the Fed may now be moving to slow the pace of rate hikes – although there are no plans to end the hikes anytime soon. (More on this in a minute.)
Interest Rate Changes in 20222
Date
Rate Change
Federal Funds Rate
3/17/22
+0.25%
0.25% to 0.50%
5/2/22
+0.50%
0.75% to 1.00%
6/16/22
+0.75%
1.5% to 1.75%
7/27/22
+0.75%
2.25% to 2.5%
9/21/22
+0.75%
3% to 3.25%
11/2/22
+0.75%
3.75% to 4%
12/14/22
+0.50%
4.25% to 4.50%
So, why is the Fed exploring a slower pace of increases? To answer that, imagine heating a mug of hot cocoa. You put the mug in the microwave for about a minute, only to find your drink is nowhere near warm enough. So, what do you do? One approach would be to heat it for another minute – there’s no chance your cocoa won’t be hot after that. But there is a chance your drink will end up curdling…or maybe even exploding all over the inside of your microwave!
Instead, you’d probably continue heating your cocoa in ten-second bursts, checking the temperature after each increment. It’s a bit more work, but it ensures your cocoa ends up exactly how you want it to be.
That’s what the Fed is doing now by dialing back the pace of their rate hikes. They’re giving themselves a chance to see what effect each “ten-second burst” has on both prices and the overall economy. The reason they feel comfortable with doing that now is that the rate of inflation is slowing, too.
According to the latest data, inflation slid from 7.7% to 7.1% in November.3 That’s a positive sign – especially as it’s a sharper decrease than economists expected. And it’s why the Fed feels a bit more comfortable with hiking interest rates at a slower pace.
So, does that mean all these interest rate spikes are working? The answer is yes – to an extent.
You see, when the Fed raises rates, what they’re trying to do is decrease economic activity. By making it costlier to borrow money, the Fed wants to decrease how much consumers spend money. It seems counterintuitive – after all, we’re used to the idea of economic growth being a good thing! As spending goes down, companies have no choice but to lower their prices to attract new business. Lower prices equal lower inflation.
The issue right now is that while prices are starting to go down, they are not going down evenly. Furthermore, not all these decreases can be directly tied to interest rates. For example, there’s an obvious link between interest rates and home prices. So, it should come as no surprise that the housing market has been falling for months. Auto loans are pricier too, which is why used-car prices are starting to fall.
But other areas of the economy aren’t quite so tied to interest rates. For example, two of the major sources of inflation this year have been food and fuel. Both have started to level off, but this is largely due to post-pandemic supply chains finally getting sorted out and the world adjusting to geopolitical issues like the war in Ukraine. As far as inflation is concerned, the effect is the same – but the cause isn’t always tied to interest rates.
The reason that matters is that in other areas, higher rates are not having the effect you might expect. For example, take the labor market. Oftentimes, when rates go up, businesses cut back on hiring or delay giving raises to their employees. So far, neither is happening. Unemployment is still near a 50-year low. Wages continue to grow at an unusually fast rate. Hiring is beginning to slow, but nowhere near what the Fed likely expected.
The result is that consumer spending continues to motor along. With most Americans having jobs and extra savings, families continue to spend. That’s the main reason we haven’t entered a recession yet. But it’s also one of the reasons that prices – although cooling! – continue to run stubbornly hot.
It also means that, while the Fed may be slowing the pace of their rate hikes, there are no plans to stop anytime soon.
Looking Ahead
On December 14, the Fed also unveiled their projections for 2023. That’s important, because these projections reveal the Fed’s intentions for the coming year, allowing us to plan ahead.
Due to all the factors, we’ve just gone over, the Fed projects they will continue to raise rates throughout the New Year. Most Fed officials predict rates will rise to 5.1% by the end of 2023 (up from 4.25% now), but that’s just the median.4 Five officials thought 5.25% was more likely, and two went as high as 5.6%. That’s significantly higher than what the Fed predicted just a few months ago when they projected rates rising to around 4.6% for 2023.
The last time interest rates were over 5% was all the way back in 2006.2 As you can imagine, this would have a profound effect on the economy, and the Fed knows it. In fact, the Fed forecasts that unemployment will rise to 4.6% next year – up from 3.7% right now – and remain near that level through 2024.4 As a result, they also project a meager 0.5% in economic growth for 2023.4 That’s not technically a recession, but it will probably still feel like one.
Now, it’s important to remember that this is a forecast. Anyone who watches the weather knows how often forecasts change. Inflation could cool faster than anticipated, nixing the need for such high interest rates. Alternatively, inflation could continue being stubborn. Or, the Fed might raise rates exactly how they predict, only to find the economy remaining surprisingly resilient.
What it means for the markets – and for us
In 2022, there has been a spike in market volatility before and after every hike. Don’t be surprised if that continues in 2023. At the same time, investors have been playing a game of chicken with the Fed all year long, seeming to bet that the central bank won’t keep raising interest rates as high as they say, or for as long as they say. This balancing act of inflation slowly cooling off, and the economy only gradually slowing down, may be the best thing that could happen to the markets. Either way, however, we need to be mentally, emotionally, and financially prepared for more volatility in 2023.
The good news is that we already are! While dealing with volatility is never fun, it’s important to remember that our investment strategy already accounts for this. We expect there to be times when we need to hit “Pause” on our journey and have factored those times into our plans accordingly. The most important thing now is that we keep focusing on our mug of cocoa – tasting, and testing as we go, looking for opportunities when we can, and holding course when we need to.
Our advice is to focus on the season. Our team will take care of the rest! So, from all of us here at Minich MacGregor Wealth Management, we wish you Happy Holidays! Please let us know if there is ever anything we can do for you. May your cocoa always be the right temperature, and your gifts never be socks.
On a scale of 1 to 10, how hopeful are you feeling about 2023?
We’ve seen A TON of headlines talking about recessions, layoffs, and market fears over the past few weeks. And what we should be doing to stave off the worst.
It’s prudent to plan ahead and reef the sails before the storm strikes.
But are we going overboard? Are we being TOO negative?
It’s a normal human reaction to try to foresee and prepare for the worst.
But we think that can sometimes lead us to act as though the worst-case scenario is a foregone conclusion.
What if we’re not making enough room for good things to happen?
While the risk of a recession next year is real, it’s not a given — it’s a prediction.
The Wall Street Journal survey of economists puts the risk of a recession within 12 months at 63%.1
On the other hand, Goldman Sachs puts the probability of a 2023 recession at just 35%.2
No one knows what will happen for certain but it doesn’t look like a recession is just around the corner.
Recent layoffs are getting big headlines, but they aren’t widespread.3
In fact, there’s still a chance that we could avoid a recession or experience only a mild downturn.
Especially if inflation has truly peaked. (Fingers crossed!)
There are likely to be stormy waters ahead, especially for employees affected by layoffs, but as we enter the final weeks of the year, I want to highlight some signs of hope:
Hopeful sign #1: The latest data shows that the U.S. economy grew nearly 2.9% in the third quarter.4
Hopeful sign #2: Economists think the economy will grow again in the fourth quarter as well.
Hopeful sign #3: The Fed might slow down the pace of interest rate hikes soon.5
It’s true, we’re still in challenging conditions as we approach 2023.
More volatility is very likely in store for us.
But let’s make room for optimism and positivity.
Good things are in store as well.
Before we go, we wanted to highlight a few more bits of good news from 2022:
We learned that U.S. child poverty plummeted 80% between 1993 and 2021.6
Scientists discovered a way to help identify babies at risk for sudden infant death syndrome.7
Voters elected the first Gen Z member of Congress.8
A record number of sea turtles laid nests on the Georgia coast.9
What other wonderful things happened this year? What good news do you have to share with us?
Earlier this year, we started a series of posts called “Questions You Were Afraid to Ask.” We look at a common question that many investors have but feel uncomfortable asking. Because when it comes to investing, the only bad question is the one left unasked!
So far, we’ve covered a variety of topics, including:
How the Dow Jones, S&P 500, and NASDAQ indices work and which companies they include.
How the values of these indices are calculated.
How stocks work, and how they differ from bonds.
How investment funds work, including the differences between passive and active funds.
The pros and cons of mutual funds, exchange-traded funds, and hedge funds.
As you can see, when it comes to investing, there’s a lot to know, a lot to consider, and a lot to choose from. And while choice is always a good thing, many investors often come to us with their heads spinning because they’re not sure where to start, what to do, or which option to choose. They all come with some variation of the same question. The question we’re going to answer right now.
Questions You Were Afraid to Ask #6: How do I know which investment options are right for me?
When it comes to this question, we have good news and bad news.
The bad news is that there is no one-size-fits-all answer.
The good news is that there is no one-size-fits-all answer.
Yes, you read that right.
To illustrate what we mean, think about your clothing for a moment. Do you buy one-size-fits-all attire? Of course not – and there’s a reason for that. “One-size-fits-all” wouldn’t look very good. It wouldn’t feel very good. And it simply wouldn’t work for every person and every lifestyle.
In life, we have a variety of different clothes we can choose from. We make those choices based on several factors. Climate: pants or shorts. Employment: jeans or slacks. Occasion: a day at the beach or a day at a wedding. Personality: colorful vs dark, brazen vs muted. Figure: from extra-small to extra-large. You choose your clothes – and your style– based on what’s right for you. Based on your wants, your needs, your nature. Investing, believe it or not, is much the same. There is no one-size-fits-all. No single “best” option. Only the best for you, based on your wants, your needs, your nature.
This might seem like a no-brainer, but it’s critical all the same. That’s because, as an investor, you will often hear the media say otherwise. You will hear people claim that the Dow is more important than the S&P (or vice versa). That stocks are better than bonds, or bonds are safer than stocks. That passive is better than active (or vice versa), or that ETFs are always better than mutual funds (or vice versa).
As we’ve seen, the truth just isn’t that simple.
In these posts, we’ve answered six questions many investors are afraid to ask. Now, we have six more for you to consider. Six questions you must not be afraid to ask. Questions only you can answer.
Those questions are as follows: Who, What, When, Where, Why, and How.
Who am I? Are you cautious by nature or a risk-taker? Are you a family-oriented person, or more of a lone wolf? An adventurer or a caretaker? Someone with a few simple wants, or big, bold dreams? Or – as many people tend to be – are you a mixture of all these things?
What kind of lifestyle do I want? Simple or extravagant? Always trying new things, or staying in your comfort zone? One focused on work and personal accomplishment, or one focused on family and community? Or again – and I can’t stress this too much – a mixture of these things, depending on what stage you’re at in life?
When will I most need money? Do you need it soon because you’re buying a new home or starting a new business? Or do you need it later when you’re about to retire?
Where do I see myself in ten years? Or twenty? Life is all about change and growth. That means you need to ensure you’re investing for long-term growth to reach your long-term goals.
Why do I need to invest? To help send your kids to college? To retire? To see the world? To give to charitable causes? To feel like you always have a safety net?
How will I pay for retirement? This is key. Because, regardless of your other goals, there’s probably going to come a time when you want to stop working. But you can’t just pick a day to not show up at work. Retirement creates a massive lifestyle change, one that will be quite upsetting to your finances if you don’t prepare for it.
It’s these questions that should determine the right investment options for you. The types of assets you invest in. How much risk you take on. Whether your portfolio is simple or complex. Active versus passive. You get the idea.
So, here’s our suggestion: Take some time to think about these questions. Then, communicate your answers with a professional you trust. Together the two of you can create an investment plan that’s as specific to you as the clothes you wear. A plan designed to get you where you want to be. We hope you’ve enjoyed learning a bit more about how investing works. We hope we’ve been able to answer some questions you may have pondered over the years. Most of all, we hope you can use this information as a springboard to ask more questions down the road. After all…
When it comes to investing, the only bad question is the one left unasked!
A lot of turkeys and trimmings are eaten to celebrate Thanksgiving, with sports and shopping galore. But what is Thanksgiving all about?
Originally, this day was rooted in want. It fostered an attitude of genuine gratitude for life’s simpler blessings of adequate food, clothing, and shelter. The day also involved sharing those blessings with others less fortunate. Thanksgiving was more than a day.
From these humble beginnings, Thanksgiving has evolved into a frenetic free-for-all whose genesis starts months before the turkeys and pumpkins are carved. We hear and feel the marketing blitz leading up to Halloween—then three more weeks of marketing. There is a short pause—we hear about “Turkey Day.”
We also survive the all-day barrage of ads pounding us into submission, preparing for the assault. That night, memories of Thanksgiving are slowly obliterated as armies of shoppers mobilize, braving the elements, armed with credit cards, coupons, and attitude.
The next morning before dawn, Black Friday officially kicks off the Christmas shopping season. Cartoonists and commentators have astutely suggested that Thanksgiving has become little more than a blip in the holiday season beginning with Halloween and lasting through New Year’s. Is this what Thanksgiving is all about: human beings reduced to the average dollar amount spent? No—a thousand times, No!!
Thanksgiving is more than the Pilgrims; more than an American autumn festival; more than an annual paid holiday from work, more than sports and shopping and feasting; it is far more than a holiday narrowly framed by a specific country. Rather, Thanksgiving is a mindset and a way of life!
Regardless of culture or season, as fellow citizens of planet Earth, we can all make the world a little better by embracing and living the principle of Thanksgiving. Thanksgiving is good for all of us!
This year, as you enjoy a fine meal with family or friends, we hope you have a wonderful holiday. Hug your family; value your friends; enjoy fine food; and cheer on your favorite team.
But remember, it is not Turkey Day. Please pause to be grateful for the abundance we all enjoy in this great land and practice Thanksgiving!
Thanksgiving is more than a day. It is a noble way of life we can aspire to.
“The greatest asset of a company is its people.” – Jorge Paulo Lemann
We truly believe it is our people that set us apart from other financial firms. Since the start of Minich MacGregor Wealth Management in 2009, we have worked hard to develop into the team we are today. We take great pride in the ways we help our clients plan for the various stages of life. Over the past 13 years our client base has expanded largely in part because of people like you that have introduced us to friends, colleagues, and family members.
To keep up with our growth and success, we decided it was time to add more talent to our team. We are excited to introduce our newest team member, Andrew Pallas. He joined our firm on October 31, 2022.
Andrew has been working in the financial industry since 2013. He started his career in western NY with a financial planning firm and in 2016, he decided to return home to the Capital District area. For the past five years, he has been a financial planner at CAP COM Federal Credit Union. Andrew has always had the intention of earning his CERTIFIED FINANCIAL PLANNER TM certification and is actively working on attaining this very prestigious designation. Lucky for us, his search for a career change occurred at the same time we decided it was time to add to our team of professionals. The rest, they say, is history.
Andrew has experience with social security, Medicare, and tax planning. He takes a holistic approach with clients that includes strategies for wealth accumulation, tax-efficient investing, and charitable giving and assists with estate and retirement income planning.
Andrew resides in downtown Saratoga Springs. Outside the office, when he is not preparing for his CERTIFIED FINANCIAL PLANNER TM certification, he enjoys playing basketball, coaching youth basketball and hiking. He is also a volunteer at Therapeutic Horses of Saratoga.
To you, and especially to all who served, happy Veterans Day!
While thinking about the meaning behind the day, we came across an editorial in the Washington Post from a few years back. It was written by a veteran named J. Mark Jackson, who served in the 82nd and 101st Airborne Divisions in Afghanistan in 2009. In the article, he answers the question, “What does it mean to be a veteran?”
Obviously, his words on the subject are far more meaningful than ours. So, in honor of Veterans Day, we thought we’d share a few of Jackson’s thoughts on being a veteran. They really highlight why the day is so important. (We highly recommend you take the time to read the entire editorial, which we have linked to at the bottom of the next page.)
What Does It Mean to Be a Veteran? by J. Mark Jackson, originally published on November 10, 2016 in the Washington Post1
“What does it mean, on a day-to-day basis, to be a veteran? To this Army veteran, it means:
Fourth of July fireworks sound surprisingly like a mortar attack.
…and a nail gun sounds startlingly like the bark of an AK-47 when heard in the distance.
Wondering, when I forget how I filed my tax return the previous year, if I am suffering from a case of undiagnosed traumatic brain injury or if I just forgot.
Wondering, when I miss words in a conversation, whether it is from hearing loss from the close rattle of a machine gun or if I was just not paying attention.
Finding a lump in my throat and tears welling in my eyes when I see images of a crying mother or wife holding a flag folded into a triangle.
Waking up desperately searching for my rifle, while my wife softly says, ‘It’s all right, it’s all right; you are home.’
Buying a red paper poppy whenever I see another veteran selling them and calling him ‘brother’ when the exchange is made.
Being unable to throw those paper poppies away, ever.
Perpetual promptness. No event is too unimportant not to arrive early.
Maintaining a slightly obsessed fetish with how a bed is made, with emphasis on the corners.
Feeling positive about the next strong and dedicated generation of future veterans to whom we handed the baton of service.
A surge of engulfing pride, like a warm shiver, when the American flag passes or during the singing of the national anthem.
Grasping the knowledge that peace is eminently more precious than any state of war, regardless of the justification. Veterans know the cost of peace firsthand, and that cost has a first name, a last name, a middle initial, and parents.
Reading that makes it just a little clearer to us how much veterans have given, and continue to give, for our community, our nation, and our freedom. There are no words we can say, no gift we can give, that could ever repay our personal debt to those who served. But with every word of kindness, every act of service, and every expression of gratitude, we can at least make up that debt a little.
We can let veterans know that we know, if only a little, what it means to be a veteran.
On behalf of everyone at Minich MacGregor Wealth Management, thank you, from the bottom of out hearts, to all our veterans. Thank you for going “over there.” Thank you for your sacrifice. And thank you, most of all, for coming home.
Updating the beneficiaries on your life insurance policies and financial accounts isn’t the fun part of financial planning, but it’s critical to making sure your loved ones are protected and your money goes where you want.
Here’s why:
Skip the Will: A beneficiary designation supersedes your will. So, if you name your children in your will but accidentally keep your ex-spouse on your retirement accounts, guess who gets that money? (Hint: it’s not your kids.)
Help Your Family, Fast: Beneficiary designations can help keep your assets out of probate, which is often lengthy, expensive, and public for your family.
When should you update your beneficiaries?
Family Events: Marriage, divorce, the birth of a child or grandchild, or the unfortunate loss of a spouse or loved one should trigger a review of your beneficiaries.
Money in Motion: If you’ve opened new accounts or rolled over a retirement account, your beneficiaries won’t automatically update. Take the time now to add primary and contingent beneficiaries.
Need help reviewing and updating your beneficiaries? Send us an email at yourteam@mmwealth.com and we’ll set up a time to do it together.
And…we’re back! A few months ago, we started a series of letters called “Questions You Were Afraid to Ask.” Each month, we look at a common question that many investors have but feel uncomfortable asking. Because when it comes to investing, the only bad question is the one left unasked!
In our last post, we looked at two categories of investment funds – passively managed funds and actively managed. Both come with their own pros and cons. But regardless which categories you choose to invest in, there are many types of funds within those categories. This month let’s look at three of those types. This is important information to know, because many IRAs and 401(k)s will give you the option of choosing from at least two of them.
Questions You Were Afraid to Ask #5: What Differentiates Mutual Funds, Exchange-Traded Funds, and Hedge Funds?
Let’s start with mutual funds, one of the oldest and most common ways that people invest. Here’s how the Securities and Exchange Commission (SEC) defines mutual funds:
A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates.1
As we’ve already covered, mutual funds can be either actively managed or passively managed. Regardless of which umbrella the fund falls under, though, many investors flock to mutual funds because they offer several potential benefits:
Simplification. Mutual funds can simplify the process of investing because instead of devoting time to researching dozens – or even hundreds – of individual companies to invest in, the fund does it for you. (Note, of course, that you or your financial advisor should still research which fund is right for you.)
Diversification. Mutual funds often invest in a wide range of companies and industries to meet the funds stated objective. This could lower your overall risk. This means that if one company/industry does poorly, you may not experience the same kind of loss you would if you invested all your money in that company or industry.
There are potential issues with mutual funds, though. For example, sometimes, it can be difficult to understand what or how the fund actually invests (Mutual funds can differ drastically depending on their objectives, investing style, time horizon, and other factors.) Mutual funds are required by law to provide a prospectus to investors that explains how the fund works, but if you don’t know what you’re looking at, this information may confuse more than enlighten. This is why it’s important to do your homework. (And by the way, everything in this paragraph is true for ETFs and hedge funds, too.)
Mutual funds can also sometimes come with more expenses than other funds, too. They might include management fees, purchase fees, redemption fees and tax costs. These expenses can eat into your returns, thereby lowering your overall profit.
Finally, mutual funds may not be a great choice if immediate liquidity is a high priority. All mutual fund trades run at the end of day. So, for example, if you wanted to sell a mutual fund at the beginning of the day, hoping to avoid what you think the market will do, you will still get the end of day price. For this reason, some investors turn instead to…
Exchange-Traded Funds
ETFs, as they are often called, can be actively managed. More often, however, they track the companies in a specific index, just like an index fund. (See our last post for more information on index funds.) Otherwise, ETFs differ from mutual funds in a few ways. For one thing, the shares each investor has in an ETF can be traded on the open market. That means you can buy or sell your shares in an ETF just like you would an individual stock. You can’t do that with regular mutual- or index funds. That’s a big advantage for investors who value flexibility and liquidity.
Most ETFs also come with lower expenses than mutual funds.2 ETFs fully disclose all holdings held. This makes it easier to see exactly what you are investing in. It also makes it easier to see where you have overlap.
But of course, nothing’s perfect. Since ETFs can be traded like common stock, that might lead to trading too often. You may find yourself paying more than you anticipated in trading fees. Then, too, some ETFs are thinly traded, meaning there’s just not a lot of activity between buyers and sellers. This could make it difficult to sell your shares.
Hedge Funds
Most people will never invest in a hedge fund. They’re generally not an option when investing through a 401(k) or IRA. But we include them here because we often get asked about them – and for good reason! You often hear about hedge funds in the media, and they’re the subject of multiple films. While mutual funds and ETFs can be either passive or actively managed, hedge funds are always active. The idea behind hedge funds is that the manager can use all sorts of strategies and tactics to help investors beat the market while “hedging” – hence the name – against risk. Hedge funds often invest in non-traditional assets beyond stocks and bonds, too.
The reason hedge funds are not an option for most investors is because of the huge cost associated with them. Legally, to invest directly in a hedge fund you must be an accredited investor. Meaning, you must have a net worth of at least $1 million or an annual income over $200,000 to invest in one. Plus, you must be willing to stomach paying all sorts of fees that are much higher than your average mutual fund. For these reasons, while hedge funds may be right for some people, they’re simply not necessary for the average investor to save for retirement or reach their financial goals.
Whew! We’ve thrown a lot of information your way over the past few months, haven’t we? That’s why, for our final post of the series next month, we’re going to look at the most important question of all: How to know which investment options are right for you. Have a great month!
