investment types Archives - The Free Financial Advisor

Should You Invest in Mobile Homes?

March 17, 2021 by Jacob Sensiba 1 Comment

Mobile homes get a bad rap, but they could really be a good place to invest money. Investing in real estate is a good way to diversify your portfolio. Mobile, or manufactured homes, could be a good little niche in that sector. Should you invest in mobile homes?

What is a mobile home?

Mobile homes, also known as manufactured homes, are residential structures built in a factory or separate location and moved to the desired location. These homes are built according to HUD guidelines.

Those guidelines are as follows:

Design and construction
Strength and durability
Transportability
Fire resistance
Energy efficiency
Overall quality

Why invest in mobile homes?

Social stigma around mobile home parks prevent people from investing in them

Investing in individual mobile homes is difficult because the people that rent them are a (and I’m making a big generalization here) a challenging bunch to deal with. Invest in the grounds and infrastructure where the mobile/manufactured homes are.

There are several benefits to investing in mobile home parks:

Recession-resistant (held up through the GFC)
Tenants rarely leave, but sometimes, evictions are necessary (as they are with any real estate endeavor)
Supply is waning, demand is increasing
Predictable maintenance costs
Stigma reduces competition with other investors
Great financing options
Limited need for contractors
They’re inexpensive (you can buy individual units to rent on your property for less than $10,000 – depending on the area and demand)

(List provided by BiggerPockets)

Conclusion

As I mentioned in the beginning, investing in real estate is a great way to diversify your portfolio. It can also be a good way to get a return on your money.

Within the real estate sector, mobile home parks can be a very good niche, for the reasons I mentioned above. Should you invest in mobile homes?

Should You Be Investing in SPACs?

March 8, 2021 by Tamila McDonald Leave a Comment

Many investors are constantly on the prowl for new options that could help them make a bit of cash. If SPACs have recently made their way onto your radar and you’re wondering if you should be investing in them, here’s what you need to know.

What Are SPACs?

SPAC stands for “special-purpose acquisition company.” Also referred to as “blank check companies,” SPACs are publicly-listed, but are considered non-operating. Instead, they exist solely to purchase private companies, allowing the company that has been acquired to have a connection with a publicly listed stock.

Generally, the process of becoming a publicly-listed is cumbersome. By going the SPAC route, a private company can avoid the challenges associated with an initial public offering (IPO). The SPAC is already public. Plus, by using a reverse merger after the acquisition, the once private company can transition to a public one while maintaining autonomy.

Are SPACs a Good Investment?

Like any part of the investment landscape, there is certainly risk associated with investing in SPACs, even if there doesn’t appear to be any on the surface. While it’s true that if a SPAC doesn’t find a private company to scoop up, investors get their money back after a set amount of time, your money may not be working for you as hard as it could going another route.

Additionally, there’s no guarantee that the private company a SPAC grabs is going to be successful once it is part of the market. As recent history has shown, not all IPOs go well. If the SPAC selects the wrong company, you can certainly experience losses.

Finally, by design, SPACs benefit the SPAC sponsors far more than individual investors. Generally, the sponsors get a significant stock allocation for the SPAC IPO, and the founder shares can dilute common stockholders.

In many cases, a SPAC’s performance can be subpar. When there is a high-valued private company serving as a potential target, it can generate competition among SPACs. When that happens, the price may inflate, causing the SPAC that “wins” to overpay, something that doesn’t work in investors’ favor.

SPAC Overpays

However, the sponsors – due to the nature of the arrangement – can still come out ahead even if the SPAC overpays, creating a level of conflict of interest. The decisions may not be in the best interest of individual investors. Instead, only the sponsors serve to gain.

Ultimately, it’s wise to be cautious about investing in SPACs. You may not know exactly what the SPAC will scoop up when you invest, which isn’t ideal. Additionally, there can be issues with transparency, as well as potential conflicts of interest.

In many ways, a SPAC is riskier than a traditional IPO. If you’re risk-averse, that’s far from ideal. However, even if you are open to some risk, the low historical performance should give you pause. If you do think SPACs are right for you, research is your ally, as it may give you an indication about the SPAC’s ability to choose the right private company. Make sure you really dig in, as that may be your only way to determine if a SPAC has potential.

Do you think investing in SPACs is a smart move? Do you plan on adding them to your portfolio? Why or why not? Share your thoughts in the comments below.

Annuities and Taxes: Here’s What You Need to Know

March 1, 2021 by Tamila McDonald Leave a Comment

Annuities can be a reliable source of income in retirement. Once you begin receiving benefits. You’ll receive a set amount of money each month or year for the rest of your life. Even if you live for decades more. However, annuities can come with tax implications. Both on the front and back ends. If you want to find out more about annuities and taxes. Here’s what you need to know.

Annuities and Taxes – Qualified vs. Non-Qualified Annuities

First, it’s important to understand that how an annuity is taxed does vary depending on the type of annuity involved, especially how it was funded.

Qualified annuities are funded with pre-tax dollars. In most cases, these involve principal payments from a type of tax-deferred retirement account, like a 401(k) or a traditional IRA. However, there may be other approaches available, as well.

When you make withdrawals from a qualified annuity, you pay taxes on the money just as you would other traditional kinds of income. Since none of the money has been taxed, every dollar in the withdrawal is treated the same.

Non-qualified annuities are funded with after-tax money. With those, when you make withdrawals, you’ll only owe taxes on earnings, not the deposited amounts. The money used to fund the annuity has already been taxed, so it won’t be taxed again. However, the earnings haven’t, making them subject to taxation.

Usually, with non-qualified annuities, the taxed amount is determined by the exclusion ratio. This calculation determines how much of an annuity income payment is taxable by separating the portion of the payment funded with the principal from the part funded by interest earnings.

In some cases, annuities purchased with funds from a Roth 401(k) or Roth IRA are tax-free. However, very specific conditions have to be met for that to happen.

Tax Rates on Annuities

When you’re receiving income from an annuity, the taxable amount is taxed based on traditional income tax rates. Annuities aren’t eligible for capital gains rates, which are often lower than income tax rates.

If you need to estimate how much you’ll owe, use the traditional tax tables from the IRS. That will give you the most accurate picture, at least on a federal level.

In some cases, you’ll also need to pay taxes on the state level. State income tax rates vary, and some may exclude annuities – as well as other kinds of retirement income – while others do not. Additionally, not all states have an income tax in the first place. As a result, you’ll need to research rules in your area to determine how much you may owe.

Depending on where you purchase your annuity, you may also owe a state premium tax. Some states tax insurance premiums, including during the sale of annuities. If you live in one of those states, you may see a 1 to 3.5 percent tax. However, some states waive the fee under certain circumstances, such as if you make the purchase using funds from a qualified retirement plan.

When Withdrawal Timing Impacts Taxes on Annuities

Another factor in how money from an annuity is taxed is when withdrawals are made. Usually, if you take any money out before you reach the age of 59 ½, you’ll owe a penalty of up to 10 percent to the IRS. However, by waiting until you’re at least 59 ½, you can avoid this entirely.

Additionally, if you take a lump sum instead of annuity income payments, at a minimum, all of your earnings are taxed right away. If you funded the annuity with pre-tax dollars, then the entire lump sum, including both the principal and earnings, are taxed immediately.

Inherited Annuities and Taxes

If you inherit an annuity from another person, the same tax rules apply to you as would to the deceased. As a result, if the annuity was qualified because it was funded with pre-tax dollars, you’ll owe taxes on the entire value of any withdrawals. If it was non-qualified, then you’ll only owe taxes on the earnings.

Ultimately, annuities are fairly simple to understand from a tax perspective. Earnings are typically taxed as income, and withdrawals from principal only are if the annuity was funded pre-tax. While your income tax rates may vary depending on your total income level, how your annuity factors in is reasonably straightforward.

Is there anything else people should know about annuities and taxes? Share your thoughts in the comments below.

The Pros and Cons of Index Investing

November 18, 2020 by Jacob Sensiba Leave a Comment

What Are Index Funds?

If you are tired of trying to beat the stock market, index investing may be the best solution for you. Index funds work by investing your money into an index of stocks. (You may have heard of S&P 500 or the Dow.) When you put money into an index fund, you are investing in all of the companies that make up that particular index’s portfolio.

This is an alternative to choosing and investing in particular stocks. The same risks exist for you as those who buy stocks individually. However, investing in an index can provide broad diversification for your equity investments. Instead of putting your eggs in a few baskets, you’re putting one egg in 500 baskets (using the S&P 500 as an example).

Pros:

They are inexpensive

There are usually no hidden fees or sales commissions with index funds. They have low annual fees- much more insignificant than the large fees that hedge funds and other alternatives charge. You can also increase your investments regularly without facing additional charges. Avoid indexes that do charge investors extra.

They Allow You to Invest in A Diverse Selection of Stocks

A well-balanced portfolio is key, and index funds aim to achieve this. As an individual, our investment opportunities are far more limited. By teaming up in an index fund we are able to share in the investments of many different stock companies. This is a much more attainable goal when we are part of an index fund.

They’re Efficient

Index funds financially outperform the majority of mutual funds. Although solo investors enjoy trying to “beat” the stock market and outsmart the institution, research has shown time after time that index fund earnings are much more consistent.

On top of bringing in more earnings, they are also user-friendly and easy. You can link your bank account to the index fund and it will automatically withdraw on a regular basis for you. No work on your part at all! Not only do you avoid having to study the stock market, but you also do not have to move the money over regularly.

It’s A No-Brainer

For anyone who is a newbie when it comes to investing, index funds are a life-saver. You don’t have to pick individual stocks or worry about the market rising and falling. All you have to do is provide the money, and the market should grow over time.

Cons of index investing:

They Can be Vague

The assets making up a fund’s portfolio are constantly changing. It can be difficult to see exactly what you own and exactly how much you have made by investing. This is due to the fluctuating values in the underlying stocks and the index itself.

Limited Upside

Although investing in individual stocks can be messy and dangerous, some investors have a special eye for it. The professionals can often beat the market and get ahead of the game. In an index fund, you will never beat the market, because you will only grow consistently alongside it.

You’re Not in Charge

If you like to be in control, it could be difficult to learn to trust your money with strangers. Your index fund managers will be the ones in charge of what the fund gains in assets. You will likely never be personally able to call the shots in an index fund, and that is something you will have to come to terms with.

Not Suitable For All Investors

One of the most obvious cons of index investing is the “blanket” suitability for all investors. That’s, simply, not the case. The risk/return relationship suggests that higher return investments usually involve higher risk. Index funds are typically designed to capture the median performance of markets such as the S&P 500 or the Russell 2000.

As a result, they usually return market performance – no more and no less. If you want a very risky investment strategy, say, for example, investing in reverse convertible bonds, you likely won’t find index funds a suitable investment vehicle.

There Can be Fees

Some index funds do charge high fees and commissions. Be sure to stay clear of these.

My Concern

Generally speaking, index funds are great. They offer broad exposure to the market and do an incredible job at limiting fees.

But, in my mind, there are two more cons of index investing:

Accidental concentration – As the market ebbs and flows, some sectors and industries will do better than others. For example, over the last 10+ years, the technology sector has outperformed the broader market by a large margin. As a result, tech makes up a greater portion of the index. If that sector experiences a pullback, the index as a whole will fall.
Liquidity concerns – This mainly applies to index ETFs, but if the market, as a whole, drops, inexperienced investors will sell out of their positions to limit their losses. When there is a rush for liquidity, these ETFs need to sell underlying positions to provide investors with that liquidity. This can lead to an acceleration of losses. Investors sell, portfolio managers sell to give individuals their money, so underlying assets drop. This can cause more investors to sell, and again, portfolio managers to sell more. It’s a domino effect

Appreciating vs. Depreciating Assets

October 7, 2020 by Jacob Sensiba Leave a Comment

I think it’s widely known that there are two types of assets: appreciating and depreciating. I think it’s less known what’s classified as appreciating and depreciating.

In this article, we will look at what each term means, examples of each, and how to use them effectively.

What’s appreciation?

Appreciation is the increase in value. The majority of assets used to accumulate and grow wealth, appreciate. An asset can appreciate because of supply, demand, or a change in interest rates.

What’s depreciation?

Depreciation is the exact opposite. It’s the loss of value. The most common example is a car, but more on that later.

It is a new year and time to start thinking about tax plans for this financial year. The tax depreciation schedule calculator is a simple online tool that allows an employer to calculate the depreciation value of vehicles used for commercial purposes. This tool can help employers who wish to ensure that the correct amount of tax is deducted from their staff’s wages and prevent any penalties from being handed out.

Appreciating assets

*Stocks – It’s commonly known that investing in stocks is the best way to not only keep pace with inflation but to grow your wealth. A stock is partial ownership in a public company. Popular examples include Apple, Amazon, Facebook, etc. (Click here to learn more about stocks)
Real estate – Single-family homes, duplexes, apartment complexes, etc. Though the pace at which real estate appreciates dwarfs compared to stocks, it does so slightly over time. (Source)
Private equity – This can be starting a company of your own or you can invest in a startup. There are also private equity funds that exist, as well. Basically, it’s a company or venture that is not open to the public (i.e. stocks on the exchange, etc.).
Alternative – Less common assets that could appreciate (cryptocurrencies, precious metals, art, and other collectibles).
Bank accounts – Savings accounts, certificates of deposit, etc. These don’t appreciate much, especially in the current “low-interest-rate”. Some may argue that you shouldn’t classify these as appreciating assets because inflation erodes away the purchasing power over time.

Depreciating assets

Cars
Boats
Furniture
Equipment
Patents/Copyrights – Patents, other than section 197 intangibles, have a useful life of 10 years and can be amortized over that 10 year period. (Source)

What’s the point?

Appreciating assets – Owning and investing money in an appreciating asset is the key driver in growing your wealth. Those who’ve accumulated significant amounts of wealth have done so by earning a living, saving, and investing diligently over decades.
Depreciating assets – There are a few reasons to own a depreciating asset.
- Fun and convenience – We own and drive cars because we need them to go places. We buy boats because they are fun. In either case, you could also own a car or boat for your business, in which case it would serve a different purpose.
- Business – Owning and operating machinery and equipment is how many of us make a living or run a business.
- **Tax write off – If you use equipment, machinery, cars, etc. for business, oftentimes you can use the depreciation of that equipment as a tax write off. Financial advisors use a set of fancy calculations to come up with the tax benefits of depreciation, we won’t go into that here.

Conclusion

Appreciating and depreciating assets both serve a purpose. It’s important to know the difference between the two and how to use each one as effectively as possible.

*Stocks can sometimes experience periods of volatility and negative performance. During such periods, the value of such stocks may decline.

**Be advised: talk to your accountant about specifics.

Financial Planning Basics: The Financial Pyramid

March 9, 2020 by Jacob Sensiba 1 Comment

The first time I heard about the financial pyramid, I was instantly intrigued. I had never thought about it in this concept before, but I unintentionally had been practicing this in my own life.

In finances you have to build the base before you can reach the top or it will all fall apart, hence the allegory of a pyramid.

The Base

The base of your financial pyramid should be a solid financial plan. This includes your written budget, short-term and long term goals, and how you will make your income as well as an investment plan to be implemented in the future.

You should have a positive cash flow, meaning, no longer using debt to fund your lifestyle.

Once you have implemented the base, you can move onto the first building block: protection.

Protection

You must protect yourself from the unimaginable, so I recommend everyone have a will and power of attorney, insurances such as life, health, auto, homeowner’s/renter’s, and disability, and a basic emergency fund of at least $1,000-$2,500.

I was thankful to have my mini-emergency fund when I had some car issues because I was able to pay cash to repair them instead of having to go into debt. The overall pyramid looks something like this:

The second building block is low-risk wealth accumulation. This would include saving for a home, retirement, and children’s college education, in addition to reducing consumer debt.

Debt Reduction

Financial guru Dave Ramsey teaches that you should get completely rid of any debt before beginning savings, although, in my opinion, you should still invest in retirement while reducing debt only if your employer offers a match.

I, myself, am in the debt reduction stage but still contribute to my retirement account since my employer offers up to a 4% match into my 401(k).

Additionally in this step, you should create your emergency savings fund. Many people believe an emergency fund of 3-6 months’ worth of expenses is adequate.

Investing

The third building block is high-risk wealth accumulation. This includes investing. Expanding on the second block, in this stage, you will max out your retirement accounts and then build a non-registered investment portfolio.

Once you have built your net worth to an amount sufficient to fund your lifestyle and retirement, you can move to the next stage of investing– speculation (also known as speculative investing.) In this stage, you invest money into investments such as start-up companies.

This is very risky, so you don’t want any debt by this stage. Also, you should only invest a small portion of your total investments into speculation. Also in this stage, you’ll want to begin tax planning, especially as your retirement investments increase.

Estate and Charity

The final building block is wealth distribution. You’ll gift and spend the money you have earned. As well as plan your estate for future generations or charity upon your death. Since your net worth increased quite a bit since you first started the financial planning pyramid, you should update your will and/or trust.

Finally, once you’ve got these basics nailed down, it’s time to hire some help. One approach a lot of millennials use is robo-advisors. A robo-advisor is a machine that uses various theories about portfolio allocation to make investing decisions. If you’re interested in a critical review of this, consider checking out Roboadvisorpros.com, they have a good article on the topic.

If you aren’t into trusting your cash to a computer, consider signing up with Personal Captial. They’ve pretty much become an industry leader among the newer financial planning firms.

If you’re’ going to use them, please use this link or click on the banner below. It will help keep the lights on here at The Free Financial Advisor.

For help getting your financial pyramid in order, check out these great articles.

10 Best Financial Planning Blogs
Best Free Financial Advice
Become a Financial Expert Step-by-Step

Our New Low(er) Interest Rate Environment

September 25, 2019 by Jacob Sensiba

With the talk of interest rates and recession in the headlines, I figured it was a good time to check-in, and give a little update on interest rates and how lowering them can impact the economy, issuers, and investors.

Why is the FED cutting?

Basically, the FED is cutting to extend the current economic expansion we are in.

The fundamental reason behind that is lower interest rates encourage corporations and consumers to spend more.

For two reasons.

One, they get paid very little, in interest, to put their money in the bank. And two, they are able to borrow money at lower rates.

Current income needs

People who need income, retirees, for example, invest their money in income-producing securities. Often times, those securities are fixed income instruments, like bonds.

Bonds pay interest on a semi-annual basis. The higher the credit quality of the issuer (company or government entity) the lower the payout. The inverse is true for a low credit quality issuer.

It’s the ever-present adage in investing, more risk equals more potential for reward.

When interest rates continue to creep lower, then those people start to make different choices.

What people are doing now

People are getting paid less, in interest, to invest in high-quality debt issuers, so they’re getting riskier. Meaning, they are investing that money with low credit quality companies and/or government entities.

Their risk of not receiving interest payments and getting their principal (the initial investment) back goes up.

The FEDs tool kit

I’ve touched on this point a few times in the past, but I’m going to hammer it home.

The Federal Reserve, essentially, has two tools. Lowering interest rates and buying Treasuries. Lowering interest rates promotes spending and buying Treasuries provides liquidity.

Because they are lowering interest rates during an expansion (whether we are still in one or not is debatable, but let’s say we are for the sake of argument), they are, effectively, removing the number of tools they have available.

When the next recession comes, my fear is they won’t be able to do enough to help us out of it.

Corporate debt

Currently, the amount of corporate debt in the market is the largest in history. Additionally, the amount of debt that’s rated BBB is also the highest in history.

BBB is the last rung on the investment-grade scale. Investment grade is anything BBB and above.

That’s a problem for basically one reason. When a BBB rated issuer gets downgraded (to BB) they are classified as junk (high-yield). When that happens, they need to tighten up their debt and improve their balance sheet. This means less borrowing and less spending.

It’s a dynamic that feeds itself. The issuer is downgraded, they spend less, GDP gets weaker, more corporations follow suit, and here comes the recession.

Investors

Once the corporate (high-yield) debt pops, issuers of debt will have trouble meeting their obligations. They’ll start to default, and their investors will be left high and dry.

Conclusion

This post is not intended to scare people, it’s to inform.

One last point. Because interest rates have been so low for so long, there are economists/academics that think the lowering of interest rates won’t actually help.

What It Take To Be A Successful Investor

July 31, 2019 by Jacob Sensiba

What makes a successful investor? Is it your ability to beat the market or to beat your competition?

In my opinion, being a successful investor doesn’t have to do with out-earning your peers or leaving the S&P in the dust. No, my definition is very simple.

Develop an investment plan using a variety of factors, and be able to execute and follow that plan indefinitely.

Suitability

This is step 1. You need to figure out what your “suitability” is. Your suitability will lay a very good foundation upon which you build your investment plan. Suitability involves three things:

Risk tolerance – This is your ability to handle drawdowns in your portfolio. If you crumble with fear every time you lose 5 percent, then you’ll probably want a fairly conservative portfolio*. On the other hand, if you have no problem seeing your portfolio drop 50 percent, then you’re ready for a more aggressive allocation.
Time horizon – Probably the most important factor of the three. Your time horizon is basically when you’ll need the money. A long time horizon allows an investor to take on more risk because there’s more time for them to recover from drawdowns. The inverse is true for short time horizons. You’ll want to be conservative because you have little time to earn back what’d you lost.
- Long time horizon – 10+ years
- Medium time horizon – 2-5 years
- Short time horizon – Less than 2 years
Goals – What’s your plan? Is this savings going to be used as a down payment for a house? If so, there’s probably a minimum dollar amount you have in mind and you’ll want to tip the odds in your favor that you don’t go below that. Similarly, if this is for retirement and you have 30 years to invest, you have the green light for risk assets.

Keep in mind that all three of these things, plus one other, need to be used together when determining your asset allocation. If you are tolerant of risk, but need the money in 5 years, somewhere in the middle between aggressive and conservative is probably better. That one other thing is your behavior as an investor.

Investor behavior

The finance/investment world is coming around to this, but your psychology is a HUGE factor as an investor.

Obtaining a high return on assets is one of your goals, but it should not be the primary goal. When you create an investment plan you have to make sure it’s something you can actually stick with.

I wrote about it previously, here.

You could be tolerant to risk and you could have a long time horizon, but if you lay awake at night every time the market drops, then you need to rethink your approach.

That kind of fear and anxiety hinders your ability to follow your plan. What normally happens, is someone sets an unrealistic investment plan, one where they take on too much risk.

Thereafter, volatility picks up. They check their portfolio and it’s declined 15 percent. They wait a day and check the next.

Another 2 percent drop. Then the thought of 2008 creeps into their heads and the panic sell.

You can set up a great investment plan, but your behavior will ultimately make the decisions. Keep that in mind.

Asset allocation

Using your suitability and behavior, you can then determine your asset allocation. The types of assets you use in your allocation can vary. If you wanted to invest a small percentage of your portfolio in gold, for instance.

The three most common assets are stocks, bonds, and cash. With risks ranging from high risk to virtually (there’s always some risk) no risk.

Speaking very generally, people with long time horizons and are more tolerant of risk, have a more aggressive portfolio. The inverse is true for people with short time horizons and a low-risk tolerance.

That said, the ultimate goal is to develop a plan that meets your goals in the smoothest fashion possible.

Ignore the noise

Throughout your investment “career” you’ll run into people, friends, family, or even random people on the street that will tell you the sky is falling or that the newest IPO will go gang-busters and you need to get in now!

Put your blinders on. There are two things that hurt investors. Their own behavior and their ability, or lack thereof, to tune out what’s happening around them.

This is extremely difficult because we, as humans, have evolved to use our peers to compare or judge, our standing in society.

Stay in your lane and focus on your goals.

Never stop learning

Every single experience in your life is a learning opportunity, especially the bad one. I recommend journaling daily, recount your day, and dig little nuggets of knowledge from your experiences.

Additionally, take in some form of content every day that improves your understanding in your line of work, or in an industry that you’re interested in.

With regard to your finances, give our Toolkit page a look. There you’ll find a number of books and resources to enhance your financial know-how.

Please be advised: Everything written in this article is for informational purposes only and should not be taken as investment advice. Opinions are my own and do not reflect the opinions of this publisher or my employer.

What is the Coverdell ESA?

May 29, 2019 by Jacob Sensiba

Introducing the last account type on our quest to find the best way to save for college, the Coverdell ESA.

Without further delay, here’s what you need to know about the Coverdell ESA.

What is it?

Like the 529, the Coverdell ESA is an education savings vehicle for K-12 and secondary education. Coverdell ESA stands for Coverdell Education Savings Account.

It got its name from Senator Paul Coverdell, who introduced the legislation for a similar account, the Education IRA. In 2002, a new piece of legislation was introduced to make the account what it is today.

The 529 and the Coverdell ESA share many of the same characteristics, but there are some things that set it apart. All of these will be listed below.

Advantages

Savings and investments in the account grow tax-deferred and are withdrawn tax-free when used for qualified education expenses.
When it comes time to withdraw, those funds are not considered income, as long as you are using them for qualified education expenses.
Can use in conjunction with other education tax credits, like the Lifetime Learning Credit, as long as there’s no double-dipping.
These accounts are self-directed, so your investment options are plentiful. They include…
- Age-based funds
- Static mutual funds
- ETFs
- Stocks
- Bonds
- Real estate

Disadvantages

Contribution limit of $2,000 per child per year.
The funds inside the account are taken into consideration when you file for financial aid. The assets are considered their parents assets.
If the money is not withdrawn from the account by the time the beneficiary is 30, they could be subject to taxes and penalties.
- After 30, the funds inside the account become fully taxable and you’re penalized 10%.
Like the 529, contributions to this account are not tax-deductible.

Unique Characteristics

Only eligible to families/individuals that fall below an income threshold ($110,000 for single taxpayers and $220,000 for couples who file jointly).
The contribution limit is $2,000 per child per year, so even if a family member opens an account for your child, you still can’t go over that number, or there will be a penalty.
Qualified expenses include…
- Tuition
- Books
- Supplies
- Equipment
- Tutoring
- Special needs services
And can also include…
- Room and board
- Uniforms
- Supplementary and transportation services
With a 529, the account owner has control over the assets. Conversely, with a Coverdell ESA, the beneficiary has control.

Conclusion

Effectively, there are three education savings vehicles used today. The UTMA/UGMA, Coverdell ESA, and the 529 plan. I’ve written about the other two in the past so go check those out.

On paper, the 529 looks like the best option, with a high contribution limit, a large number of qualified expenses, and there’s no penalty for letting funds sit for decades.

That is all true, and honestly, I prefer the 529, but the vast, vast majority of people that are helping their children save for college will not come close to the high contribution limit.

The only drawback to the Coverdell ESA is the penalty if the funds aren’t used before 30. Other than that, I don’t think the $2,000 contribution limit is a factor because most people can’t put that much away, anyway. Not without sacrificing their ability to save for retirement, as well.

That said, they’re both great options and you can’t go wrong with either one.

How to Invest for the Long Term

August 1, 2018 by Jacob Sensiba Leave a Comment

Investing is an important part of your financial life. What’s more important is investing for the long-term.

With a long time horizon, you have the ability to ignore short-term market volatility and you have the ability to let your investments compound over time.

Investing this way can be difficult, however, so here are some tips on how to do that.

Pick a strategy and stick with it

You need to pick and stick with what works for you. There are several strategies that you could choose.

Value – A strategy that involves a deep dive into company/industry fundamentals. Companies/industries in this area may or may not be out of favor. All you care about is how the underlying fundamentals look.

Growth – High flyers. Companies with high P/E ratios. Companies that have a strong case for continued growth. Sectors like technology and consumer discretionary are considered growth.

Contrarian – If you buy when others sell or sell when others buy, you may be a contrarian investor. You go against the herd. Someone who does this has a unique ability to be extremely objective.

Momentum – You invest in companies or sectors that are performing well and are fairly likely to continue that trend going forward.

Start early

This is no secret, the earlier you start the better. Albert Einstein once said, “Compounding is the eighth wonder of the world.” It really is amazing what compounding can do. If you have 20, 30, or 40 years to invest, you should be sitting pretty at that finish line.

For example, say you have two investors. One investor starts contributing $1,000 per month to an account and invests in a stock market index ETF, starting out at 25 and stops contributing after 10 years.

Another investor starts contributing $1,000 and that same index ETF, starting at 35 and they contribute until they turn 65. At age 65 person A ends up with 1.49 million, and person B ends up with 1.26 million.

Compounding truly works wonders. Start early and give compounding a chance to work its magic.

Make every move with the future in mind

Every decision that you make needs to be a slow and thoughtful one. It’s particularly important to make decisions with your future self in mind. Delayed gratification is HUGE when investing for the long term.

For example, you have your debts paid off and now have a little extra money each month. You decide that you want to buy a boat. You save up and pay $20,000 for a nice, new boat.

Here’s the flip side. Say it took you three years to save up for that boat. Instead of saving, you deposited $5,500 per year into a Roth IRA (max contribution amount). This is invested in a stock market index ETF we mentioned earlier.

Now, let’s go out 10 years. You still have that boat and have taken good care of it. However, it’s lost over 50% of value over that time period. Conversely, that $16,500 that you invested has grown to $33,600.

Buying the boat may have felt good before, but investing that for the long-term is by far the better financial decision.

Invest in what you know

Peter Lynch famously said, “Invest in what you know and know why you own it.” This is such an important principle within investing. If you are competent in the consumer staples sector, stay in the consumer staples sector.

At times you may see technology stocks return far more than your sector, but you could have easily invested in a technology company that went bust. You don’t know the industry so how would you know what’s good and what isn’t.

By sticking with an industry that you are knowledgeable about, you increase your chances of success.

Contribute regularly

Contributing at regular intervals does two things.

One, you’re saving and investing more, which increases the size of your nest egg.

Two, when the market ebbs and flows, you will continue to invest the same amount each month/year. You’ll buy more when it’s low and buy less when it’s high.

This is called dollar cost averaging. It effectively reduces your cost basis for your entire position, which effectively increases your gain, if your investment is up when you sell it.

Diversify

One of the most effective ways to reduce how much your portfolio reacts to dramatic shifts in the market is to diversify. Hold some stocks, some bonds, some cash, some gold, and some real estate. There are other investment products you could own, but these are usually the big ones.

Be objective

Try to take your emotions completely out of it.

When the market starts to sell off, you need to objectively look at your positions. Look at the characteristics of the business. Has anything changed? Or is it just declining due to a broader market selloff?

If it’s the latter, take some of that cash you have and buy that baby at a discount.

Use stocks

Over the long-term, stocks are the best investment to a) outpace inflation and b) effectively appreciate the money that you’ve saved.

Utilize various products

There are a variety of vehicles out there for your investments. Take advantage of as many as you can.

401(k) is an employer-sponsored retirement plan. Money saved in it can lower your taxable income and investments grow tax-deferred.

Traditional IRA – Individual retirement account. You open it up and save in it. Tax-deductible contributions. Investments grow tax-deferred.

Roth IRA – Similar to a Traditional IRA, except money contributed is not tax deductible, but money withdrawn is tax-free (money withdrawn from 401k and IRA is taxed).

These are just a few of the vehicles that can be used to save for retirement.

Next week I will dive deeper into the various products available.

Say no to penny stocks

These are stocks that cost less than $5 per share. More often than not, these are very risky and the companies themselves have a much higher probability of going out of business than other companies with higher stock prices.

Don’t invest via “hot tips”

Your friend says, “A stock I invested in last week is already up 100%, you need to get in on this before it goes any higher.”

When you hear this, just let it filter out of your brain. Odds are, the dramatic increase in price is pure behavior related, and no stock can sustain that kind of growth. That stock will come crumbling down at some point.

Think of the tech bubble from the 2000s. There were companies with literally no information about them, and they were going from $10/share to $200/share within a matter of weeks.

Just 48% of companies from the dot-com bubble survived past 2004. (Source)

Conclusion

Investing for the long-term is your greatest chance for financial success. Starting early, contributing regularly, and ignoring the noise are only a few great tips discussed here, but they are probably the most important.

If you would like to hear more about long-term investing and/or for our disclosures visit www.crgfinancialservices.com.

Rates of return are hypothetical, are provided for illustrative purposes only, and do not reflect the performance of an actual investment. All investments involve the risk of potential investment losses and no strategy can assure a profit. Past performance does not guarantee future results. Diversification seeks to reduce the volatility of a portfolio by investing in a variety of asset classes. Neither asset allocation nor diversification guarantee against market loss or greater or more consistent returns.

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What is a mobile home?

Why invest in mobile homes?

Conclusion

Related reading:

What Are SPACs?

Are SPACs a Good Investment?

SPAC Overpays

Annuities and Taxes – Qualified vs. Non-Qualified Annuities

Tax Rates on Annuities

When Withdrawal Timing Impacts Taxes on Annuities

Inherited Annuities and Taxes

What Are Index Funds?

Pros:

They are inexpensive

They Allow You to Invest in A Diverse Selection of Stocks

They’re Efficient

It’s A No-Brainer

Cons of index investing:

They Can be Vague

Limited Upside

You’re Not in Charge

Not Suitable For All Investors

There Can be Fees

My Concern

Related reading:

What’s appreciation?

What’s depreciation?

Appreciating assets

Depreciating assets

What’s the point?

Conclusion

The Base

Protection

Debt Reduction

Investing

Estate and Charity

Why is the FED cutting?

Current income needs

What people are doing now

The FEDs tool kit

Corporate debt

Investors

Conclusion

Suitability

Investor behavior

Asset allocation

Ignore the noise

Never stop learning