The Market Crash Is Coming! (…Eventually)

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Here on the Best Interest, I provide a lot of “you should be investing!” advice. I talk about the power of long-term investments. And stock market strategies. And even about my specific investment choices. But today is different. Today’s post is about the upcoming market crash. Well…it’s coming eventually.

Perhaps you’ve come to believe that I’m an unwavering bull. A pure optimist. That I think investments can do nothing but increase in value. But that’s not true. I know the crash will come. It always does.

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And that might seem scary. If the crash is coming, then why not do something about it? So that’s what today’s post is about. Even though we’re aware that a market crash is coming (eventually), we can take a step back and think about it rationally.

Being a Bull Before the Market Crash

Here’s a prediction.

I predict that I will eventually make a blog post where I say something like,

“I bought some shares of an index fund this month—just like every other month. And I think it’s one of the smartest things you can do as an investor.”

And after that future blog post, the market will proceed to fall 30% over the next few months.

Some people will then look at the Best Interest and think, “Pfff! This guy Jesse doesn’t have a clue what he’s talking about! He invested a few thousand bucks right before the market crashed!! What a dummy!”

I’m calling it now. It’ll happen. And I understand why it will appear like I’d be a dummy.

So let’s dig in. Am I a dummy?

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Historical Data: The Market Crash Always Comes

The market crash always comes eventually.

Bear markets—where the stock market value drops by 20% or more from its previous high—have occurred 12 times since 1929.

Years of Bear Markets Percent Drawdown from Previous High
1929 – late 30s (Great Depression) -86%
1956 – 57 -22%
1961 – 62 (Flash Crash of ’62) -28%
1966 -22%
1968 – 70 -36%
1973 – 78 (Bretton Woods + Oil Crisis) -48%
1980 – 82 -27%
1987 – 88 (Black Monday) -34%
1990 -20%
2001 – 05 (Dot Com Bubble) -49%
2008 – 09 (Financial Crisis) -56%
2020 (COVID) -32%

The market ebbs and flows, oscillating between “unsustainable optimism and unjustified pessimism.” If we believe the assumption that stock prices are current unsustainably optimistic, then it’s believable that a serious bear market could happen in the next few years.

But lesser corrections—typically defined as at least a 10% drawdown—occur even more frequently. Since 1950, there have been 37 corrections of 10% or more. That’s more frequent than one every two years.

It doesn’t take Nostradamus to predict a future market downswing. I’m not calling a 1-in-1000 event. Market corrections happen all the time.

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“But if he gets elected…!!!”

You can find arguments from both sides of the political aisle that certain parties lead to better stock market performance. But let’s investigate the data itself.

First, let’s look at the president only. But heed warning: this is a slightly dangerous game. Does the president alone have enough influence to affect the stock market? Will the answers we find here be conclusive of causation? Or will they only present correlation?

From 1926 to 2020, we have 95 years of S&P 500 data. During that time, we’ve had 48 years of Democratic leadership and 47 years of Republican leadership. Republican years saw an average S&P 500 return of 9.0%, while Democratic years saw an average return of 14.9%.

That’s a pretty big difference! But is it causal i.e. one thing causes the other to occur? Can a system as complicated as the stock market be tied down to a single influencing variable like the president’s political party? Probably not.

After all, that’s only 23 presidential terms and 15 individual presidents. Eight Republicans and seven Democrats. Not exactly a huge sample set.

Keep this in mind for the next time a President tweet-brags about the stock market’s success.

President + Congress

But there is another working theory worth inspecting. The theory is that our government is more efficient when the Congress (both Houses) is controlled by the President’s party. If the President and Congress work together effectively, then we all benefit. It’s a “teamwork makes the dream work” situation.

In the 95-year period since 1926, we’ve had 48 years of President/Congress unification (14 years Republican and 34 years Democrat) and 47 years of division (33 with a Republican president and 14 with a Democrat). The market performance during these periods is very interesting.

President / Congress S&P 500 Average Annual Return
Dem / Dem (34 years) 14.5%
Repub / Repub (14 years) 13.9%
Dem / Repub or Split (14 years) 15.9%
Repub / Dem or Split (33 years) 7.0%
Total Unified (48 years) 14.3%
Total Divided (47 years) 9.7%

Is this causal? Does a unified Federal government ensure that the economy and stock market perform better? I doubt it’s conclusive. But it is interesting nonetheless.

The market trends upwards no matter who is in office, but it appears that political cooperation might help grease the wheels.

The Silver Lining of Market Crashes

Back when we consulted Mr. Market, one big takeaway was:

The only two prices that ever matter are the price when you buy and the price when you sell.

Ask yourself: what are your investing plans are for the next few years? Are you going to be a buyer—someone who is investing for the future? Or are you going to be a seller—someone who has invested for the past few decades and now wants to live off those investments?

If you’re a buyer, then a market crash has a pretty significant silver lining. Cheaper prices! If the market declines, then you get to invest at lower prices. It’s the easiest way to increase your long-term investing potential. Buy low, sell high. Dollar-cost average investors relish these chances to decrease their cost basis.

If you’re a seller, let’s look at how your past 30 years have been. The S&P 500 value was around ~350 in 1990. And now it’s at ~3500, or about 10x higher. If the market drops 20% next week to 2800, then your returns are only ~8x compared to 1990. But an 8x return ain’t bad!

“If the market crash is coming…why not sell now and wait to re-invest after the prices drop?”

Before I answer the question above, let’s consult Peter Lynch—who is considered one of the most successful investors of all-time.

Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves.

Peter Lynch

What exactly is Lynch saying? How do people lose money by “preparing” for corrections?

People lose money “preparing” for corrections because they sell too soon and then don’t know when to buy back in. It’s that simple. Both actions—selling too soon and not buying back in soon enough—can cause investors to miss out of years of growth and years of dividends.

That’s why Peter Lynch’s quote rings so true. Timing the market is hard.

So we don’t sell in preparation for a crash. But what about saving up cash and waiting to buy? Why not hold cash, wait for the 10% drop (that we know happens every 2 years, or so) and buy in then?

Well, I looked at that too. Back in March ’20, my “Viral Stock Market Strategies” article (get it? viral?!) looked at an assortment of supposed strategies that involved holding onto cash while waiting for the market to drop. I back-tested these strategies against the historical S&P 500 data, and simple dollar-cost averaging beats all the “wait for a drop” strategies.

You think there’s a market crash coming? I know, me too (eventually). There’s certainly a chance that holding onto cash and waiting for the crash is correct right now. But if you try that tactic over time, it’s a losing strategy.

Don’t sell. And don’t wait to buy. Carry on with your normal investing cadence.

Don’t do something. Just sit there.

Jack Bogle

“But what if it’s the crash?!”

What if what’s coming is the big market crash? The mother-of-all-crashes! What if society falls apart? Or if a meteor hits Earth and life changes as we know it? What if we all start scavenging for beans and scrap metal and fuel for our souped-up dirt bikes?

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Mad Max – where fuel and water are all that matter.

Scary questions, but they have a pretty simple answer. If an existential threat ruins your investments, then the stock market will be the least of your worries. That’s it. If “the big one” hits, then the stock market will be one of many societal structures that no longer matter.

If it’s not “the big one,” then the market will recover. It always does.

Why? Why does the market always bounce back? In part, it’s because humans are resilient. We learn and grow and work towards progress. While this year’s COVID market recovery can be attributed to many different factors—like the Federal Reserve lowering interest rates—it can also be attributed to human resiliency.

If “the big one” is coming, then shouldn’t you just “YOLO” and spend your money now? Yeah, you should. I suppose we all need to do some probability analysis.

  • What are the odds that “the big one” is about to come and you look stupid that your investments become worthless?
  • What are the odds that “the big one” never comes and you wish that you had invested in your younger years to enable retirement?

I’ll take my chances and save for retirement.

Crash Landing

So, am I a dummy? I hope I’ve convinced you otherwise.

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Even though we know that the stock market will eventually succumb to 10%, 20%, or even larger drawdowns, there’s no basis that you’ll benefit by trying to wait or time that market crash. It might work, but it usually doesn’t. That’s what the historical data tell us.

Waiting for the election doesn’t matter either. Democrats, Republicans…the market does its own thing. There might be some causality, but it’s tough to tell.

There are silver linings in corrections and crashes. If you’re investing for the long-term, then corrections enable cheaper prices and greater returns.

And if this market crash is “the big one,” then none of this really matters. It’s hard to blog if the electrical grid fails.

If you enjoyed this article and want to read more, I’d suggest checking out my Archive or Subscribing to get future articles emailed to your inbox.

This article—just like every other—is supported by readers like you.

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Alternative Investments Are Not Just for the Wealthy

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We hear a lot these days about alternative investments. Wall Street firms regularly tout their expertise in these investments and try to convince us we need them in our portfolio.

In the beginning, alternative investments were only available to what most would consider the wealthy.

The SEC set the definition of the wealthy with their accredited investor definition. To be eligible to invest in these alternative investments, one has to have an income of at least $200,000 (individual) or $300,000 (joint) for the last two years. Additionally, the rule states the investor expects that income to continue going forward.

If they don’t meet the income requirement, accredited investors must have a net worth of at least $1,000,000 (exclusive of personal residence). Though that group is growing, it leaves out millions of people who could benefit from the diversification offered by this asset class.

One thing common in the early days of these investments was high fees. In the beginning, managers charged investors 2% of the amount invested plus 20% of profits. Here’s what that means.

In This Article

The High Cost of Fees

If someone invested $100,000 in a fund, and the fund earned 10% (few do), the total dollars paid by the investor would be $4,000 ($100k x 2% = $2,000 + $10,000 x 20% = $2,000). That means instead of making $10,000 on your $100,000 investment, you walked away with $6,000! Instead of a 10% return, you earned 6%! That’s a 40% drop in your profit!

Also, your money was not available to you until the project or fund sold or closed. That typically is five years or more.

Over the years, investors became wise to the scheme, as did other investment product producers. They introduced lower cost, more liquid alternative investments into the marketplace, and lowered the bar for investing.

In today’s post, we’re going to introduce you to six investments you may not have considered – three for accredited investors, three for everyone else. We think by the end of this post, you’ll feel more comfortable and confident in looking at these investments for your portfolio.

What Are Alternative Investments?

Let’s start with what most consider the traditional investment products – those would be stocks, bonds, and cash. Investors can put money in the U.S. and international markets in both stocks, bonds, and cash. Most investors access these products via mutual funds and exchange-traded funds (ETFs). The most popular form of investing in these markets is via index funds.

When investing in index funds, investors put their money in funds that mirror the market. There are no fund managers picking which stocks to buy, when to buy them, and when to sell. Instead, in index funds, investors get all of the stocks in that index (like the S & P 500) at the same proportion each stock makes up in the indexes.

Rather than trying to beat the market, investors take what the market offers. It’s a very inexpensive and easy way to invest.

Alternative investments, on the other hand, are not mutual funds, ETFs, or index funds. Instead, the funds have a management team and invest in things that are different from the stock and bond markets. They include offerings like private equity, real estate, hedge funds, venture capital, managed futures, and derivative products.

Many of you have heard these names thrown in the financial press. In addition to high fees, many alternative investments have high minimum initial investments.

Crowdfunding – The Game Changer

For the reasons mentioned above, innovation entered the alternative investment arena. As a result, companies began developing investments with lower fees and smaller minimum investments. They made these accessible to non-accredited investors. These innovative investments are a game-changer for the everyday investor.

Crowdfunded real estate investment trusts are the primary vehicle for these investments. These newer funds register with the SEC as exempt funds, usually under the SEC’s Regulation Crowdfunding. Crowdfunding in real estate, like with individual or small business crowdfunding allows smaller investors into an investment space that hasn’t been available to them in the past.

We’ll offer a couple of specific funds to consider shortly.

Other options come in the form of mutual funds (managed futures, commodities, long-short funds, etc.). We will leave the discussion of these for another day. We want to focus on private funds, which are more like the traditional alternative investments initially designed for the wealthy.

Alternative Investments for Everyone

We want to highlight three investments available to non-accredited investors. One, Vinovest, is a unique offering. The other two, DiversyFund and Fundrise, are crowdfunded real estate funds as described in the last section.

Let’s dive into the summaries.

Vinovest

Vinovest offers a unique alternative investment in assets; one would normally not consider an investment class. We’re talking about fine wine. You can read our review of Vinovest for a more detailed description.

The first thing to know about investing in fine wine is that it takes knowledge to understand how to choose the right wines. Vinovest has a team of experts, called sommeliers, who have undergone rigorous training over several years. Three of their four sommeliers have achieved the Master Sommelier title. That’s the highest degree of recognition in the wine industry. These folks know their wine.

Wine selections come from their knowledge and a sophisticated algorithm their technical team developed — the result – the best wines with the best chance or price appreciation. You own the individual bottles. Vinovest will store and age the wine at their state of the art facilities around the world. They guarantee the safety of your wine.

The minimum investment is just $5,000. It’s a unique offering and worthy of consideration.

Fundrise and DiversyFund

Crowdfunding offers a method of fundraising that can bypass Wall Street firms and big banks with their high rates and fees. The introduction of crowdfunding was disruptive. In crowdfunded real estate, non-accredited investors now have access to similar real estate investments that accredited investors have always enjoyed.

Both FundRise and DiversyFund are crowdfunded real estate funds. Investors can invest in these funds with as little as $500.

Here’s a summary of each. You’ll find a link to our review of both for reference.

Fundrise

Fundrise has invested over $2.5 billion to date and has a history of above-average returns. They offer three core plans to get you started – Supplemental Income, Balanced Investing, and Growth. Each name describes the goals of the fund. If you’re looking for income, consider the Supplemental Income fund.

If you want a mix of income and growth, go with the Balanced Investing Fund. Are you looking for capital appreciation? Choose the growth fund.

You can get more details and learn more about REITS and crowdfunded real estate in this review.

DiversyFund

Contrary to Fundrise, DiversyFund is a reasonably new entrant in the field of crowdfunded real estate investing. Unlike the Fundrise investment options, the team at DiversyFund focuses on growing investors’ capital. They have a value add investment strategy when looking for properties.

What that means is they look for multi-family properties (apartments, condos, etc.) that have positive cash flow (renters) in good neighborhoods. The value add in their property selection comes from finding properties that need some work. We’re not talking about a complete redo. Instead, the building might need a new roof, updated bathrooms or kitchens, or maybe a fresh coat of paint.

With the improvements, they can charge more rent when the leases expire, and new tenants come on board. Get additional details from this review.

Alternative Investments for Accredited Investors

What follows are three recommendations for those of you who meet the criteria of the accredited investor. What follows are offerings that have much lower minimum investments and fees. Two are crowdfunded offerings. The other is not.

FarmTogether

Have you ever thought about investing in farmland? Did you not pursue that thought because you didn’t know you had enough money or didn’t know enough about it? If either of those describes you, you’re going to want to learn about FarmTogether.

FarmTogether offers a low-cost investment opportunity that allows investors to own real land. Real land is less subject to inflation and more stable than many other investments. Why? For one thing, we’re not making any more of it. The law of supply and demand means it’s likely to appreciate.

For those looking for cash flow, they offer that as well. The typical investments range from $10,000 – $50,000 per transaction. That $10,000 number is much more accessible than many of these types of offerings. And there are precious few funds that offer investment in farmland with cash flow.

Here’s a look at their current offering:

alternative investment offering details from FarmTogether

You can read our full review here.

Yield Street

YieldStreet is a fixed income alternative investment. The team focuses on investments in litigation finance, real estate, consumer and commercial financing, to name a few. Getting into these types of alternative fixed income areas has typically been limited to hedge funds and other institutional investors. Accredited investors can now access these alternatives with Yieldstreet. They have the experience and expertise you want. Below are some of the details and history.

YieldStreet alternative investment stats

They have multiple offerings from which investors can choose. The minimum and maximum investment depend on the offering chosen. The minimum investment is usually $10,000. Once again, that is much lower than many alternative investments.

You can read our review of YieldStreet here.

PeerStreet

PeerStreet is another alternative investment in the real estate space. Rather than buying properties, the team at PeerStreet invest in loans backed by real estate. The quality of the loans is directly related to the quality of the real estate backing the loans. Here’s a picture of their loans.

Snapshot of PeerStreet loan history

The returns for loan investments are above average. The LTV (loan to value) of the properties shows they are not heavily leveraged, and the terms are relatively short. Like many of the investments we highlight here, PeerStreet has a low minimum investment of only $1,000 per loan.

Be sure to check out our review of PeerStreet to learn more.

Finding Other Alternative Investments

When it comes to investing, there are numerous options from which to choose. The problem comes in knowing where to look for the options. MoneyMade has you covered. What is MoneyMade?

From our review – “It’s a discovery engine built to help you find and compare all types of investment opportunities, spanning from alternative investment platforms through to Robo Investing.” And it’s super simple to use. Just enter the criteria of the investment you’re looking for and let MoneyMade do the rest. Take a look at a search for Startups on MoneyMade below.

MoneyMade: Discover | Startups

Read our review of MoneyMade to learn more and take advantage of this great new platform.

Final Thoughts

I hope by now, you see that alternative investments are no longer the exclusive investments for the uber-wealthy. Competition from mutual funds, and, more recently, from the crowdfunded investment arena have brought costs and minimum investments way down. That’s not so good for the Wall Street product producers. But it’s great for consumers.

The six investments we highlight are, by no means, meant to be the cure-all be all for alternative investments though we do think that Vinovest and FarmTogether are two of the more unique offerings available.

Before doing any investing, you should know why you’re investing. You should know what you want your investments to do for you. Once you get those foundational questions answered, you can take the time to investigate the best investments to help you achieve those goals. If you don’t know where to start, a great place would be MoneyMade. If you feel like you need help deciding, consider hiring an independent financial advisor.

Whether you’re a seasoned investor of a DIYer who is looking for alternatives to the traditional stocks and bonds, we think the six investments highlighted here are worthy of consideration. If none of those make sense, head over to MoneyMade and let them help you find what you’re looking for.

Good luck!

Fred started the blog Money with a Purpose in October 2017. The blog focused on three primary areas: Personal Finance, Overcoming Adversity, and Lifestyle. During his time at Money with a Purpose, he was quoted in Forbes, USA Today and appeared in Money Magazine, MarketWatch, The Good Men Project, Thrive Global and many other publications.

I April 2019, Fred, along with two other partners, acquired The Money Mix website. To focus his time and energy where he could be the most productive, Fred recently merged Money with a Purpose with The Money Mix. You can now find all of his great content right here on The Money Mix, along with content from some of the brightest minds in personal finance.

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Retirement Archives – Money Crashers

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529 Plans: A Complete Guide to Funding Future Education

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Do you have kids? Are there children in your life? Were you once a child? If you plan on helping pay for a child’s future education, then you’ll benefit from this complete guide to 529 plans. We’ll cover every detail of 529 plans, from the what/when/why basics to the more complex tax implications and investing ideas.

This article was 100% inspired by my Patrons. Between Jack, Nathan, Remi, other kiddos in my life (and a few buns in the oven), there are a lot of young Best Interest readers out there. And one day, they’ll probably have some education expenses. That’s why their parents asked me to write about 529 plans this week.

What is a 529 Plan?

The 529 college savings plan is a tax-advantaged investment account meant specifically for education expenses. As of the passage of the Tax Cuts and Jobs Act (in 2017), 529 plans can be used for college costs, K-12 public school costs, or private and/or religious school tuition. If you will ever need to pay for your children’s education, then 529 plans are for you.

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529 plans are named in a similar fashion as the famous 401(k). That is, the name comes from the specific U.S. tax code where the plan was written into law. It’s in Section 529 of Internal Revenue Code 26. Wow—that’s boring!

But it turns out that 529 plans are strange amalgam of federal rules and state rules. Let’s start breaking that down.

Tax Advantages

Taxes are important! 529 college savings plans provide tax advantages in a manner similar to Roth accounts (i.e. different than traditional 401(k) accounts). In a 529 plan, you pay all your normal taxes today. Your contributions to the 529 plan, therefore, are made with after-tax dollars.

Any investment you make within your 529 plan is then allowed to grow tax-free. Future withdrawals—used for qualified education expenses—are also tax-free. Pay now, save later.

But wait! Those are just the federal income tax benefits. Many individual states offer state tax benefits to people participating in 529 plans. As of this writing, 34 states and Washington D.C. offer these benefits. Of the 16 states not participating, nine of those don’t have any state income tax. The seven remaining states—California, Delaware, Hawaii, Kentucky, Maine, New Jersey, and North Carolina—all have state income taxes, yet do not offer income tax benefits to their 529 plan participants. Boo!

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This makes 529 plans an oddity. There’s a Federal-level tax advantage that applies to everyone. And then there might be a state-level tax advantage depending on which state you use to setup your plan.

Two Types of 529 Plans

The most common 529 plan is the college savings program. The less common 529 is the prepaid tuition program.

The savings program can be thought of as a parallel to common retirement investing accounts. A person can put money into their 529 plan today. They can invest that money in a few different ways (details further in the article). At a later date, they can then use the full value of their account at any eligible institution—in state or out of state. The value of their 529 plan will be dependent on their investing choices and how those investments perform.

The prepaid program is a little different. This plan is only offered by certain states (currently only 10 are accepting new applicants) and even by some individual colleges/universities. The prepaid program permits citizens to buy tuition credits at today’s tuition rates. Those credits can then be used in the future at in-state universities. However, using these credits outside of the state they were bought in can result in not getting full value.

You don’t choose investments in the prepaid program. You just buy credit’s today that can be redeemed in the future.

The savings program is universal, flexible, and grows based on your investments.

The prepaid program is not offered everywhere, works best at in-state universities, and grows based on how quickly tuition is changing (i.e. the difference between today’s tuition rate and the future tuition rate when you use the credit.)

Example: a prepaid credit would have cost ~$13,000 for one year of tuition in 2000. That credit would have been worth ~$24,000 of value if used in 2018. (Source)

What are “Qualified Education Expenses?”

You can only spend your 529 plan dollars on “qualified education expenses.” Turns out, just about anything associated with education costs can be paid for using 529 plan funds. Qualified education expenses include:

  • Tuition
  • Fees
  • Books
  • Supplies
  • Room and board (as long as the beneficiary attends school at least half-time). Off-campus housing is even covered, as long as it’s less than on-campus housing.

Student loans and student loan interest were added to this list in 2019, but there’s a lifetime limit of $10,000 per person.

How Do You “Invest” Your 529 Plan Funds?

529 savings plans do more than save. Their real power is as a college investment plan. So, how can you “invest” this tax-advantaged money?

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There’s a two-part answer to how your 529 plan funds are invested. The first part is that only savings plans can be invested, not prepaid plans. The second part is that it depends on what state you’re in.

For example, let’s look at my state: New York. It offers both age-based options and individual portfolios.

The age-based option places your 529 plan on one of three tracks: aggressive, moderate, or conservative. As your child ages, the portfolio will automatically re-balance based on the track you’ve chosen.

The aggressive option will hold more stocks for longer into your child’s life—higher risk, higher rewards. The conservative option will skew towards bonds and short-term reserves. In all cases, the goal is to provide some level of growth in early years, and some level of stability in later years.

The individual portfolios are similar to the age-based option, but do not automatically re-balance. There are aggressive and conservative and middle-ground choices. Thankfully, you can move funds from one portfolio to another up to twice per year. This allowed rebalancing is how you can achieve the correct risk posture.

Advantages & Disadvantages of Using a 529 Plan

The advantages of using the 529 as a college investing plan are clear. First, there’s the tax-advantaged nature of it, likely saving you tens of thousands of dollars. Another benefit is the aforementioned ease of investing using a low-maintenance, age-based investing accounts. Most states offer them.

Other advantages include the high maximum contribution limit (ranging by state, from a low of $235K to a high of $529K), the reasonable financial aid treatment, and, of course, the flexibility.

If your child doesn’t end up using their 529 plan, you can transfer it to another relative. If you don’t like your state’s 529 offering, you can open an account in a different state. You can even use your 529 plan to pay for primary education at a private school or a religious school.

But the 529 plan isn’t perfect. There are disadvantages too.

For example, the prepaid 529 plan involves a considerable up-front cost—in the realm of $100,000 over four years. That’s a lot of money. Also, your proactive saving today ends up affecting your child’s financial aid package in the future. It feels a bit like a punishment for being responsible. That ain’t right!

Of course, a 529 plan is not a normal investing account. If you don’t use the money for educational purposes, you will face a penalty. And if you want to hand-pick your 529 investments? Well, you can’t do that. Similar to many 401(k) programs, your state’s 529 program probably only offers a few different fund choices.

529 Plan FAQ

Here are some of the most common questions about 529 education savings plans. And I even provide answers!

How do I open a 529 plan?

Virtually all states now have online portals that allow you to open 529 plans from the comfort of your home. A few online forms and email messages is all it takes.

Can I contribute to someone else’s 529?

You sure can! If you have a niece or nephew or grandchild or simply a friend, you can make a third-party contribution to their 529 plan. You don’t have to be their parent, their relative, or the person who opened the account.

Investing in someone else’s knowledge is a terrific gift.

Does a 529 plan affect financial aid?

Short answer: yes, but it’s better than how many other assets affect financial aid.

Longer answer: yes, having a 529 plan will likely reduce the amount of financial aid a student receives. The first $10,000 in a 529 plan is not part of the Expected Family Contribution (EFC) equation. It’s not “counted against you.” After that $10,000, remaining 529 plan funds are counted in the EFC equation, but cap at 5.46% of the parental assets (many other assets are capped higher, e.g. at 20%).

Similarly, 529 plan distributions are not included in the “base year income” calculations in the FAFSA application. This is another benefit in terms of financial aid.

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Finally, 529 plan funds owned by non-parents (e.g. grandparents) are not part of the FAFSA EFC equation. This is great! The downside occurs when the non-parent actually withdraws the funds on behalf of the student. At that time, 50% of those funds count as “student income,” thus lowering the student’s eligibility for aid.

Are there contribution limits?

Kinda sorta. It’s a little complicated.

There is no official annual contribution limit into a 529 plan. But, you should know that 529 contributions are considered “completed gifts” in federal tax law, and that those gifts are capped at $15,000 per year in 2020 and 2021.

After $15,000 of contributions in one year, the remainder must be reported to the IRS against the taxpayer’s (not the student’s) lifetime estate and gift tax exemption.

Additionally, each state has the option of limiting the total 529 plan balances for a particular beneficiary. My state (NY) caps this limit at $520,000. That’s easily high enough to pay for 4 years of college at current prices.

Another state-based limit involves how much income tax savings a contributor can claim per year. In New York, for example, only the first $5,000 (or $10,000 if a married couple) are eligible for income tax savings.

Can I use my state’s 529 plan in another state? Do I need to create 529 plans in multiple states?

Yes, you can use your state’s 529 plan in another state. And mostly likely no, you do not need to create 529 plans in multiple states.

First, I recommend scrolling up to the savings program vs. prepaid program description. Savings programs are universal and transferrable. My 529 savings plan could pay for tuition in any other state, and even some other countries.

But prepaid tuition accounts typically have limitations in how they transfer. Prepaid accounts typically apply in full to in-state, state-sponsored schools. They might not apply in full to out-of-state and/or private schools.

What if my kid is Lebron James and doesn’t go to college? Can I get my money back?

It’s a great question. And the answer is yes, there are multiple ways to recoup your money if the beneficiary doesn’t end up using it for education savings.

First, you can avoid all penalties by changing the beneficiary of the funds. You can switch to another qualifying family member. Instead of paying for Lebron’s college, you can switch those funds to his siblings, to a future grandchild, or even to yourself (if you wanted to go back to school).

Lebron James Mood GIF by NBA - Find & Share on GIPHY

What if you just want you money back? The contributions that you initially made come back to you tax-free and penalty-free. After all, you already paid taxes on those. Any earnings you’ve made on those contributions are subject to normal income tax, and then a 10% federal penalty tax.

The 10% penalty is waived in certain situations, such as the beneficiary receiving a tax-free scholarship or attending a U.S. military academy.

And remember those state income tax breaks we discussed earlier? Those tax breaks might get recaptured (oh no!) if you end up taking non-qualified distributions from your 529 plan.

Long story short: try to the keep the funds in a 529 plan, especially is someone in your family might benefit from them someday. Otherwise, you’ll pay some taxes and penalties.

Graduation

It’s time to don my robe and give a speech. Keep on learning, you readers, for:

An investment in knowledge pays the best interest

-Ben Franklin

Oh snap! Yes, that is how the blog got its name. Giving others the gift of education is a wonderful thing, and 529 plans are one way the U.S. government allows you to do so.

If you enjoyed this article and want to read more, I’d suggest checking out my Archive or Subscribing to get future articles emailed to your inbox.

This article—just like every other—is supported by readers like you.

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Tagged 529 plan, education

Source: bestinterest.blog

How to Invest in Gold as a Beginner

Gold is one of the oldest investment strategies there is and continues to be relevant even today. Gold tends to move in the opposite direction as the stock market, so it can be a worthwhile asset in the event of a market downturn.

gold on table

When you imagine investing in gold, you may picture people hiding gold bars underneath their bed. This is an option, but it’s probably not the smartest investment strategy. And there are actually many ways you can invest in gold, even as a beginner.

Why invest in gold?

Before we get into how to invest in gold, it can help to understand why gold is still a sound investment in 2021. The biggest reason is that gold is considered to be an inflation hedge.

An inflation hedge is an investment that protects the purchasing power of currency from rising costs due to inflation. An inflation hedge either maintains or increases its value over a long period of time.

For instance, the dollar bill is not an inflation hedge because its value decreases over time. In comparison, an ounce of gold can still purchase roughly the same amount of goods as it could 200 years ago.

You don’t want to have all of your assets tied up in gold. But for investors that are looking for ways to protect themselves from inflation, buying gold isn’t a bad choice. And gold can help you diversify your portfolio outside of the stock market.

Pros and Cons of Investing in Gold

There are many advantages to investing in gold, but there are downsides to consider as well. If you’re on the fence about whether or not buying gold is the right strategy for you, here are a few pros and cons to think about first.

Pros

  • Gold has intrinsic value
  • It can serve as a hedge against inflation
  • A good way to diversify your portfolio
  • Buying gold can provide a feeling of security
  • It’s fairly easy to buy and sell gold coins
  • There are multiple ways to get started investing in gold

Cons

  • It can be hard to know if you’re getting a good deal
  • Storing gold can be expensive
  • Dealers can charge a number of hidden fees
  • Gold doesn’t pay interest or dividends

5 Ways to Invest in Gold

Now that you understand why gold is a good investment, you may be wondering how to get started. Well, it’s actually easier than ever to invest in gold because there are so many options available.

However, this can cause many new investors to feel overwhelmed and unsure of how best to start. If you’re new to investing in gold, here are five solid options you can consider.

1. Physical gold

The most straightforward way to invest in gold is by purchasing physical gold, either online or in-person. You can buy gold bars, coins, or bullions from gold dealers.

There are advantages to going this route, and the biggest is that it’s a tangible asset that you own. Having a tangible asset can provide many people with a sense of security, and more control over their investment.

However, if you purchase gold coins or bars, you’re going to have to choose carefully when it comes to the company you work with. Some dealers will mark up the price of gold heavily, so it can be hard to know if you’re getting the best deal.

And if you purchase physical gold, you’ll need to have a way to store it, so you’ll likely end up paying storage costs. Plus, gold is not a liquid asset, so you may have a hard time selling it down the road.

2. Gold mining stocks

One of the biggest issues many people have with investing in gold is that there’s no growth potential. Sure, gold retains its value, but it’s not going to earn you any money, which is the entire point of investing.

If this issue has been holding you back from buying gold, then you might consider gold mining stocks. Instead of purchasing physical gold, you’ll purchase stocks of companies engaged in mining precious metals.

There are many gold mining stocks that consistently outperformed the market during the fallout of COVID-19. For instance, Goldcorp, Franco Nevada Corp., and Kirkland Lake Gold Ltd. are all good options you can consider.

However, you aren’t really investing in gold; you’re investing in that business. And that always comes with inherent risks. If you choose to go this route, you’ll need to pay close attention to what’s going on with that company.

3. Gold exchange-traded funds (ETFs)

Gold ETFs are a great option for anyone that wants to invest in gold without having to pay for storage costs. An ETF holds gold bullions at a storage facility and allows investors to buy shares of the fund.

Gold ETFs are a great option for beginners because you can invest in the asset without having to physically manage it yourself. You can purchase gold ETFs through a regular brokerage firm.

4. Gold certificates

Gold certificates are another way to invest in the asset without having to physically purchase it and store it yourself. Essentially, you buy a note issued by a company that owns and sells gold. The note isn’t issued for any specific type of gold, but the company verifies that it has the assets to back the note.

Gold certificates are not a bad option for beginners, but you’ll need to choose the company wisely. Otherwise, it could be easy to fall prey to scam artists. If you’re not sure about going this route, then gold ETFs may be a better option for you.

5. Gold mutual funds

And finally, if you’re interested in the idea of owning stock in companies that deal with gold, you might consider investing in a gold mutual fund. A mutual fund allows you to own a portfolio of gold mining companies, as opposed to just investing in one company.

A gold mutual fund is a great way to diversify your portfolio, though the fees may be higher. If you’re considering this option, you’ll want to find a broker that you trust who can advise you.

What’s the Best Gold Investment Strategy for Beginners?

If you’re new to investing in gold, then you may be wondering what the best option is. The truth is, there are no perfect investment strategies, so you’re going to have to evaluate the risks and rewards of each one.

Consider what your goals are and why you want to invest in gold. If your only strategy is to protect yourself against inflation, then buying physical gold may be the right choice for you. Whereas, if you want an income-producing asset, then gold stocks or mutual funds may be a better choice.

Just keep in mind that gold should only be one part of your total investment strategy. Ideally, it will be less than 10% of your total portfolio. That way, you’ll diversify your assets without putting too much at risk.

Bottom Line

By now, you understand what the benefits and downsides are to investing in gold, as well as your options for getting started. If you want to move forward and begin investing in gold, it’s best to start small and slowly increase your assets over time.

Make sure you do your homework when it comes to the company you choose to work with. When you talk to potential companies, try to get a sense of how transparent they are and forthcoming about the fees they charge. It’s also a good idea to check their ratings and reviews so you can see what kind of experience other customers have had.

But if you take your time and invest wisely, you could protect yourself from future market downturns.

Source: crediful.com

How To Build Wealth In Three Easy Steps

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Do you want to learn how to build wealth?

When it comes to building wealth, there are several strategies and even more opinions. Some people get lucky, like winning the lottery, inheriting vast sums of money from their long-lost uncle, or being fortunate enough to buy that one in a million stock that explodes in value.

The majority of us aren’t lucky enough to be in the right place at the right time. Instead, for the people who want a happy early retirement, we have to accumulate wealth over the long run using a strategic how to build wealth plan. Banking on getting lucky at some point in your life is a losing endeavor for most, but wealth can be obtainable for those who take the time to understand these three simple steps:

  • Make money
  • Save money
  • Invest money

Execute these three steps properly, and accumulating wealth is not only achievable but likely.

In This Article

How to Build Wealth Steps

If you can master these three steps, making money, saving money, and investing money you will be on your way to building personal wealth.

Making Money

How one makes money is one of the most difficult and important decisions in a person’s life. To complicate the matter further, this is usually a decision that someone is forced to make when they’re still a teenager and with limited world experience. Someone faced with this decision should consider the time and cost of the education, the earnings potential of that career, and if it’s something that they can see themselves doing for the next 40 years of their life.

Making money is a fundamental step to ensure a fruitful and enriched life. If the career you’ve chosen doesn’t compensate you adequately, many people decide to add side gigs for additional earnings. The good news is, side gigs are usually added later in life when people have more experience and ability to select something they enjoy doing. In some situations, side gigs end up becoming more profitable than the main gig.

Saving Money

It’s important to understand that saving money and investing money are not the same thing. Saving money starts with good spending habits, not buying stuff you don’t need, and making good choices on the money you do spend. Staying away from extremely high margin items, no matter how small those purchases are, is an excellent place to start. Going to the movies once a month and buying $20 worth of snacks that’s only worth $2 can add up dramatically over a lifetime.

Spending large amounts of money on depreciating assets is also a losing strategy. For example, spending $35,000 on a brand-new car versus buying the same two-year-old model for $25,000 will have a dramatic effect on long-term wealth.

Most people don’t understand the long-term time value of the dollar, and by doing so, people end up spending money without putting much thought into it. For example, if a 25-year-old decided to buy a used car versus a new car, and instead saves $10,000 for investing, their long-term wealth would substantially be increased. You might not have the same shiny car your friend has, but you’ll likely retire a decade before them. You need to ask yourself, would you rather drive a shiny new car in your 20s or retire ten years sooner? Don’t think that’s the case… I’ll explain further on.

how to build wealth

Investing Money

Investing money is the process of buying assets that are likely to appreciate over time. The value of money is always decreasing, so simply keeping money in the bank is not an intelligent strategy for building long-term wealth.

If a gallon of milk costs $5 today and costs $6 five years from now, that’s a 20% increase in the cost of goods. This means you would have made 20% on your saved capital just to sustain the same standard of living. To gain wealth, you would’ve had to of gained more than 20% on your saved capital, which would put you ahead of the game. Fortunately, this is relatively easy to do.

To give you an idea of the power of investing, let’s invest that $10,000 you saved from buying a two-year-old car versus the new car. If you were to invest that money at 8% annually, which would be extremely easy to do based on historical averages, at the end of the year, that $10,000 would now be worth $10,800. That would then compound on itself, and by the end of year two, you would now have $11,664. This keeps going on and on. By the end of five years, your money is now worth $14,693.

how to build wealth

For the person that decided to buy a used car at the age of 25 and save that $10,000, investing it intelligently, by the time they were 55 years old, their $10,000 would be worth $100,626! That’s the power being able to make money, then make smart decisions with the money, and then investing it intelligently. Just imagine what it’s like for people who achieve even higher rates of return on their capital.

Getting There

For those who put in the time to learn how to invest properly, much larger returns are obtainable. To put this in perspective, if the same person put their $10,000 to work at an 18% annual interest rate, they would have a payout of $1,433,706 at the end of 30 years. That’s not an exaggeration, and that’s if they never saved anything again! Just imagine if you saved more and implemented a solid investment plan.

Too many people put their retirement, arguably the most valuable asset they have, in the hands of a stranger. People acquire lots of different skills over their lifetime; learning how to invest their own money is definitely a skill that everyone should take the time to learn. The reason being, nobody cares more about your money than you.

Over the long run, no strategy beats investing in the stock market. Many investors fear the stock market due to the volatility. However, investors can’t make the best returns if at least a portion of their savings isn’t in the area where the best returns are achieved. And when you combine stocks with options, not only are investors able to mitigate risk, but even higher levels of performance can be achieved. The smartest investors like Warren Buffett and Peter Lynch achieve great success by combining a stock and options strategy, but anyone can do it.

Take Control of Your How To Build Wealth Plan

For people who want to take control of their wealth and learn options trading for FREE, so that they can put their saved capital to better use, OptionStrategiesInsider.com has you covered. Their options trading strategies teach users how to mitigate risk, diversify an already existing stock portfolio, and make above-average returns using less capital within their portfolio. This ensures smart investors a happy medium between risk and reward, enabling them the ability to achieve their long-term financial goals.

Chris Douthit, MBA, CSPO, is a former professional trader for Goldman Sachs and the founder of OptionStrategiesInsider.com. His work, market predictions, and options strategies approach has been featured on NASDAQ, Seeking Alpha, Marketplace, and Hackernoon.

Source: debtdiscipline.com