First-Time Investors should Stop Chasing Hot Stocks | TheStreet

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“Your savings rate is…the biggest determinant of how you do financially over time.” Christine Benz, the director of personal finance for investment research firm Morningstar

As the stock markets plunged across the globe in March, a wave of Americans saw an opportunity to start investing. But chasing hot stocks like Apple, Tesla or Amazon, according to financial experts, is akin to making the same old ‘tried and true’ investment mistakes as our forefathers and foremothers.

“Individual stocks are terrible investments for people just starting out,” according to Christine Benz, the director of personal finance for investment research firm Morningstar.

Active investing strategies, such as buying and selling individual stocks on trading platforms like Robinhood, often underperforms over the long-term versus more passive investment strategies, such as investing in low cost index funds that simply follow a stock market index like the S&P 500.

While chasing hot stocks may seem thrilling in the short-term while you’re winning, the keys to financial success and security are incredibly mundane. They include:

  • Creating and following a financial plan;
  • Disciplined and deliberate savings;
  • Investing for the long-term;
  • Time in the market beats timing the market;
  • Investing in market index mutual funds and ETFs; and
  • Diversification and asset allocation.

Read more: https://www.thestreet.com/personal-finance/first-time-investors-stop-chasing-hot-stocks-do-this-instead-nw

Why would anyone own bonds now? There are at least five reasons | MarketWatch

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Published on www.MarketWatch.com: Aug. 4, 2020 at 12:52 p.m. ET

By Ben Carlson

Bonds play a role in an investment portfolio, even amid historically low interest rates

What’s the better performer 2020 year to date — the red-hot Nasdaq 100 index of tech behemoths (Apple, Microsoft, Amazon and Alphabet, etc.) or boring, old long-term bonds?

The Nasdaq 100 ETF QQQ is up an astonishing 25.5%. But the long-term treasury ETF TLT is up 27.3%. Surprisingly, long-term bonds are outperforming tech stocks.

Yet, according to Deutsche Bank, we’re now experiencing the lowest government bond yields in well over 200 years:

Fixed income assets, such as bonds, typically provides regular cash and lower volatility when markets hit turbulence.  And, bond prices often are uncorrelated to equities. Stocks typically do well in periods of economic growth, whereas bonds typically do well in periods of declining economic activity and recessions.  Additionally,  bonds offer downside protection and moderate upside potential as investors tend to seek out the safety of U.S. government and investment-grade corporate bonds amid stock market uncertainty.

Many investors have been saying for years that bond coupon rates and yields can only go up from here, and yet, they’ve done nothing but fall more. And maybe they’ll fall even further and possibly go negative like in Europe and Japan (something we should not rule out in the U.S. if the pandemic worsens).

But eventually short-term movements in rates will wash out and the long-term returns will be based more on the current bond yields. When you consider how paltry those yields are, investors in fixed-income are guaranteed to see minuscule returns from here over the long haul.

So why own bonds at historically low yields? Some reasons:

  1. Bonds hedge stock-market volatility
  2. Bonds can be used to rebalance
  3. Bonds can be used for spending purposes
  4. Bonds protect against deflation
  5. There are other asset class options, but there aren’t many

Although bonds and bond funds have done extremely well in 2020, the bottom-line regarding bonds and bond funds…you can either earn less income from low yielding bonds to better protect your capital or earn more income from dividend paying stocks to accept more risk in your portfolio.

Read the entire opinion article at: https://www.marketwatch.com/story/why-would-anyone-own-bonds-now-there-are-at-least-five-reasons-2020-08-04

References:

  1. https://www.fidelity.com/insights/investing-ideas/bond-funds-portfolio-protection

How Vaccines Work, How They’re Developed and What’s the Latest on One for COVID-19

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By Andrea Klemes, DO, FACE, CMO MDVIP

Since the coronavirus pandemic began in early 2020, we’ve heard a lot about vaccines. There have been promises for quick vaccine development as well as warnings about how long it really takes to develop a safe, effective vaccine.

You’ve also probably heard that a coronavirus vaccine is necessary for us to return to normal. The good news? Surprising progress has been made in creating vaccines for COVID-19. As of now, there are more than 160 vaccines in various stages of development, and many are already into the human testing phase. While the path to success is still uncertain, never in human history have so many scientists and resources been devoted to a single public health crisis.

In July, multiple vaccine manufacturers released preliminary data from phase 1 studies that showed new vaccines are well tolerated and created antibodies. This is good news because it shows success in human subjects; in phase 1 trials, small groups of people receive the vaccine. Three vaccines are either currently in a later phase of development, where they are being tested on thousands of people, or about to enter that phase.

While it’s good news, there’s a long way to go. Here’s a quick primer on how vaccines work, how they’re developed and where we stand developing a vaccine for the current coronavirus outbreak.

How Vaccines Work
Vaccines work by mimicking a virus or bacteria that enters the immune system to build up antibodies. Ironically, vaccines are one of our oldest modern medical treatments. The first effective vaccination — to smallpox — was developed in the late 18th century. Over the last 220 years, scientists have advanced the process and effectiveness for vaccines.

Modern vaccines are simple in concept: create a synthetic compound that behaves like a real live pathogen that doesn’t cause illness. The compound will instead provoke the immune system to create antibodies that teach the body to react quickly and forcefully if the real pathogen invades the body.

Antibodies are an essential part of your immune system. When a pathogen, like bacteria or a virus, invades your body, antibodies bind to the invader and neutralize it, minimizing its damage. Your body came with some antibodies, which were passed from your mother. But most antibodies are developed over time when you’re exposed to pathogens. Vaccines make that natural process happen without infecting you with a real virus or bacteria.

How Vaccines Are Made
There are four basic types of vaccines, but regardless of the type, the process to produce safe and effective vaccines is typically long and difficult. When we’re not in crisis mode, vaccine labs can take anywhere from 10 to 15 years to develop a new vaccine. Of course, when we’re in the throes of a pandemic, labs generally move quicker. For example, during the mumps outbreak, a vaccine was generated in four years – the quickest in U.S. history.

Labs are currently working on an even faster timetable, with hopes that a COVID-19 vaccine might be available by the end of 2020 or by the middle of next year.

The reason it takes so long it that there are five phases of vaccine development:

  • Exploration: In this stage, drug companies investigate different approaches to the vaccine. Historically, this phase lasts between two and four years; however, evolving technology has help quicken the pace of this phase for some vaccines, including COVID-19. Another factor that has helped speed up the exploratory stage of the COVID-19 vaccine is information sharing among scientists; for example, scientists genetically mapped the virus as early as January — something that would have taken much longer 10 or 20 years ago. Also, since COVID-19 is similar to SARS — another coronavirus that caused a six-month pandemic in 2003 — scientists working on the COVID-19 vaccine were able to learn from those working on the SARS vaccine — a significant head start.
  • Preclinical: Once researchers develop a vaccine candidate, it’s tested in cell cultures and animals to see if it triggers an immune response without damaging cells. This takes about a year. And if the vaccine doesn’t work, researchers circle back to the exploration phase. But if it is successful, it moves on the testing phase.
  • Testing: Vaccines are tested through clinical trials – research studies that evaluate the effectiveness and safety of vaccines, medications, medical devices, surgical procedures or behavioral interventions on a group of people. Most trials start with a small group of people (phase 1), and, if they go well, they are expanded to include a moderate size group of people (phase 2) and then a large group (phase 3). Of course, if issues arise during clinical trials, the vaccine reverts to the preclinical phase.
  • Regulatory review: If clinical trials go well, the drug company submits a Biologics License Application and product label for the vaccine. In the United States, applications and labels are sent to the U.S. Food and Drug Administration (FDA). In the U.S., this process takes about 10 months, although in a circumstance such as the COVID-19 pandemic, the process will probably be accelerated.
  • Production: Once the drug manufacturers have been given a green light, they can begin producing the vaccine. In the U.S., the FDA continues overseeing the production of the vaccine.


Where COVID-19 Vaccines Stand
At the end of July there were 23 vaccines in clinical testing and another 137 in pre-clinical development, according to the World Health Organization.

Dr. Erica Saphire, an infectious disease authority and professor at La Jolla Institute for Immunology, recently told medical officials that the earliest a vaccine may be available is January 2021, but it’s more likely that a viable vaccine won’t be available until July 2021 or later. Even when one is available, it will take time to get the vaccine manufactured and distributed. Of course, once a vaccine is available, healthcare workers, first responders and those at the highest risk – nursing home patients, for example — will probably be the first to have access to the vaccine.

Until a vaccine is available, continue to take precautions such as wearing a face mask and social distancing to lower your risk of contracting COVID-19. And continue working closely with your physician to help you control chronic conditions and maintain a strong immune system that can lower your chances of developing serious complications should you catch COVID-19.

Wearing a Facial Mask in Public

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Updated:  August 5, 2020, 10:45 p.m.

Masks are important tools in slowing or stopping the spread of COVID-19.

Wearing masks in public has become a politically charged subject. Even with the rise of COVID-19 infections and deaths across the South and West, Americans continue to debate the need to wear facial coverings in public despite the plethora of scientific evidence showing mask effectiveness in preventing the virus spread.

Despite the universal recommendation to wear masks while out in public from government officials, epidemiologists and medical experts, there stills appears to be a reluctance by the American public to adhere to the guidelines.

Everyday while out in public, even in locations and inside establishments where facial coverings are mandatory, you can observe people out in public refusing to wear masks or wearing them incorrectly and ineffectually.

Periodically, you can observe people with their noses, a critical pathway of the respiratory system, exposed from beneath their masks or their masks worn on their chins.

Whether donning masks incorrectly was being done out of ignorance or political sensibilities, it accomplishes the same end, it does not help reduce the public spread of the coronavirus.

Cloth masks

Cloth masks are at their best when preventing the wearer of the mask from spreading the virus to other people, either when they are already sick, asymptomatic, or even pre-symptomatic.

N95 masks or surgical masks work

According to the CDC, N95 masks and surgical masks are best used in a medical setting, when the amount of virus in the environment is quite a bit higher. The intention of these masks is to reduce the transmission of the virus to the person wearing the mask.

Wearing a mask

Wearing a mask in your neighborhood, in your workplace, or around your community is a way to show you care about those around you. You are essentially saying, “I care about you. I am member of this community. And my intention is to not give this infection to you, even if I don’t know if I’ve got it.”

Washing cloth masks

Cloth masks should be washed every day. It’s helpful to have multiple cloth masks available so you can rotate through your supply while others are washing or drying.

N95 masks or surgical masks are intended to be worn through the course of one day and discarded.

Your Weight, BMI and Health Risk

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Over the past several months, our daily lives have radically changed in ways both large and small. From how we go about our weekly errands, to how we seek healthcare, to how we socialize with our wider communities. Social physical distancing has quickly brought to the forefront just how intrinsic human interaction is to our physical, mental and emotional well-being.

As is always the case in times of crises, we can find hope in the examples of mindfulness, resilience and adaptability shown by people across the country. Regarding our physical health, times of crises reveal the importance of healthy living and habits that promote health and well-being.  Subsequently, it is equally important to conduct a self-assessment of weight and health risk using three key measures:

  • Body mass index (BMI)
  • Waist circumference
  • Risk factors for diseases and conditions associated with obesity

Body Mass Index (BMI)

BMI is a useful measure of overweight and obesity. It is calculated from your height and weight. BMI is an estimate of body fat and a good gauge of your risk for diseases that can occur with more body fat. The higher your BMI, the higher your risk for certain diseases such as heart disease, high blood pressure, type 2 diabetes, gallstones, breathing problems, and certain cancers.

Although BMI can be used for most men and women, it does have some limits:

  • It may overestimate body fat in athletes and others who have a muscular build.
  • It may underestimate body fat in older persons and others who have lost muscle.

Use the BMI Calculator or BMI Tables to estimate your body fat. The BMI score means the following:

BMI

  • Underweight — Below 18.5
  • Normal — 18.5–24.9
  • Overweight — 25.0–29.9
  • Obesity — 30.0 and Above

Waist Circumference

Measuring waist circumference helps screen for possible health risks that come with overweight and obesity. If most of your fat is around your waist rather than at your hips, you’re at a higher risk for heart disease and type 2 diabetes. This risk goes up with a waist size that is greater than 35 inches for women or greater than 40 inches for men. To correctly measure your waist, stand and place a tape measure around your middle, just above your hipbones. Measure your waist just after you breathe out.

Along with being overweight or obese, the following conditions will put you at greater risk for heart disease and other conditions:

Risk Factors

  • High blood pressure (hypertension)
  • High LDL cholesterol (“bad” cholesterol)
  • Low HDL cholesterol (“good” cholesterol)
  • High triglycerides
  • High blood glucose (sugar)
  • Family history of premature heart disease
  • Physical inactivity
  • Cigarette smoking

For people who are considered obese (BMI greater than or equal to 30) or those who are overweight (BMI of 25 to 29.9) and have two or more risk factors, it is recommended that you lose weight. Even a small weight loss (between 5 and 10 percent of your current weight) will help lower your risk of developing diseases associated with obesity. People who are overweight, do not have a high waist measurement, and have fewer than two risk factors may need to prevent further weight gain rather than lose weight.

Talk to your doctor to see whether you are at an increased risk and whether you should lose weight. Your doctor will evaluate your BMI, waist measurement, and other risk factors for heart disease.

The good news is even a small weight loss (between 5 and 10 percent of your current weight) will help lower your risk of developing those diseases.

References:

  1. https://www.nhlbi.nih.gov/health/educational/lose_wt/risk.htm#limitations

Purpose of Saving

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Save for the long term. Saving and investing are a marathon. To power through saving and investing, you need purpose, patience and stamina.

As a general rule, it’s recommended that individuals save and invest 15% of their gross income into a retirement fund or funds like a 401(k), 403(b), IRA, etc. The exact amount depends on the individual, but the sooner individuals begin saving, the better.

Delaying saving until you have more money to contribute could mean less funds in the future, as your investment won’t have as much time to earn compounding interest.

The impact of compounding is greater the earlier you start saving. You’ll earn not only from the money you invest but also from previous earnings. Not to mention, the sooner you work savings into your budget, the easier it will be to live within your means and prioritize savings in the future.

No matter how little, contribute what you can to your selected plan. Any time you see an increase in salary, receive a bonus or pay off a debt, consider increasing your contribution.

“Savings is the money set aside for emergencies and major purchases like a vehicle or a house. Savings is about setting aside money for future use.”

Most Americans don’t feel prepared for retirement. Fully 58% of workers with pay of more than $100,000 indicated they are not saving enough for retirement; that percentage increases to 69% across income levels. Additionally, 18% of people who earn more than $100,000 say they live paycheck to paycheck which makes it difficult to save for retirement, according to a survey of 8,000 workers by global advisory firm Willis Towers Watson. Frankly, the problem is simply that Americans aren’t saving enough.

Experts say there are ways to up your retirement savings, even if you’re feeling financially stretched. First, look for ways to slash your current spending to free up extra cash or consider a side gig to earn more.

Saving money takes effort and discipline

“Do not save what is left after spending but spend what is left after saving.” Warren Buffet

Saving does requires self discipline and desire to save and to not spend more than you earn. That lack of frugality could explain why 58% of Americans have less than $1,000 in savings. But, saving money can be simple when you develop the correct mindset and create positive savings habits. Add, savings can get easier to accomplish when you actually know where your earnings go month after month.

Automate your savings

Automate your savings is about setting aside a portion of your earnings that would go directly into either a bank account or a retirement plan, depending on your financial goals and plan. You can also set automatic transfers from your checking to savings accounts to fund important goals and create automatic bill pay so you never forget to handle a fixed expense. With an automatic transfer of a portion of your earnings, you’re effectively paying yourself first as a means to save money, and at the same time, you will not really miss the cash you’re socking away.

Reasons to Save and Invest

If you require motivation to save money, make a competition or game out of saving money. By making it interesting and competitive, saving should become more deliberate. Thus, a good way to boost your cash reserves is to find someone who’s willing to engage in a savings contest.This will encourage you to save money that will put you on the path of buying yourself more financial security.

Another trick to staying motivated and on track, set small saving goals and milestones that will give you a sense of progress. For example, make a point to celebrate saving and investing accounts reach $10K, $25K and $100K in assets.

You cannot save your way to financial independence and wealth. The only reasons to save are to create an emergency fund, to set aside money for a short term major purchase like a house or vehicle, and to invest it.  Saving money will put you on the path of buying yourself more financial security.

The difference between saving and investing comes down to accumulating money vs. making money grow. Both are important and it essential to understand how to make saving and investing work together. It’s important to put your money to work for you. Put your saved money into investment accounts and never use these accounts for anything, not even an emergency.  This will force you to create an emergency fund.

Avoid debt that doesn’t produce cash flow

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” Albert Einstein

Make it a personal financial rule that you will never use debt that doesn’t make you money. You should only borrow money to purchase assets that increase your income or create positive cash flow. Financially savvy people use debt to leverage investments and grow cash flows. Financially non-savvy spenders use debt to buy good and services that make others richer.

Debt is one of the big three destroyers wealth and can wreck havoc on one’s ability to achieve financial security and independence. It can quickly get out of hand especially when people habitually spend more than they earn to live a lifestyle they cannot afford. Debt can compound to the detriment of a spender if consumers fail to pay off credit card balances each month.

References:

  1. https://makingcents.navyfederal.org/knowledge-center/retirement-savings/making-a-retirement-plan/planning.html
  2. https://www.marketwatch.com/story/1-in-5-people-making-more-than-100000-a-year-are-still-living-paycheck-to-paycheck-2020-02-11?mod=retirement&link=sfmw_fb
  3. https://www.schwab.com/resource-center/insights/content/youre-saving-should-you-be-investing-too?SM=uro#sf229772500

COVID-19 vs. 1918 Spanish Influenza Pandemic | The Daily Social Distancing Show with Trevor Noah

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One of the lessons experts learned from the 1918 flu pandemic is how quickly the pandemic was forgotten and how fast it disappeared from the political discourse.

The one lesson learned from a pandemic should be to never forget because forgetting doesn’t lead to positive public health outcomes.

There has been several global public health emergencies since 1918 such as SARS in 2003 and the 2009 H1N1pandemic influenza. Yet, these events have caught authorities and the general public by surprise, but not the epidemiologist who have been studying pandemics were not surprised.

Another lesson to remember is that governments have the responsibility to prepare for a pandemic; they have the obligation to invest in public-health systems to protect their citizens from both the threat and the reality of the next pandemic.

References:

  1. https://news.harvard.edu/gazette/story/2020/05/harvard-expert-compares-1918-flu-covid-19/

Companies Start to Think Remote Work Isn’t So Great After All | The Wall Street Journal

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Projects take longer. Collaboration is harder. And training new workers is a struggle. ‘This is not going to be sustainable.’

“Four months ago, employees at many U.S. companies went home and did something incredible: They got their work done, seemingly without missing a beat. Executives were amazed at how well their workers performed remotely, even while juggling child care and the distractions of home.”

“Now, as the work-from-home experiment stretches on, some cracks are starting to emerge.

  • Projects take longer.
  • Training is tougher.
  • Hiring and integrating new employees, more complicated.
  • Workers appear less connected and
  • Younger professionals aren’t developing at the same rate as they would in offices, sitting next to colleagues and absorbing how they do their jobs.”

“Months into a pandemic that rapidly reshaped how companies operate, an increasing number of executives now say that remote work, while necessary for safety much of this year, is not their preferred long-term solution once the coronavirus crisis passes.”

“No CEO should be surprised that the early productivity gains companies witnessed as remote work took hold have peaked and leveled off, he adds, because workers left offices in March armed with laptops and a sense of doom.”

“Few companies expect remote work to go away in the near term, though the evolving thinking among many CEOs reflects a significant shift from the early days of the pandemic.”

Read more: https://www.wsj.com/articles/companies-start-to-think-remote-work-isnt-so-great-after-all-11595603397

Reference:

Cutter, Chip, Companies Start to Think Remote Work Isn’t So Great After All, The Wall Street Journal, July 24, 2020 11:10 am ET

Passive Income Ideas | Bankrate

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JAMES ROYAL, BANKRATE 8:00 PM ET 5/19/2020

Passive income can be a great supplementary source of funds for many people, and it can prove to be an especially valuable lifeline during a economic recession or during other tough times, such as the government lockdown imposed which has throttled the economy and exponentially increased unemployment in response to the coronavirus pandemic. Passive income can keep some money flowing when you lose a job or otherwise experience some type of financial hardship.

If you’re worried about being able to earn enough to pay essential living expenses or to save enough of your earnings to meet your retirement goals, building wealth and building retirement savings through passive income is a strategy that might appeal to you, too.

What is passive income?

Passive income includes regular earnings from a source other than an employer or contractor. The Internal Revenue Service (IRS) says passive income can come from two sources: rental property or a business in which one does not actively participate, such as being paid book royalties or stock dividends.

In practice, passive income does involve some additional effort upfront or labor along the way. It may require you to keep your product updated or your rental property well-maintained, in order to keep the passive dollars flowing.

Passive income ideas for building wealth

If you’re thinking about creating a passive income stream, check out these strategies and learn what it takes to be successful with them, while also understanding the risks associated with each idea.

1. Selling information products

One popular strategy for passive income is establishing an information product, such as an e-book, or an audio or video course, then the cash from the sales. Courses can be distributed and sold through sites such as Udemy, SkillShare and Coursera.

Opportunity: Information products can deliver an excellent income stream, because you make money easily after the initial outlay of time.

Risk: “It takes a massive amount of effort to create the product,” Tresidder says. “And to make good money from it, it has to be great. There’s no room for trash out there.”

Tresidder says you must build a strong platform, market your products and plan for more products if you want to be successful.

“One product is not a business unless you get really lucky,” Tresidder says. “The best way to sell an existing product is to create more excellent products.”

Once you master the business model, you can generate a good income stream, he says.

2. Rental income

Investing in rental properties is an effective way to earn passive income. But it often requires more work than people expect.

If you don’t take the time to learn how to make it a profitable venture, you could lose your investment and then some, says John H. Graves, an Accredited Investment Fiduciary (AIF) and author of “The 7% Solution: You Can Afford a Comfortable Retirement.”

Opportunity: To earn passive income from rental properties, Graves says you must determine three things:

  • How much return you want on the investment.
  • The property’s total costs and expenses.
  • The financial risks of owning the property.

For example, if your goal is to earn $10,000 a year in rental income and the property has a monthly mortgage of $2,000 and costs another $300 a month for taxes and other expenses, you’d have to charge $3,133 in monthly rent to reach your goal.

Risk: There are a few questions to consider: Is there a market for your property? What if you get a tenant who pays late or damages the property? What if you’re unable to rent out your property? Any of these factors could put a big dent in your passive income.

3. Affiliate marketing

With affiliate marketing, website owners, social media “influencers” or bloggers promote a third party’s product by including a link to the product on their site or social media account. Amazon might be the most well-known affiliate partner, but eBay, Awin and ShareASale are among the larger names, too.

Opportunity: When a visitor clicks on the link and makes a purchase from the third-party affiliate, the site owner earns a commission.

Affiliate marketing is considered passive because, in theory, you can earn money just by adding a link to your site or social media account. In reality, you won’t earn anything if you can’t attract readers to your site to click on the link and buy something.

Risk: If you’re just starting out, you’ll have to take time to create content and build traffic.

4. Invest in a high-yield CD

Investing in a high-yield certificate of deposit (CD) at an online bank can allow you to generate a passive income and also get one of the highest interest rates in the country. You won’t even have to leave your house to make money.

Opportunity: To make the most of your CD, you’ll want to do a quick search of the nation’s top CD rates. It’s usually much more advantageous to go with an online bank rather than your local bank, because you’ll be able to select the top rate available in the country. And you’ll still enjoy a guaranteed return of principal up to $250,000, if your financial institution is backed by the FDIC.

Risk: As long as your bank is backed by the FDIC, your principal is safe. So investing in a CD is about as safe a return as you can find. Over time, the biggest risk with fixed income investments such as CDs is rising inflation, but that doesn’t appear to be a problem in the near future.

5. Peer-to-peer lending

A peer-to-peer (P2P) loan is a personal loan made between you and a borrower, facilitated through a third-party intermediary such as Prosper or LendingClub.

Opportunity: As a lender, you earn income via interest payments made on the loans. But because the loan is unsecured, you face the risk of default.

To cut that risk, you need to do two things:

  • Diversify your lending portfolio by investing smaller amounts over multiple loans. At Prosper.com, the minimum investment per loan is $25.
  • Analyze historical data on the prospective borrowers to make informed picks.

Risk: It takes time to master the metrics of P2P lending, so it’s not entirely passive. Because you’re investing in multiple loans, you must pay close attention to payments received. Whatever you make in interest should be reinvested if you want to build income. Economic recessions can also make high-yielding personal loans a more likely candidate for default, too.

6. Dividend stocks

Dividends are payments that companies make to shareholders at regular intervals, usually quarterly. Dividends and compounding may be a strong force in generating investor returns and growing income.

Many stocks offer a dividend, but they’re more typically found among older, more mature companies that have a lesser need for their cash. Dividend stocks are popular among older investors because they produce a regular income, and the best stocks grow that dividend over time, so you can earn more than you would with the fixed payout of a bond, for example.

Shareholders in companies with dividend-yielding stocks receive a payment at regular intervals from the company. Companies pay cash dividends on a quarterly basis out of their profits, and all you need to do is own the stock. Dividends are paid per share of stock, so the more shares you own, the higher your payout.

Investors looking to boost the income generated by their portfolio may want to consider high quality dividend paying stocks. Profitable dividend paying companies have the ability to maintain and even grow dividend payments to their investors. This is demonstrated by the growth in dividends per share paid by the companies in the S&P 500. From 2010 through 2019 the dividends per share paid by the companies in the S&P 500 have more than doubled, a growth rate of nearly 11% per year.

Opportunity: Since the income from the stocks isn’t related to any activity other than the initial financial investment, owning dividend-yielding stocks or focusing on a quality dividend investment strategy can be one of the most passive forms of making money.

While dividend stocks tend to be less volatile than growth stocks, don’t assume they won’t rise and fall significantly, especially if the stock market enters a rough period. However, a dividend-paying company is usually more mature and established than a growth company and so it’s generally considered safer. That said, if a dividend-paying company doesn’t earn enough to pay its dividend, it will cut the payout, and its stock may plummet as a result.

Risk: The tricky part is choosing the right stocks. Graves warns that too many novices jump into the market without thoroughly investigating the company issuing the stock. “You’ve got to investigate each company’s website and be comfortable with their financial statements,” Graves says. “You should spend two to three weeks investigating each company.”

That said, there are ways to invest in dividend-yielding stocks without spending a huge amount of time evaluating companies. Graves advises going with exchange-traded funds, or ETFs. ETFs are investment funds that hold assets such as stocks, commodities and bonds, but they trade like stocks.

“ETFs are an ideal choice for novices because they are easy to understand, highly liquid, inexpensive and have far better potential returns because of far lower costs than mutual funds,” Graves says.

Another key risk is that dividend stocks or ETFs can move down significantly in short periods of time, especially during times of economic uncertainty and high market volatility, as in early 2020 when the coronavirus crisis shocked financial markets. Economic stress can also cause some companies to cut their dividends entirely, while diversified funds may feel less of a pinch.

7. Savings or Money Market accounts

It doesn’t get any more passive than putting your money in a savings or money market account at the bank or in a brokerage account offering high yields. Then collect the interest.

Opportunity: Your best bet here is going with an online bank or a brokerage account, since they typically offer the highest rates. Online bank and brokerage account rates can often be higher.

Risk: If you invest in an account insured by the FDIC, you have almost no risk at all up to a $250,000 threshold per account type per bank. However, money market accounts are not FDIC insured. The biggest risk is probably that interest rates tend to fall when the economy weakens, and in this case, you would have to endure lower payouts that potentially don’t earn enough to beat inflation. That means you’ll lose purchasing power over time.

8. REITs

A REIT is a real estate investment trust, which is a fancy name for a company that owns and manages real estate. REITs have a special legal structure so that they pay little or no corporate income tax if they pass along most of their income to shareholders.

Opportunity: You can purchase REITs on the stock market just like any other company or dividend stock. You’ll earn whatever the REIT pays out as a dividend, and the best REITs have a record of increasing their dividend on an annual basis, so you could have a growing stream of dividends over time.

Like dividend stocks, individual REITs can be more risky than owning an ETF consisting of dozens of REIT stocks. A fund provides immediate diversification and is usually a lot safer than buying individual stocks – and you’ll still get a nice payout.

Risk: Just like dividend stocks, you’ll have to be able to pick the good REITs, and that means you’ll need to analyze each of the businesses that you might buy – a time-consuming process. And while it’s a passive activity, you can lose a lot of money if you don’t know what you’re doing.

REIT dividends are not protected from tough economic times, either. If the REIT doesn’t generate enough income, it will likely have to cut its dividend or eliminate it entirely. So your passive income may get hit just when you want it most.

9. A bond ladder

A bond ladder is a series of bonds that mature at different times over a period of years. The staggered maturities allow you to decrease reinvestment risk, which is the risk of tying up your money when bonds offer too-low interest payments.

Opportunity: A bond ladder is a classic passive investment that has appealed to retirees and near-retirees for decades. You collect interest payments, and when the bond matures, you “extend the ladder,” rolling that principal into a new set of bonds. For example, you might start with bonds of one year, three years, five years and seven years.

In a year, when the first bond matures, you have bonds remaining of two years, four years and six years. You can use the proceeds from the recently matured bond to buy another one year or roll out to a longer duration, for example, an eight-year bond.

Risk: A bond ladder eliminates one of the major risks of buying bonds – the risk that when your bond matures you have to buy a new bond when interest rates might not be favorable.

Bonds come with other risks, too. While Treasury bonds are backed by the federal government, corporate bonds are not, so you could lose your principal. And you’ll want to own many bonds to diversify your risk and eliminate the risk of any single bond hurting your overall portfolio.

Because of these concerns, many investors turn to bond ETFs, which provide a diversified fund of bonds that you can set up into a ladder, eliminating the risk of a single bond hurting your returns.

10. Rent out a room in your house

This straightforward strategy takes advantage of space that you’re probably not using anyway and turns it into a money-making opportunity.

Opportunity: You can list your space on any number of websites, such as Airbnb, and set the rental terms yourself. You’ll collect a check for your efforts with minimal extra work, especially if you’re renting to a longer-term tenant.

Risk: You don’t have a lot of financial downside here, though letting strangers stay in your house is a risk that’s atypical of most passive investments. Tenants may deface or even destroy your property or even steal valuables, for example.

11. Advertise on your car

You may be able to earn some extra money by simply driving your car around town. Contact a specialized advertising agency, which will evaluate your driving habits, including where you drive and how many miles. If you’re a match with one of their advertisers, the agency will “wrap” your car with the ads at no cost to you. Agencies are looking for newer cars, and drivers should have a clean driving record.

Opportunity: While you do have to get out and drive, if you’re already putting in the mileage anyway, then this is a great way to earn hundreds per month with little or no extra cost. Drivers can be paid by the mile.

Risk: If this idea looks interesting, be extra careful to find a legitimate operation to partner with. Many fraudsters set up scams in this space to try and bilk you out of thousands.

How many streams of income should you have?

There is no “one size fits all” advice when it comes to generating income streams. How many sources of income you have should depend upon where you are financially, and what your financial goals for the future are. But having at least a few is a good start.

“In addition to the earned income generated from your human capital, rental properties, income-producing securities and business ventures are a great way to diversify your income stream,” says Greg McBride, CFA, chief financial analyst at Bankrate.

© Copyright 2020 Bankrate, Inc. All rights reserved

Source: https://www.bankrate.com/investing/passive-income-ideas/

References:

  1. https://oshares.com/research-paper-dividend-investing-ousa-ousm/

Wealth accumulation can create estate tax issues

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Financial security is a goal for us all, but with wealth comes complexity. An increase in wealth not only typically causes an increase in annual income taxes, but it may also beget estate and gift taxes. Current federal law allows each citizen to transfer a certain amount of assets free of federal estate and gift taxes, named the” applicable exclusion amount.

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In 2020, every citizen may, at death, transfer assets valued in the aggregate of $11.58 million ($23.16 million for married couples), free from federal estate tax. For gifts made during one’s lifetime, the applicable exclusion amount is the same. Therefore, every person is allowed to transfer a total of $11.58 million during their life or at death, without any federal estate and gift tax. (This does not include the annual gift exclusion, which applies as long as each annual gift to each recipient is less than $15,000.)

Therefore, generally, only estates worth more than these amounts at the time of death will be subject to federal estate taxes. But this wasn’t always so. From 2001 to 2009, the applicable exclusion rose steadily, from $675,000 to $3.5 million. 2010 was a unique year, in that there was no estate tax, but it was brought back in 2011 and then made permanent (unless there is further legislation) by the American Tax Relief Act of 2012 at an exclusion amount of $5 million, indexed for inflation. The Tax Cuts and Jobs Act passed in December of 2017 doubled the exclusion amount to $10 million, indexed for inflation ($11.58 million for 2020). However, the new exclusion amount is temporary and is scheduled to revert back to the previous exclusion levels in 2026.

Outdated estate documents may include planning that was appropriate for estates at much lower exemption values. Many documents have formulas that force a trust to be funded up to this applicable exclusion amount, which may now be too large or unnecessary altogether, given an individual’s or family’s asset level.

Take the time to review the formulas in your estate documents with your attorney and tax professional to determine whether the planning you have in place is still appropriate.

https://www.fidelity.com/insights/personal-finance/estate-planning-pitfalls?ah=1