Making money is the intended goal of both day trading and investing, yet their approaches (and often the outcomes) are very different.

As with all investing choices, it is generally a good idea to educate yourself and strive to make informed decisions based on your own circumstances and goals.

Day Trading: Short-term, Trend-based, and Risky

Day trading involves the buying and selling of stocks, typically in a short time frame of days, hours or even minutes, to turn a quick profit by taking advantage of short-term price fluctuations.

Tales of wild day trading successes tend to capture our attention and sound appealing, but the reality is that most day traders eventually suffer from catastrophic losses or middling returns for the effort expended.  

At the extreme day traders are gambling that current trends will continue. Losses are constant, and big wins are the exception.

Day trading is a form of short-term speculation, and that requires an acute ability to forecast and follow upward and downward trends betting that they will continue long enough to profit.

Timing is critical, and you have to be prepared to make moves quickly.  Even with all of these variables at play, luck often determines outcomes, and this is an unsettling driver of financial decisions.

Day Trading Failure Rate Is High 

Most individuals do not find success in day-trading ventures in the long-term, and many learn the hard way that day-trading risks far outweigh rewards. 

Yes, at times the payoff can be worthwhile, but it is rarely lasting.  Day traders are always just one or a few trades away from ruin.  

The roller coaster approach of day trading can be exciting but it is a risky option especially when your financial savings are on the line.

 
Day Trading, in a nutshell, is:

•  Financially risky. Faster gains, but also sudden unexpected losses.
• Largely dependent on timing.  You must have the ability to monitor prices and act rapidly.
• Complicated as far as taxes go.  Difficult to track large number of trades.
• Transaction costs and taxes for trades can quickly add up.
• Very dependent on trends.  A serious time commitment is necessary.
• Stressful and demanding both physically and mentally

Investing: Long-view and Reliable Gains

If you want to make your hard-earned money work for you, long-term investing is the tried and true method for successful and reliable returns and long-term wealth.  

There is a reason why most individuals choose investing to build substantial wealth over the course of a lifetime: it works. Slow and steady wins the race.

There are many rich long-term investors and very few wealthy traders (unless they are market makers or arbitrageurs working on a big scale).

Investing Is A More Predictable Path to Success

If day trading is a roller coaster ride, investing is a steady climb to freedom. With the latter, you are much more likely to end up at a beautiful sunset with the financial freedom to look back on a long but worthwhile journey.

There will be temporary peaks and valleys to weather, but the overall trajectory will be upward due to reinvesting and compounding.  

When retirement and financial freedom is at stake, this approach is a lot smarter and far more reliable.

With investing, the day-to-day performance of an investment is much less important than its ability to deliver consistent income and growth over a longer period of time.

A Good Advisor Helps Manage Risks

Investing does, of course, carry risks too, but a long-term approach enables investors to ride-out downturns, and with time, the market recovers from every dislocation.  

A seasoned advisor can help you to weather the ups and downs while keeping your focus on the long-term goal of building lasting prosperity.

Warren Buffett, considered to be among the most successful investors of all time, advocates for exactly this type of investing: value-driven investments based on holistic assessments of companies and their people. 

Buying stocks in companies based on their potential and the quality of the goods/ services offered, and then holding them as they realize this potential, is the key.

Long Term Investing offers:

• A long-term patient approach with a higher degree of compounding over time
• Lower turnover leads to less taxes and transaction expenses incurred
• A less risky approach to making money. The long-term approach allows time for market downturns to pass.

What Role Does Expert Guidance Play in Smart Investing?

A seasoned investment advisor will work with you for the duration, making adjustments as needed to respond to market opportunities or changing variables in your own life.

This client/ advisor relationship is the bedrock of smart investing.

Ridgewood Investments, as fiduciaries, are driven to advise our clients to take smart decisions for the long-term, which is an extremely important factor to consider.

We are a fee-only advisor firm so we never work for commissions.

At Ridgewood Investments, our advisors pride themselves on always continuing to seek out new knowledge about investments and the financial industry. Whether you are a new or an experienced investor, expanding your investing knowledge is essential. New investment options, shifting market conditions, and planning for various life stages necessitates keeping up no matter how extensive your base knowledge. Below are some resources that can help you grow your investing expertise and plan for tomorrow.

Resources to Build Your Background Knowledge

“I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you.”

~ Charlie Munger

A thorough understanding of investment basics is key to building an investment portfolio that will stand the test of time. Great investors read constantly about different types of investments, the history of investing, and growing their understanding across the board.

Below are some resources that might be helpful to you in developing your investment knowledge if you are willing to put in the time and effort:

Books

•  A Few Lessons for Investors and Managers From Warren Buffett edited by Peter Bevelin
• Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger edited by Peter D. Kaufman
• Security Analysis: Sixth Edition, Foreword by Warren Buffett by Benjamin Graham
• Supermoney by Adam Smith
• The Intelligent Investor: The Definitive Book on Value Investing by Benjamin Graham
• The Little Book of Common Sense Investing by John C. Bogle

Websites

• The SEC has basic definitions and tutorials on investing basics at Investor.gov
• Gain basic knowledge on a wide variety of topics at Investopedia.com.
• Bankrate’s Investing Resources includes short articles on investing topics
• Morningstar’s Investment Classroom offers free self-study of beginner to advanced topics
• TD Ameritrade’s Immersive Curriculum dives into some more advanced topics, such as futures trading
• Ridgewood Investment’s Insights blog includes new articles posted regularly on investing strategies, practical considerations, and more

Podcasts and Videos

• Wealth, Taxes, and Finances with John Cindia - covers investing basics with a focus on retirement and taxes
• Investing with Ken Majmudar - Ridgewood Investments founder Ken Majmudar discusses various investing topics

Daily and Weekly Resources to Keep Up to Date on Market Conditions & Trends

“Investing is most intelligent when it is most businesslike”

~ Benjamin Graham

Warren Buffett famously spends up to 80% of his day reading. Investors who treat investing like a business, and put in the work to keep learning and researching, are likely to see  the best results on their investments. Understanding the current conditions of the market and keeping up-to-date on world news can be achieved by reading and listening to reliable sources daily.

Below are some additional resources you might find helpful for staying up to date on current market conditions:

Periodicals (and their websites)

• The Wall Street Journal (daily)
• Barron’s (weekly)
• Kiplinger's Personal Finance (monthly)
• The Economist (weekly)

Websites:

• Forbes.com
• Marketwatch.com
• WSJ.com
• Bloomberg.com
• Reuters.com

Podcasts

• Invest Like the Best with Patrick O'Shaughnessy
• CoinDesk’s Money Reimagined

If funds are limited, your local library can be a great resource to access free books, ebooks, audiobooks, and periodicals that are normally behind a paywall.

Resources to Plan for the Future  

"The investor of today does not profit from yesterday’s growth. If past history was all there was to the game, the richest people would be librarians"

~ Warren Buffett

Predicting the future is of course impossible, but a well-educated investor can hedge against inflation and develop multiple passive income streams to ensure a secure retirement. History can be a great guidepost to the future because while it doesn’t repeat, it often rhymes. The resources previously listed will all help you plan for the future. Some retirement-specific resources include:

• DOL’s Preparing for Retirement
• SSA’s Retirement Benefit Calculators
• Ridgewood Investments Insights blog includes several articles on planning for retirement, such as Effective Strategies to Maximize Income in Retirement and What You Need to Know About Annuities (Secret Pitfalls You Never Figure Out Until It Is Too Late)

It’s hard to plan for the future if you don’t know where you are. Check out The Top 7 Questions You Should Be Able to Answer About Your Finances and come up with a plan to regularly track your finances and rebalance your investments. It doesn’t matter if you use apps, spreadsheets, or even pen and paper so long as you are regularly tracking your investments and assets.

Why a Financial Advisor is Essential for Most Investors

“Being rich is having money; being wealthy is having time.”

~ Margaret Bonnano

The internet brings the world’s knowledge to your fingertips. Anyone with an internet connection can access millions of resources that claim to help you become a better investor. However, sifting through the often contradictory advice to find trustworthy resources takes time, knowledge, and patience. While do-it-yourself investing can be great if you have the expertise, time, and desire to do so, most investors lack at least one of the three. 

When choosing a financial advisor, you will likely have a list of questions for your top candidates. You’ll want to know whether the advisor is a fiduciary, their investing philosophy, and logistics like how they communicate with clients. Interviewing a financial advisor should not be a one-way street. A good financial advisor should also have detailed questions for you to get a better understanding of your needs and goals to be able to make sure you are a good fit as a client.

At Ridgewood Investments, potential clients can request a free investment consultation, In our pre-qualifying conversations we discuss many of the questions below to help us mutually assess whether we might be a good fit for each other.

Why are you seeking independent financial advice?

Just like at the doctor’s office, “what brings you here today?” should be one of the first questions you are asked by your advisor. People seek out financial advisors for many different reasons  and a good financial advisor will want to make sure they have the knowledge and experience to address your primary needs. Some common reasons for seeking an advisor are:

• An increase in income or an inheritance that you need help managing
• Time constraints that make managing your investments difficult
• Desire for advice in one or more specific areas, such as tax saving strategies
• A life change such as retirement, a new baby, marriage, etc. that could impact your financial outlook or trigger the need to make a change
• Starting or growing a business

Before meeting with a potential advisor, think about exactly why you are seeking financial advice and what you want out of the relationship. Do you want advice in a specific area? Do you have an existing financial plan that you want to get feedback on and tweak? Do you hope to be mostly hands-free with your finances? Articulate exactly what you want out of your relationship and make sure your financial advisor’s responses to your answers indicate that they are well-prepared to address your financial needs.

What are your short-term and long-term goals?

If your financial advisor doesn’t know where you want to go, they will have a hard time getting you there. A comprehensive financial plan is built around your goals for the future so your advisor should be asking what your personal goals are in order to be able to personalize your plan. Let your advisor know your goals in the following areas:

• Entreupenurship - Do you own your own company or plan to start one? If so, choose an advisor with a business background and experience helping other entrepreneurs. 
• Family and Relationships - Marriage (and divorce), having children, and caring for extended family all have significant impacts on how your finances should be balanced. Money that will be needed for college in three years needs to be invested differently than funds that are for earmarked retirement twenty years down the road. Some cultures have a strong expectation that children will care for their aging parents. If that is the case for you, you want an advisor who understands and respects your cultural obligations. 
• Home Ownership - If purchasing or upgrading a home is important to you, your financial advisor will need to adjust your planning so that funds for the down payment and upgrades are available at the right time. Let your financial advisor know if you are already a homeowner or if you plan to purchase a primary residence or vacation property and what your ideal timeline is for doing so.
• Retirement - When and where do you hope to retire? Your financial advisor needs to know your timeline to structure your investment portfolio.
• Travel - Is travel important to you? Now or during retirement? Your financial advisor can make sure you have funds available each year to see the world.

If a financial advisor does not ask about your goals or seems dismissive about what matters most to you, it’s time to move on or keep searching.

What are your most pressing financial concerns?

In addition to your goals, your financial advisor should be asking about what money issues keep you up at night so that they can make a plan to mitigate your concerns. Common concerns include:

• Changes to Your Family - If your family will be growing (marriage, adoption, birth, etc) or shrinking (divorce, death), you likely have specific concerns about the financial implications. 
• Debt - Do you have existing debt? Are you concerned about taking on a mortgage, student loans, etc. in the future? A good advisor can help you come up with a plan to pay down high interest debt quickly. For low interest debt, like a mortgage at 3%, putting extra payments into the loan means missing out on stock market gains. Your advisor can show you the numbers so that you can make informed choices.
• Healthcare - Healthcare in the United States is expensive. If you are or will be caring for a chronically ill family member or someone needing end of life care, your advisor can help you come up with a tax-effective plan to fund the care. 
• Paying for College - Many parents stress about rising tuition costs for their children. For high income parents who do not expect to get any need-based aid, coming up with a tax-effective plan to save money is important.
• Retirement - If you think your current nest egg will not be sufficient to live the lifestyle you want during retirement, your 

Just like with your financial goals, you want a financial advisor who understands your concerns and can offer concrete steps to mitigate them.

Where is your money now and what income do you currently have?

To create a personalized investment plan, your advisor needs to know where your money is now and how much you have coming in. If large amounts of your money are tied up in illiquid assets like real estate, your financial plan will need to reflect that reality. Making a list of your accounts and their approximate balance and type (savings, checking, stocks, etc.) will help your advisor get a clearer picture of what needs to be changed to reach your goals and address your concerns. Your advisor may ask to see your most recent tax return to understand your income and make sure their investment decisions don’t carry unnecessary tax burdens.

How do you usually make financial decisions?

Your advisor will want to know how you have been making financial decisions up to this point. If you have been working with a different financial advisor, explain why you are making a switch and what you hope will be different this time. If you have always self-managed your money, explain why that is no longer working for you. 

Do you make some or all financial decisions jointly (with a spouse or business partner, for example)? Your advisor may want to speak with those individuals as well so that everyone is on the same page to create and execute your financial plans. 

Your advisor may ask you where you get your financial advice and why you trust those sources. Do you run every investment decision by your uncle because you admire his financial growth? Do you follow podcasters and vloggers for advice on emerging areas of investment to make sure you don’t miss out on trends? Knowing who you’ve trusted for financial advice historically and why can help your advisor address your goals and concerns in the future.

How do you feel about risk? What emotions do you have around money?

Investing strategies and philosophies vary widely among advisors and carry different amounts of risk and reward. Your advisor will want to know your comfort level with risk in your investments. A good advisor will take steps to mitigate unnecessary risks while recognizing that some risk is necessary to maximize gains. Your advisor can personalize your portfolio to match your risk tolerance and emotional risk set points and advise on the tradeoffs involved at various levels of risk exposure. 

Money is emotional for almost everyone. How you grew up, how your parents managed money, when and how you learned about financial issues, and how secure you feel at this point in your career can all affect how you make financial decisions. Every time the market drops, we see large numbers of well-educated investors pull their funds into cash even though that means they miss out on the gains that follow when the market recovers. The intense fear of loss overrides their knowledge of the cyclical nature of markets even when they logically know better (for more on this phenomenon, see our article on Solomon’s paradox).  A good financial advisor will ask about your emotions managing money so that they can help you avoid your own worst impulses and build safeguards into your plan so that you feel confident about how your money is allocated to help you achieve your long-term and short-term objectives no matter what happens in the markets in the near term.

If you have been reading about the recent rise of cryptocurrencies like Bitcoin and Ethereum you may have heard of blockchains and various other developments such as the recent spike in popularity of certain non-fungible tokens or NFTs.

The difference between NFTs and normal tokens is that in some respects every bitcoin is just as good as any other bitcoin and therefore priced more or less identically.  However the same technology that enables bitcoins to be equivalent can also be used to uniquely identify and allow trading of digital “works” which are unique (and therefore non-fungible).

Like all new trends, the current excitement and speculation surrounding NFTs may be creating unwarranted bubbles. Because NFTs like all crypto tokens are intangible and digital ledger entries in the underlying network, it can be hard to understand why anyone thinks they are valuable.

However, intangible things having value is not a new phenomenon.  Video gamers, for example, have been buying outfits, weapons, accessories, etc. for their characters that have no value in the “real” world for years now. 

Cryptocurrency has transitioned from being a strange fad for nerds and blockchain enthusiasts to a more mainstream acceptance though this transition is still in its early stages. NFTs may have similar potential to go mainstream in some form. In this article, we’ll briefly explore what NFTs really are, who they are good for, and where you can learn more.

A NFT of a GIF of Nyan Cat by Chris Torres sold for 300 Ether (ETH) - about 590K in USD at the time of the February 2021 sale. 

What is an NFT?

A NFT is a record that shows ownership of a digital asset. To be “fungible”, a currency must be able to be exchanged for the same portion or total of another person's currency. If I have a dollar bill and trade with you, it doesn’t matter that the serial numbers are different - we both end up with $1. 

However, an NFT is more like a unique collectable item - think of it like a digital version of baseball cards for example - if I have a Ken Griffey Jr. 1989 Upper Deck card (frequently sold for under $10) and you have a 1952 Topps Mickey Mantle (recently sold for $2.88 million), they are not interchangeable, even though both are baseball cards.  Why one is worth so much more than the other has to do with a variety of factors including scarcity and desirability- ultimately coming down to supply and demand for that particular item.

Blockchain technology is best known for cryptocurrency but there are many other uses. Anything that can be archived digitally can potentially be loaded onto or linked with blockchain technology. NFTs to date have included images, videos, audio recordings, articles, screenshots of tweets, virtual gaming items, and more. NFTs can be one of a kind (i.e. only one was ever minted and sold) or one in a limited edition (multiple copies of the same NFT are released).

Typically, when someone creates and or acquires a NFT, they are purchasing a blockchain based token that points to a file hosted elsewhere. The unique aspect of linking unique content to tokens on a blockchain is that every transaction is timestamped, verified by multiple users, and encrypted. It is very secure. 

While the original image, song, video, etc. may still exist elsewhere on the internet, by linking a creative “work” into a blockchain, the creator thereby can make that particular copy unique and more meaningful.  This is not that dissimilar from the way things work in the world of physical art in which the authenticity and provenance of a particular painting or object can mean the difference between an object worth tens of million because it can be traced to the hand of a master versus being worth almost nothing though it might be a copy and look just as beautiful if hung on a gallery wall.

It is not just art that NFTs can create value for as illustrated below when Jack Dorsey the founder of Twitter and Square sold an NFT of his first tweet on twitter from 2006 for millions of dollars in 2021.

An NFT of Jack Dorsey’s first-ever tweet sold for $2,915,835.47 to winning bidder Sina Estavi on March 6, 2021.

If anyone else had minted an NFT of the same tweet which is freely viewable - it likely would not have been valued anywhere near the value placed on it when Jack Dorsey himself minted the tweet.

How Creators Can Leverage NFTs

NFTs have potential to create novel long-term monetization opportunities for artists with a loyal fan base. In traditional arenas available to artists, intermediaries take a large percentage of creators earnings (i.e. a record label and management takes most of the money earned from streaming services for musicians). Intermediaries own the content rights (i.e. a record label controls your songs) and how fans see your content (a change to the Spotify algorithm can severely affect your plays). 

NFTs allow creators to sell directly to fans and keep a much larger percentage of the profits (say 85%). Also unique is that the NFT can be set up programmatically so that whenever the NFT is sold to someone new (ie traded), the creator can automatically get a percentage of each subsequent sale (often 10%). Each time the NFT is sold, the creator can make more money for having minted this value as an NFT in the first place.  This is unique to NFTs because this would be difficult if not impossible to decree in the physical world.

The value of a NFT, at least initially, comes from the underlying credibility or popularity of a given athlete, artist, celebrity, etc. associated with “minting” i.e creating the NFT.

The Jack Dorsey tweet, which anyone can still view on twitter, has authenticity and value because Jack himself offered it up for sale. The American digital artist Beeple spent years building his brand on Instagram before his record setting $69 million NFT sale at Christie’s of EVERYDAYS: THE FIRST 5000 DAYS, a digital collage of 13.5 years of posting daily photos.

A NFT offered by NBA Topshot called Serial No. 1 Legendary LeBron James Moment, sold for $71k because of the value of LeBron James’ brand. Some NFTs, just like physical art, are valuable because some people think they are valuable and are willing to pay for them.  In some cases some of these people may just be speculating that they will be able to resell to someone else at even a high price.

Why Some People Seem to Be Purchasing and Valuing NFTs

It’s understandable if you are still not sold on the idea of owning a record of a digital item. Why buy an NFT of Elon Musk’s song about NFTs when you can just view the video on Twitter or YouTube for free?

Some of the reasons may include:

• NFTs are unique and collectible. Some people enjoy collecting NFTs in the same way they buy objects in video games or enjoy collecting trading cards, vinyl records, stamps, etc. The success of CryptoKitties, a game that involves breeding digital cats to create and collect their "digital" progeny, was driven by 1.5 million users who have spent more than $40 million trading digital cats on the platform. While high profile sales like “Dragon” (pictured above) garner news coverage, the average sale price (all-time) of a CryptoKitty is only $14.96.
• Authentic interaction with the creator. Superfans can be motivated by the allure of ownership and the opportunity to directly support or at least own a digital "asset" directly associated with a favorite artist or creator. An NFT is a permanent record of the art or creation. The band Kings of Leon generated over $2 million in NFT sales from their new album “When You See Yourself” in March 2021. The sale ended on March 19th. Fans who missed out will have to find one of these original NFTs at resale - no new NFTs will be released around that album creating some scarcity value perhaps.
• NFTs may appreciate in value. If you buy a painting of a promising new artist at a local gallery, there is always the chance that the artist’s career will take off and you can sell the painting and retire early. A share of Amazon stock has come a long way from its $18 IPO. NFTs offer at least the possibility of gains in the future to the collector. As the creator or a particular work gains popularity the owner may be able to sell their NFT for significantly more than their original purchase price or pass the NFT as an intangible but valuable asset to their heirs. The same can happen in reverse however and NFTs could potentially also lose value.
• NFTs have trading potential. Not everyone buying NFTs is a fan of the artist. Purchasers may just be trying to make a profit by speculating in a new virtual arena. Lindsay Lohan listed her first NFT on Rarible, which sold for 10 Wrapped ETH (about $17k), only to be resold an hour later for 33 ETH ($57k). 

Are NFTs an Investment or a Bubble?

NFTs are a nascent, developing phenomenon. Wherever there is speculation and excitement, there is potential for a bubble. The average sale price of an NFT in December 2020 was $126. The average sale price rose to $864 in January 2021 and to over 1k by February.  These average prices are far lower than the headlines touting the highest priced NFTs, but they do suggest significant appreciation, at least in the short-term, as more people have become aware of this burgeoning sector.

NFT pricing is likely to be volatile (like cryptocurrency). An individual asset could lose value or the market as a whole could tank. A high risk tolerance is needed to invest in any emerging idea or system and NFTs are still at quite an early stage though as a whole seem to be gaining momentum quite quickly.  NFTs could continue to grow into a large market, a lot of uncertainty and innovation still lies ahead.

Just as with cryptocurrency, “owning” an NFT requires someone to have access to a secure digital wallet that can store the cryptographic keys that control transmission of the NFT on its associated blockchain network. Like with cryptocurrency, if you lose access to your digital wallet, you lose access to your NFT.

Currently, NFTs are sold via two kinds of marketplaces. Self-service platforms allow anyone to create and sell an NFT. These platforms allow newer creators whose work could appreciate in the future but also have a high rate of copycats and fakes since they do not restrict any users from using the platforms. 

Curated platforms only permit approved creators to mint NFTs. Curated platforms feature high-quality digital art but offer a more limited range of products and come with higher fees for creators.

NFTs are certainly an interesting opportunity for venturesome people who like to get involved into new things and are certainly worth paying attention to as a relatively new development that will probably experience a great deal of further innovation, growth, and perhaps growing pains in the months and years to come.

The artist grimes sold her WarNymph digital collection featuring a total of 10 artworks created in collaboration with her brother Mac Boucher for $6 million in February 2021. The collection sold out in 20 minutes. 

Do you want to read more about NFTs? Here are some additional resources to also read for those interested in learning more:

• https://justincone.com/posts/nft-skeptics-guide/
• https://creatoreconomy.so/p/guide-to-nfts-for-creators
• https://businessesgrow.com/2021/03/24/nft/

Family offices, which are private wealth management advisory firms that cater to ultra-high net worth investors, offer comprehensive services to manage the entire wealth of an individual or family. Family offices differ from traditional wealth management firms in that they offer a complete outsourced solution for all financial and investment concerns of their clients. Single-family offices serve just one individual or family while multi-family offices take on a small number of families for economies of scale that allow for cost-sharing among the clients.

What is the history of family offices?

Majordomos began managing the wealth of royal families and other aristocrats in the 6^th century. The term majordomo comes from the Latin “maior domūs”, meaning principal of the house. Majordomos acted on behalf of the owners of residences. Over time, they came to manage finances of noble and royal houses as well as institutions and governments, including cathedrals and some cities.

In the United States, industrial titans pioneered the modern family office in the 19^th century. The family of J.P. Morgan founded the House of Morgan in 1838, which managed the Morgan family’s assets. In 1882, the Rockefellers founded their family office.

Family offices began gaining popularity in the 1980s as new technologies introduced within the financial markets required a higher standard of expertise and sophistication from financial advisors while the consolidation of the financial service industry reduced or eliminated the role of the bank trusts that had historically served wealthy families. Family offices have increased since 2005, growing alongside the rise in super-wealthy families. The new wealth created from technology companies in the 21^st century created a new demand for family offices.

While family offices were traditionally founded by a single family, many have opened their doors to other ultra-affluent families to share operating expenses. Multi-family offices are typically privately held companies and their capital is the investable assets of member families. Multi-family offices are most common in Europe and the United States, although firms in Hong Kong and Singapore are increasingly providing the services of a multi-family office.

What does a multi-family office do?

Multi-family offices offer a comprehensive slate of services for their clients. However, due the personal nature of multi-family offices, services and strengths vary wildly amongst offices. A common phrase in the industry is “When you have seen one family office, you have seen one family office”.

Common financial services provided by multi-family offices include:

• Accounting and reporting
• Financial planning, including investment advice and risk management
• Insurance analysis and management
• Managing multi-generational wealth, such as securing the future of new family members, inheritance and wealth transfer services
• Philanthropy (including private foundations)
• Tax advisory and regulatory compliance
• Trusteeship and estate planning

Many multi-family offices include additional administrative and lifestyle services, such as:

• Assisting in family governance
• Concierge medicine
• Coordinating all family staff
• Family education and mentoring
• Family security
• Large purchases, such as aircraft and new properties
• Legal services (often with an in-house legal counsel who coordinates with specialized lawyers as needed)
• Overseeing wine and art collections
• Property management (including aircraft and yachts)
• Travel planning
• Additional concierge service on demand

Multi-family offices provide a holistic solution for ultra-affluent families. Most multi-family offices employ a core staff, who coordinate with outside professionals to provide solutions to the full range of a family’s financial and lifestyle needs. 

Ultra-affluent families who prefer multi-family offices expect responsiveness, top tier service, and a staff that can not only respond to issues promptly but anticipates potential issues and have solutions ready.

Multi-family offices personalize investments to fit the needs and risk profiles of member families. Investments may include commercial real estates, hedge funds, private equity, and venture capital opportunities.

The staff of a multi-family office often includes investment managers, financial advisors, and various administrative, legal, and tax advisors. As multi-family offices can have anywhere from two to over a hundred clients, staff sizing will vary considerably. Regardless of the number of families served, a dedicated small team should be assigned to work with you.

Many multi-family offices charge an asset-based fee or flat retainer rate that covers all services offered by the office.

What are the benefits and downsides of a multi-family office?

Multi-family offices provide a single point of contact for an ultra-affluent family’s financial needs. Benefits of the multi-family office model include

• Optimizing the overall investment strategy across asset classes.
• Control – multi-family offices regularly evaluate the performance of all team members. Any asset manager who fails to meet the expected yield can quickly be removed.
• Coordinates all advisors to work towards an integrated wealth strategy specific to the family’s needs
• Ensure privacy and confidentiality while providing services to all generations of the ultra-affluent family. As baby boomers retire, then need for intergenerational wealth transfer advice will substantially rise.
• Family members gain time to enjoy their wealth that was previously spent managing it
• Finances and investments are managed in the context of the full family balance sheet, allowing for optimum efficiency
• Low employee to client ratios to allow for responsive and personalized service
• Multi-family offices streamline the family’s financial and legal affairs, allowing for a clear overview and greater control over the direction of the family’s assets
• One dedicated contact for all financial needs eliminates redundant communications with various private banks, advisors, and other services
• Unbiased financial advice provided with a complete understanding of the family’s assets and liabilities. Multi-family offices do not sell products and thus eliminate conflicts of interest.

There are some downsides to the family office model. Family offices are more expensive to operate than employing traditional wealth management firms. As costs are shared between member families in a multi-family office, the model negates some of the downsides of a single-family office. A multi-family office can spread the cost of investments over a larger asset base and achieve higher cost efficiencies. Multi-family offices can increase investable assets by adding a new family to the existing platform.

Multi-family offices are also less personalized than a single-family office. However, a well-run multi-family office can still provide a level of personalization and responsiveness sufficient for many ultra-affluent families. Additionally, you will benefit from the expertise gained by the staff of your chosen multi-family office from supporting other ultra-affluent families.

Who should consider employing a multi-family office and what does it cost? 

Ultra-affluent families often seek out a multi-family office when assets grow to a size and complexity where full-time professional management becomes necessary or prudent. When the big picture of your finances becomes too complex, too complicated, or too time-consuming to manage alone, a multi-family office can provide a dedicated point of contact for all family members.

For single-family offices, the benefits may not outweigh the costs unless the family has over $500 million in assets to manage. Fully integrated family offices can cost upwards of $1 million per year to operate. Multi-family offices allow families who exceed a net worth of $50 million in investable assets to take advantage of the model, with the majority of clients holding over $100 million in investable assets. Some multi-family offices welcome any client who can pay their required fees while others have minimum asset requirements.

For ultra-affluent families who do not have the assets or desire to establish a single-family office, a multi-family office can provide personalized, holistic service at a much lower cost. Depending on the asset range of the family multi-family offices with annual costs for true multi-family services range from $50,000 per year up to $500,000 per year.

The decision to employ a multi-family office is typically made just once in a lifetime and should not be undertaken lightly. When vetting potential multi-family offices, make sure you know what services are in-house and what is outsourced. Looking at the quality and reputations of the providers contracted for the outsourced services chosen can often give you an idea of the quality of the multi-family office itself. Multi-family offices should have direct deal capabilities, having invested time and resources into cultivating relationships with private equity partners and independent sponsors. Inquire as to the specific services a multi-family office provides and meet with some of the advisors to get a feel for the level of professionalism, skill, and responsiveness of the multi-family office. The sole priority of the staff of the multi-family office should be the benefit of their client families. For most families the value that they can receive is in the form of more proactive taxes, investments, management of finances and avoiding mistakes.

Unless you are a do-it-yourself investor, finding the right financial advisor(s) to guide you is one the most important choices that you can control towards having a comfortable and worry free future. 

A good or even great advisor can be invaluable in helping you build wealth, minimize risks and liabilities, and secure your family’s future while the wrong advisor or just a few self directed mistakes can cost you millions in bad investments, lost opportunity costs, and unnecessary fees or losses. 

Where your trusted advisor works and how they are incentivized for their work can have a real impact on your investments and the quality of outcomes you can expect.  

In this article, we discuss some of the differences between large and often brand name brokerage firms such as, but not limited to, Merrill Lynch, Morgan Stanley, Goldman Sachs Wealth Management, LPL, Edward Jones and others and smaller more nimble Registered Investment Advisor firms like our own firm Ridgewood Investments.

Some Benefits and Downsides of the Big-Name Brokerage Firms

Large, brand-name brokers are globally recognized and employ thousands of people and tend to be public traded companies. The big firms allocate substantial advertising budgets and employ large marketing teams to reach millions of potential clients. In-house research analysts and other employees offer guidance and market information to their frontline brokers (who also call themselves private client advisors these days).  These representatives have securities licenses and are allowed to sell products on a commission.

Large brokerage firms market their products all over the country usually through hundreds of local offices, so finding a firm and beginning to invest is typically convenient for new clients. Name recognition and the size of these firms can provide a sense of security for their clients.

For clients who prefer a hands-off approach and don’t have strong opinions on investment strategies, they may enjoy the convenience of having the big-name firm custody their investments and perhaps provide a quarterly update meeting.

However, each of the brokers at large firms may be responsible for hundreds or even thousands of clients sometimes working within a team of several junior and senior brokers.  As a result of this set up, at least at some large firms, each broker can have less time for personalization and building deep expertise in investments.  Clients of these larger firms are often put into cookie-cutter asset allocation portfolios.  If you go to presentations with your broker and are shown one or more pie charts every time, this may be an indication that this is what you have.

On the plus side, big brokerage houses offer a wide variety of financial products on their platforms as the model involves selling many different products through their large distribution systems. Due to their market share, big-name firms can sometimes offer investment opportunities that not all boutique advisors have access to, for example in areas like private equity and perhaps even venture capital.  However, when these products are offered, they often generate commission dollars for the broker - and this can create unwanted conflicts of interest.

A big drawback of the large brokerage firm model is that individual brokers are often only allowed to sell their own firm’s products or a very limited menu offered by the firm due to the way these platforms work. Even if the advisor realizes that a third party solution would be a better fit for your portfolio, the advisor can’t or won’t recommend it since their hands are often tied by their employer’s platforms.

Because of their large size, the larger firms often employ far more layers of management and support staff as well as their overhead of rents of prime high street office spaces in city centers and large advertising budgets.  As a result of these overheads, big brokers can have fees and commission structures that match these high overhead costs and these platforms tend to be far less nimble and entrepreneurial than smaller advisory firms.

Another drawback of the large firm model can be that brokers often work under a suitability standard.  This is a lower standard of care than the fiduciary standard that smaller independent investment advisors are held to.  This means that brokers can get by with certain situations, like accepting a greater portion of their incomes based on commissions even though this kind of compensation structure often leads to more conflicts of interest.

Benefits and Downsides of a Boutique Financial Advisory Firm

A boutique investment firm is a smaller financial advisory firm that provides specialized financial services to a particular market - typically targeting clients who fall into the high net worth segments of the spectrum from an income and net worth criteria.  Unlike larger firms, most boutique firms have anywhere from several up to perhaps a few dozen advisors in some of the larger practices. 

Boutique firms typically have a lower advisor to client ratio than the big firms.  As a result, boutique firms can offer a more personal relationship with your advisor. With fewer but on average larger clients, boutique advisors are more likely to be proactive in their approach to your investments and even the advice that they provide. If a deeper relationship is important to you, exploring a boutique firm as an option might be a good fit.

Most boutique firms focus on certain specialties or niches.  Some firms such as Ridgewood Investments lead with long term investing managed in-house by CFA charterholders, while others may focus on certain client niches.  Luckily, in an Internet connected world it is easier to find a boutique firm advisor, even one who is not geographically in your area. You no longer need to live in the same town as your advisor to have regular access to their advice and the COVID pandemic and the move to video conference platforms like Zoom has accelerated this transition even further.

Most boutique firms are fee only, meaning they aren’t incentivized to sell you certain products in order to earn a commission. In fact at fee-only firms like ours, we never work on or accept commissions and thereby are often able to avoid such obvious conflicts of interest.

Instead, fee only investment advisors typically charge a percentage based on assets under management and/or a flat hourly rate or incentive fee.  Unlike commissions which are generated when you transact, the fee-only advisor typically only makes more money when they succeed in growing the value of your assets. 

Another large difference is that most boutique investment advisors are set up as SEC Registered Investment Advisors.  They often hold themselves to a higher legal standard of care called the Fiduciary Standard.  This means that they must put their clients interests first and ahead of their own interests.  One of the ways this can make a practical difference is that fiduciary advisors must avoid conflicts of interest and if faced with any unavoidable conflict of interest, they must disclose these conflicts to their would-by clients to make the clients aware.

Another difference is that boutique advisors generally have less overhead structures - in some cases this can mean more direct access to advisors and more flexibility on fee structures that reflect their lower overhead expenses.  Despite their smaller size, however, boutique advisors can leverage the technology platforms of the larger custodian firms such as Charles Schwab and Fidelity Investments who specialize in working with independent and boutique RIA firms.  The scale of these large custodian platforms allows smaller firms to access almost all the same investment and financial options as many of the large brokerage firms.

The more sophisticated boutique firms like Ridgewood Investments use their size and entrepreneurial cultures to create access to more custom and personalized options.  At Ridgewood Investments, for example, we have in-house expertise in management portfolios not only of stocks and bonds, but also in income producing commercial real estate, crypto currencies, private debt and even multifamily office services.  For advisors to be able to manage and offer such a breadth of investments that they themselves create and manage would be impossible at large brokerage houses.

Ridgewood Investments - Boutique Financial Advisory Firm to consider

Ridgewood Investments is a boutique financial advisory firm run by advisors with Wall Street experience offering unique investment opportunities not available at many other boutique firms. We treat every client as a partner or member of our extended family and strive to protect and grow their investments to achieve their long-term goals.

Our turnkey approach allows you to focus on what matters most to you while we draw on our decades of in-house experience and research to create customized investment portfolios. Our financial advisors practice value investing, using a variety of long-term strategies to grow your wealth and reduce your tax burden while focusing on long-term gains. You will be able to rest easy knowing that your money is being managed by a top tier team of Ivy-league or equivalent educated advisors. Our responsive team of dedicated customer service professionals ensure that help is always only a phone call away for whatever questions come up. 

Learn more about our investment philosophy: https://www.ridgewoodinvestments.com/about.

We all love to dream about the lazy days and freedom of retirement when working against a hard deadline or dealing with a difficult boss. In reality, many retirees find that they enjoy continuing to work in some capacity. Part-time work, consulting, and passion projects all become possible when you are no longer locked in to a 9-5 lifestyle. Other retirees abandon paid work entirely, concentrating on hobbies, philanthropic pursuits, or just catching up on a lifetime of books to be read. Even if you are done earning wages from the workforce, you can still continue to generate income throughout your golden years by putting your money to work for you.

Strategy #1: Earn Income from Investments

With interest rates on savings accounts still historically low, money kept in low-yield savings and money market accounts will actually lose value each year due to inflation. A well-balanced portfolio that may include stocks, bonds, and real estate investments, can continue to generate income throughout your golden years. Dividend-paying stocks are particularly useful for retirees. When choosing dividend-paying stocks, look for companies with a record of periodically increasing dividends over time, which can help offset inflation. Beware of chasing the highest yields. Stocks that pay yields of 7% or more may not sustain enough profits to continue such a high yield over time. There are a number of blue-chip stocks offering yields of 2.5-4%. Similarly, you may consider exchange-traded funds (ETFs) and mutual funds that include stocks that pay dividends.

Bonds are another key part of a retiree’s portfolio. As you near retirement, most experts recommend increasing the percentage of bonds in your portfolio to reduce the overall risk. For conservative investors, the percentage of bonds at retirement may be over 40%. Investing in a core bond or bond index fund of U.S. government and high-quality corporate securities may be a good choice for most retirees. If you are in an upper tax-bracket, know that there are not federal taxes on income from municipal bonds. While municipal bonds offered by state and local governments tend to offer lower yields, not owing taxes on the yields is very helpful if you are in an upper tax-bracket.

Real estates investment trusts (REITs) own and manage real estate such as apartments, office buildings, and shopping centers. REITs are required by law to distribute at least 90% of their taxable income to shareholders. Due to this, REITs tend to be among the companies paying the highest dividends. ETFs and mutual funds allow you to invest in REITs. REITs offer unique tax advantages but it’s important to know whether payments from the REIT are in the form of income, capital gains, or a return of capital as all have different tax implications.

Strategy #2: Delay Claiming Social Security

While eligible individuals can begin claiming Social Security benefits as early as age 62, waiting to begin claiming is prudent for many retirees. Your full retirement age for Social Security depends on your birth year and is somewhere between 66-67 for most individuals. Claiming Social Security benefits prior to your full retirement age permanently reduces your payment – a significant loss over a retirement of 20-30 years. Your Social Security monthly benefits are permanently reduced by five-ninths of 1% for every month you start getting benefits up to 36 months before your full retirement age. If you begin claiming more than 36 months before your full retirement age, your benefit is further reduced by five-twelfths of 1% for each additional month. If your full retirement age is 66 and eight months, and you begin collecting Social Security at age 62, you would only get about 71.7 percent of your full benefit.

Delaying claiming Social Security past your full retirement age permanently increases your monthly benefit. Your monthly benefit increases by 2/3 of 1% for every month you delay until age 70, when benefits max out. Compared to beginning collecting benefits at age 62, your monthly benefit will be roughly 24-32% higher than if you began collecting at full retirement age and 76% higher if you delay to age 70.

Of course, other factors influence when it’s best to begin your Social Security benefits, including your life expectancy, current employment, current cash needs, and marital status. For a more detailed discussion of Social Security considerations, see Understanding Social Security and When to Take Your Benefits. 

Strategy #3: Earn Extra Income

Retiring from your full-time career does not have to mean leaving paid work entirely. Many retirees find enjoyment and fulfillment in maintaining a connection to the workforce. The extra income from paid work can help bolster savings, fund travel, or defer higher healthcare costs. Some popular employment choices for retirees are:

• Consulting work – Leverage the knowledge and experience you have accumulated over your career to stay involved and earn extra income. Consulting work tends to be high paid, commensurate with experience, and allows for flexibility in how often and how long you work.
• Philanthropic or passion projects – With wages no longer the primary consideration, you can enjoy work in the non-profit sector for a cause dear to your heart, such as fundraising for cancer research, matching companion animals with forever homes, or supporting the arts. The organizations you work with are happy to use your contacts and experience and you get the fulfillment of contributing to a cause you support while earning some extra income.
• Local connection – Retirees often enjoy work that connects them to their local community or family. This could include working at a local museum or bookstore, helping in the business of one of your children, or starting a small business focused on a hobby you love. Retirees who are well-connected to their communities live longer and happier than those who are more isolated. 

Continuing to work in some capacity allows you to delay claiming Social Security, thereby increasing your monthly benefit, and gives some financial freedom for fixing up the house, beginning a new hobby, or traveling the world.

Strategy #4: Understand the Pros and Cons of Annuities

Very few workers now have access to a pension. Unless you retired from public service or from one of the few remaining companies that offer a traditional pension, you will not have access to the guaranteed source of lifetime income that a pension once offered. Annuities are a way to create your own guaranteed monthly income for the rest of your life. However, annuities come with significant drawbacks and are not right for many investors. There are two main types of annuities:

• Immediate Annuity – You purchase an immediate annuity from an insurance company with a lump sum of money in exchange for a monthly check (typically for life). Some annuities offer survivor benefits and will continue to pay your spouse after your death. Those annuities offer a lower monthly payment.
• Deferred Income Annuity – You purchase an annuity in your 50s or 60s but payments don’t start for 10 years or longer. In most cases, the longer you wait to claim, the higher your monthly payment will be. If you die before benefits begin, you do not receive any payout unless you opted for return of premium or survivor benefits. Qualified longevity annuity contracts (QLAC) may be beneficial for retirees with a significant amount of money in tax-deferred retirement accounts. You can invest the lesser of $125,000 or up to 25% of your traditional IRA or 401k plan in a QLAC without taking required minimum distributions (RMDs) on the money when you turn 70.5. Your payments must begin by age 85.  

Annuities may be right for very conservative investors who cannot handle riskier investments or investors who have a hard time managing their money and may otherwise spend it too quickly. If you fall into one of those categories, purchasing an annuity that, paired with social security can cover your basic expenses, such as your housing costs, utilities, and food, can provide peace of mind that your essential expenses will always be covered.

For everyone else, remember that the primary purpose of an annuity is to make a profit for the insurance company. High fees, rider charges, and insurance charges can push the breakeven point for an annuity far into the future. Unless you are particularly long lived, there are far more effective investments. Many investors are better served by independently investing the money they would have spent on an annuity and taking regular withdrawals. Your financial advisor can help you set this up. For a more detailed look at the pitfalls of annuities, see our article.

Strategy #5: Manage Your Withdrawals

Having a strategy in place to reduce investment withdrawals when the market is down can extend your retirement savings over a longer period. Dividing your investments based on when you plan to use that money can help prevent excessive withdrawals.

Money for the next year of expenses should be easily accessible and in protected holdings, such as FDIC insured savings accounts. Coupled with Social Security and any earned income, this money should be sufficient to cover your living expenses for a year as well as deal with unexpected expenses, such as home repairs or travel costs.

Money that you will need within the next decade can be in an annuity or high-quality bonds. This money is relatively stable and can be withdrawn periodically to fund your account that holds the next year of expenses.

Assets that won’t need to be cashed out for at least 10 years can be invested more aggressively in stocks and REITs as you will have time to recover from a market crash if needed. Deferred income annuities and permanent life insurance policies would also fall into this category. As you age, you’ll move more of your money into less-risky investments to ensure a steady income in retirement.

Strategy #6: Protect Against Inflation

The inflation rate has averaged 2.2% since 2000. According to Bankrate, the national average interest rate for savings accounts was 0.07% for the week of January 27, 2021. While you can find online savings accounts offering higher rates, the rates are still well below inflation. Inflation can eat away at the spending power of your hard-earned retirement savings.

Investing in the stock market is the best way to make sure your investments keep up with the cost of living. The average annual return of stocks on the S&P 500 over the past 90 years has been 10%. While you have more risk holding stocks, possibly losing money during downturns, long term investors will typically well outpace inflation over the long hall. Depending on your risk tolerance, age, and where you are in your retirement, stock holdings may make up 30-60% of your overall portfolio.  

Treasury inflation-protected securities (TIPs) can also protect against inflation. These are government-issued bonds that adjust your principal for inflation. You are guaranteed a fixed rate of interest every six months. As your principal rises, so does the amount of interest you will earn. TIPs do have some disadvantages – they typically underperform traditional treasury bonds, the CPI used to calculate inflation may not reflect your actual cost-of-living changes, and TIPs pricing is volatile and not as stable as cash.

Strategy #7: Minimize Your Tax Burden

Minimizing the amount of your retirement savings owed in taxes can help you make the most of your nest egg. There are many perfectly legal strategies to lower your tax bill with careful planning. It’s worth consulting a tax professional to understand how your different retirement accounts are taxed and come up with a plan to withdraw your funds in a way that minimizes your tax burdens.

For taxable brokerage accounts, you have already paid taxes on the money invested. You’ll be taxed on interest and dividends as they are earned and on capital gains when you sell an asset. For tax-deferred accounts, such as traditional IRAs and retirement accounts, withdrawals are taxed at ordinary income tax rates. RMDs kick in when you reach 70.5 years of age. For Roth IRAs that you have owned at least five years, all withdrawals are tax-free. There are no RMDs, so you can leave the money to grow if you don’t need it just yet. Roth IRAs are very helpful when you need to withdraw money for a major expense without triggering a correspondingly major tax bill.

Financial experts typically recommend tapping taxable accounts first, tax-deferred accounts second, and tax-free Roth accounts last. 

Strategy #8: Plan for Health Care Costs

Health care costs are often the most surprising expense for retirees. Your health typically declines as you age and the switch from private insurance to Medicare can add some unpleasant surprises. Early retirees should keep in mind that you will not qualify for Medicare until age 65 so you will need to factor in private insurance costs until that age. Retirees are often surprised that Medicare has multiple parts (A, B, C, and D). You will want to price out the different options as you near retirement to determine what options are best for you and what the cost will be.

Health Savings Accounts (HSAs) offer a tax-friendly way to save up for health care expenses. HSAs offer three tax advantages:

1. You contribute money on a pretax basis 
2. Money in the account grows tax-deferred
3. Withdrawals are tax-free if used for qualified medical expenses

The maximum contribution for HSAs contributions for 2021 is $3600 for self-plan and $7200 for family-coverage. You must have a high-deductible insurance plan with a deductible of at least $1400 for self-only or $2800 for family plans.

Choosing long-term care insurance that will provide 3-5 years of care can prevent exorbitant costs from a nursing home stay from derailing your retirement savings. The best time to shop for long term care insurance is typically around 60-65 years of age, assuming you are in good health. You may be able to deduct part of your long-term care insurance premiums on your tax return.

Strategy #9: Downsize or Relocate

Moving to a smaller house or cheaper location can free up money previously tied up in your primary home. For example, a couple moving from a $600,000 home in the suburbs to a $300,000 condo in the same area can now access $300,000 that can grow in the stock market and be used to cover retirement expenses. Smaller homes typically come with smaller utility and repair costs, as well as lower property taxes. Moving to a lower cost locale can yield even more savings, or allow you to keep the same size property at a much lower cost. A new home with a lower cost of living can help your retirement dollars stretch further for food, clothing, and hobby expenses.

Before relocating, be sure to visit your potential home and make sure that you will feel comfortable living their long term (not just on vacation). Some states are much more tax-friendly for retirees than others – check how your current and new state will tax your retirement income. If you have children, consider proximity to them when choosing where to live. It’s much easier for your child to help you navigate crutches after a fall or for you to help your child with grandchildren from 30 minutes away than it is from the other side of the country.

Where you decide to invest your money can significantly affect how fast your funds grow and how much risk you are exposed to. In general, lower risk investments yield lower returns while higher risk investments have the potential for much higher returns but experience more volatility. A well-balanced portfolio will spread your money across different investments to lower risk and maximize gains. Funds that you will need in the short-term should be in relatively safe investments that offer liquidity while money you will not need for many years can be invested in more volatile investments that offer higher return potential. Potential investments to consider include cash & commodities, bonds & securities, stock market investments, and real estate.

Cash & Commodities

Bank products offer very low risk investment options including certificates of deposit (CDs), savings accounts, and money market accounts. When you purchase a CD, you agree to loan the bank a certain amount of money for a predetermined amount of time and interest. Savings accounts offer an annual percentage yield (APY) on your deposited funds. A money market account offers a higher APY than most savings accounts, typically with higher minimum deposit and balance requirements. Your funds deposited into a CD, savings, or money market account are insured by the FDIC up to at least $250,000. However, the downside is that interest rates currently offered on consumer deposit products by banks are low. Too low, in fact, to keep up with inflation. Interest rates are rarely offered above 1% for CDs and money market accounts. For savings accounts, the national average APY is a paltry 0.07%. Some brick-and-mortar banks offer as little as 0.01% on their savings accounts. While bank products are a safe place to stash your emergency fund for easy access, you will want to branch out to invest the rest of your money.

Commodities, such as silver, gold, or crude oil, are often seen as lower risk. By definition, commodities are basic goods that can be transformed into other goods and services. Investing in commodities is one of the more popular ways to hedge against inflation. Commodities tend to be more volatile than other investments. Political actions, environmental changes, and other external factors can suddenly and drastically influence the price of commodities. Many investors like that they can take possession of a physical product when investing in gold in the form of bullion bars or coins. However, just because gold is one of the oldest investment types does not mean it is without risk. Gold pricing is based on scarcity and fear. Prices tend to rise when scarcity and fear is more common and fall as fears reduce. Gold can be a good investment if you think the world will be a more fearful place in the future than at the time of purchase.

Cryptocurrencies

Cryptocurrencies are a newer type of investment in a unique type of digital asset. A cryptocurrency is a virtual currency secured by cryptography, which ensures that the cryptocurrency is nearly impossible to counterfeit or double-spend. Cryptocurrencies have the advantage of being easier to transport and divide than precious metals like gold and of existing outside the direct control of central banks and governments. Stories of overnight Bitcoin millionaires have piqued mass interest in cryptocurrency investment. While there is certainly significant return potential in cryptocurrency investment, there are some drawbacks. Cryptocurrencies are unregulated and come with particular risks: the possibility of future governmental regulation and the risk that a particular cryptocurrency will never gain sufficient acceptance as a form of payment. As cryptocurrencies have only been around for a decade or so, they have an unknown rate of return that makes it harder to make long term predictions. Due to their volatile nature, you may want to delay investing in cryptocurrency until after you have a well-established emergency fund and have built a balanced portfolio of other investments.

Bonds & Securities

Bonds and securities are low risk investments that come with a higher average return than bank products. Bonds are loans to the entity you purchased it from for a set amount of time and interest. Governments and corporations issue bonds to raise capital for projects and operations. Treasury securities, U.S. government bonds that are backed by the “full faith and credit” of the U.S. government, carry minimal risk and correspondingly low interest rates – often below the rate of inflation. Municipal bonds issued by state and city bonds are slightly riskier but offer more competitive interest rates. Current average rates for municipal bonds are somewhere between 2-2.25%. Corporate bonds carry a little more risk for the reward of a higher interest rate. According to Moody's Seasoned Aaa Corporate Bond Yield, the average rate of return was 2.60% as of Feb 09 2021. The long-term average is 6.66% but recent years have seen lower rates. Foreign governmental bonds are also available and carry varying amounts of risk and reward. Bonds are included in most investors’ portfolios to reduce risk. Retirees often include a higher portion of bonds in their portfolios to avoid sudden losses from market fluctuations.

The Stock Market & Investment Funds

When you purchase a stock, you are purchasing a sliver of that company’s earnings and assets. Stock investments allow for fractional ownership of many different companies. The stock market, as captured by the S&P 500, has yielded an average rate of return of about 10% over the last century. Investing in a single company’s stock exposes you to more risk if the company does poorly or goes under. Sears Holding Corp, the parent company of Kmart and Sears, hit their all-time high stock-closing price on April 17, 2007 at $193 a share. Today, shares trade well under $1. On the other hand, investing in Tesla shares at $17 during their IPO in 2010 would have made you a fortune – Tesla trades at over $800 a share today.

To minimize risk and diversify your stock investments, consider mutual funds, index funds, and exchange-traded funds (ETFs). Mutual funds allow you to purchase small shares of a large number of investments in a single transaction. Mutual funds are professionally managed and follow a set strategy to invest in stocks, bonds, or a mix of both. Mutual funds come with an annual fee, called an expense ratio. Index funds are mutual funds that passively track an index, such as the S&P 500, by holding stock of the companies within the target index. Expense ratios for index funds are lower than actively managed mutual funds. ETFs are a type of index fund distinguished by how they are purchased. ETFs are traded on an exchange like a stock, which means you can buy and sell ETFs throughout the day and the ETF’s price will fluctuate throughout the day. Mutual funds and index funds are priced once daily at the end of each trading day. Mutual funds, index funds, and exchange-traded funds may also pay out dividends and interest to investors, depending on the holdings of the fund.

Stock options are a way to limit your losses to the set price of the contract. When you purchase a stock option, you are given the right to buy or sell shares of that company at a predetermined price within a certain timeframe. Options offer flexibility – you can let the contract expire without exercising your right to buy or sell. Most options contracts are for 100 shares of a given stock. When you purchase a stock option, you are buying the contract with the right to buy or sell, not the stock itself. It’s typically used for a stock you expect to increase in value. If you are correct, you can purchase the stock for less than its current price and turn a profit. If you own stock in a company but are worried about losses, you can purchase an options contract that gives you the right to sell a specified number of shares at a set price, which you can exercise if the stock price falls. Options contracts can also be resold to other investors.

Real Estate

Many investors like real estate investing because it is relatively easy to understand. Investing in and managing real estate property comes with a high initial capital outlay in most cases. To make a profitable investment, you will want to find a property that you can purchase with a margin of safety. You can make a profit by buying a property below market rate and selling at full price or by renting or leasing the property to tenants. Managing real estate can come with unexpected expenses and requires a decent amount of time devoted to upkeep or a monetary cost to outsource those tasks.

Real Estate Investment Trusts (REITs) allow you to invest in real estate without having to personally buy, manage, or finance any properties. A REIT is similar to a mutual fund, gathering the funds of many investors and investing them in a collection of income-generating real estate properties. REITs can be bought and sold like stocks on the stock market. The barrier to entry is much lower – if you can purchase a share or fractional share of a REIT, you can become a real estate investor. EITs are required by law to distribute at least 90% of their taxable income to shareholders. Due to this, REITs tend to be among the companies paying the highest dividends.

Investing your money is the most reliable way to grow your wealth and secure your future. Warren Buffet defines investing as “…the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power — after taxes have been paid on nominal gains — in the future”.  In other words, you are giving up the chance to purchase something now in order to have increased income and security down the line. If you are a first-time investor, the sheer number of investment options can be paralyzing. Specialized language and abbreviations tossed around by investment professionals make it difficult to sort through your options and get started.  Luckily, you don’t need a finance degree or large income to begin investing.

Why Should You Invest?

Investing allows for wealth creation and, depending on the investment vehicle, may include special benefits like building on pre-tax dollars, reducing your taxable income, and qualifying for employer-matching programs. Investing can help you reach financial goals, including saving for college, purchasing a home or vacation home, and of course securing your retirement. One of the most compelling reasons to invest is the financial cost of not doing so.

Money kept in a savings account will lose value over time due to interest rates well below inflation. According to Bankrate, the national average interest rate for savings accounts for the week of December 30, 2020 was a paltry 0.07%. If you parked $10,000 in a savings account with the national average interest rate and made no additional contributions, you would have $10,007 one year later and $10,283.86 after forty years. If you had put that same money in an index fund in the stock market, assuming an average return of 7%, you would have $10,700 after one year and $149.744.58 after forty years. While there is more inherent risk to the stock market, the reward is significantly higher.

Investing in the stock market lets you become a business owner without being an entrepreneur. When you purchase stock, you are purchasing fractional ownership in that company and your wealth can grow as the company does. Imagine having bought Amazon shares at $18 each during their May 15, 1997 IPO. Amazon now trades well over 3k a share. While few companies will be the next Amazon, the overall stock market return has been about 10% a year for the last century. Investing in the stock market lets your money earn money while you do other work.

What Do I Need to Consider First?

Most financial experts recommend establishing an emergency fund prior to investing. An emergency fund will ideally cover 6-9 months of expenses. If you do not have a fund yet, start with a goal of $1000 and increase your goal by 1 month’s expenses each time you reach it. You can consider beginning to invest once you have about 3 months of expenses saved, although you will want to continue increasing your emergency fund until you have at least 6 months of expenses on hand. An emergency fund needs to be easily accessible, such as in a high-interest rate online savings account. Having an emergency fund keeps a job loss, surprise home repair, or medical problem from derailing your financial life.

If you carry high interest debt, such as a personal loan or credit card balance, you should consider paying it off before investing. Even solid stock market returns of 9-10% can’t offset paying 16% interest on a credit card balance. Lower interest debt (typically with 2-6% interest), such as a mortgage, car payment, or student loans, does not need to be paid off before beginning to invest as you will likely get higher returns from your investments than you are paying in interest. If you are paying 2% interest on a mortgage and earning 10% in the stock market, you are essentially losing 8% by directing extra funds towards your mortgage instead of investing.

Once you have decided that you are ready to invest, you will need to decide how much time you have to spend on investing, what your investing style is, and how much risk tolerance you have. Active investing requires large amounts of time dedicated to research and constructing your portfolio. You need plenty of time and investment knowledge to actively craft and manage your investment portfolio. On the other hand, passive investing has historically produced strong returns and allows you to set it and forget it. Investing in investment vehicles managed by someone else, such as mutual funds, is considered passive investing. For the vast majority of new investors, passive investing will make the most sense. 

You can always take more control of your portfolio in the future as you learn more about investing and have the time and knowledge to do so.You will also need to be honest with yourself about your tolerance for risk. A well-crafted portfolio will strike a balance between maximizing the returns on your money and keeping the risk level in a range you are comfortable with. Lower risk investments generally also yield lower returns. For examples, government bonds offer predictable returns with very little risk. However, the current yield for the 10-year U.S. Treasury note is around 1.15%, well below the rate of return available from other, higher-risk investments. The stock market on average returns around 10% per year, a much higher return. Owning individual stocks in a company exposes you to more risk if that company does poorly while index funds spread your investments over a large swath of the stock market, lessening the effect of individual stock fluctuations. You can still lose money if the market declines but keep in mind your investment timeline – if you leave your money in the market, it will likely regain its value and continue growing again within a period of months or years.

Where Should I Start Investing?

Once you have an emergency account funded and have eliminated high-interest debt, you are ready to start investing. You can begin with a small amount – say $100 per month – and contribute more over time as your income increases.

For many people, the best place to begin investing is in an employer-sponsored retirement plan such as a 401(k). Most employer-sponsored plans deduct your contributions from your paycheck before taxes are calculated, reducing your current tax burden. Some employers will match all or a portion of your contributions up to a certain percentage of your salary. Be sure to contribute at least enough to get the full match – otherwise you are passing up free money. If your employer does not offer a sponsored-plan or you are a non-traditional worker, consider opening a traditional IRA or Roth IRA. Self-employed individuals can look into a solo 401(k) or SEP IRA. Regardless of what plan you are using, consider increasing your contribution by 1% each year or each time you get a raise. You will hardly miss the difference and the increased contributions will make a significant difference at retirement time due to the magic of compound interest.

If you have a retirement fund that is well-funded, you may be ready to explore other investment options. Know your investment goals – money you will want to use in the next couple of years to buy a house may need to be more liquid and in less risky investments than money you plan to keep invested for 10 years or longer.  If you are doing it yourself with your investments, you will want to choose an online broker. Shop around and check out broker reviews before deciding where to open an account. Many financial institutions have minimum deposit requirements. If you are beginning with a small initial investment, you will want to seek out an online brokerage with a low (or no) minimum deposit. Look into fees like low balance fees or commissions on trades. If you are trading frequently with relatively low dollar amounts, commission fees can become cost prohibitive. Luckily, it is possible to find zero-commission brokers today.

Certain investments have extra fees. Mutual funds are professionally managed pools of funds that invest in a focused manner, for example in small-cap stocks. One fee charged by mutual funds is the management expense ratio each year – the higher the management expense ratio, the more it will lower the fund’s overall returns.

You can protect and grow your portfolio using two tools: diversification and dollar cost averaging. Diversification is investing a range of assets in order to reduce the risk of one investment’s poor performance hurting your overall investment return. Mutual funds or exchange-traded funds are helpful for diversification, particularly for a beginning investor whose total investments are too low to spread across sufficient assets. Both mutual funds and exchange-traded funds typically invest in a large number of stocks and other investments within the fund.  

Dollar-cost averaging is an investment strategy in which an investor makes periodic purchases of a target asset, dividing the total amount to be invested over a long period to reduce the impact of volatility on the overall purchase. When you invest a set percentage of your salary in predetermined investments in your 401(k) each month, you are taking advantage of dollar cost averaging. Dollar-cost averaging is a simple and effective way for new investors to invest in mutual or index funds.

What if I Need More Help?

Whether you are just beginning to invest or are ready to branch out into other investments, you do not have to go it alone. Robo-advisors are a low-cost option for investors who just need a little help to craft and maintain their portfolio. You typically answer a short questionnaire about your goals and risk-tolerance and, using an algorithm, the robo-advisor recommends a portfolio and asset allocation that’s appropriate for your age and investment time horizon. Robo-advisors will rebalance your portfolio over time and invest your monthly contributions accordingly. However, robo-advisors are limited in scope. A robo-advisor cannot help with issues like forgetting to contribute, not increasing your contributions over time, or avoiding financially ruinous investment decisions like pulling your money out of the market after a crash.

If you want a more personalized, hands on approach, seek out a financial advisor. A financial advisor can provide the experience, broad knowledge, and personalization that an algorithm just can not match. If you have a steady, reliable income and have the ability to save or invest 20% or more of your income, it may be time to consider a financial advisor. The right financial advisor for you will depend on the value of your assets and what you are willing to pay in fees. Some financial advisors specialize in servicing affluent professionals while others prefer to work with middle-class families. Shop around and talk to different financial advisors to find the right person for you. The right financial advisor can be a long-term partner to grow your wealth and achieve your financial goals. 

What Contributes to the Gender Investment Gap?

The investment industry is predominantly male dominated, which can make investing unappealing to some women. According to 2015 data from Morningstar, fewer than 10% of money managers at mutual funds and exchange-traded funds are women. In comparison, that same year, women made up 37% of doctors, 33% of lawyers, and 63% of auditors and accountants. Financial planning models default to men’s salaries and life experiences and use language geared towards male clients. Financial goals are often discussed using sports, war, and construction metaphors that don’t resonate with female clients or make them feel welcome in the male-dominated industry. The industry often views women as risk-averse and not interested in investing, which is not the case. Women prefer more financial education prior to investing and want to understand the risk involved. Firms that make an effort to cater to female clients can draw on a vast and underserved market. 

The Fidelity study also found that women are more likely to invest in target-date funds, which are well diversified and automatically adjusted to an appropriate risk level for the investor’s age. Women are less likely to have all of their retirement savings in stocks, which is an inherently risky asset.