How to take advantage of low interest rates – the best financial moves for investors and borrowers

low rates
There are ways to benefit when interest rates are low, from saving money on loans and credit card balances to seeking out income-generating investment and savings vehicles.

  • Low interest rates impact finances in different ways: good for borrowers, tough on savers and income investors.
  • Ways to take advantage of low interest rates include refinancing loans, selling bonds, and buying property.
  •  CDs, corporate bonds, and REITs offer the best investment income options when interest rates are low. 
  • Visit Business Insider’s Investing Reference library for more stories.

Interest rates have been at historic lows for years…and they just keep falling. In the US, the federal funds rate – the benchmark on which other rates are based – is near 0% in 2021, and the Federal Reserve has declared that it plans to keep it there until at least 2023. 

Why are interest rates so low? The Fed adjusts interest rates as part of its mandate to oversee the nation’s money supply, the amount of cash and easily obtainable funds circulating throughout the US. Reducing interest rates is part of what’s called an expansionary monetary policy, and the Fed does it to combat economic slowdowns or recessions, which mean business cutbacks and closures, and job losses. 

The theory is that low interest rates stimulate the economy, encouraging companies and consumers to borrow, spend, and expand. For example, in the wake of the Great Recession, the Fed lowered the federal funds rate in 2008, and it stayed near zero until 2015. 

The Fed is currently depressing interest rates to keep the economy pumping despite the dragging effect of the ongoing COVID-19 pandemic.

But what do low interest rates mean for your personal balance sheet – your investments, savings, and debts? The answer is mixed: Favorable in some ways, unfavorable in others. But overall, you can take action to take advantage of the situation.

Here’s what you need to know to make the most of low interest rates. 

How do low interest rates impact your finances?

For bank account-holders, bad news: Falling interest rates typically mean lower returns on their savings. Whether the money is stashed in a savings account, a checking account, or a money market account, the interest earned on it will decrease.

Borrowers, on the other hand, might get some relief. Folks who are paying off debt whose interest fluctuates, such as a credit card balance or a variable-rate loan, will likely see a decrease in their annual percentage rate (APR). It won’t affect their overall balance – the amount they owe – but it will result in smaller interest charges. 

Consumers who are in the market to finance a major purchase, such as a car or home, will have access to loans with more favorable rates.

As for investors, it depends on what they’re invested in. Broadly speaking, though, low interest rates are good for people who have money in the stock market. When interest rates are low, consumers have more money to spend and banks are lending more. Companies generate more revenue and are able to take out loans that can help them expand – which can cause their stock share prices to rise. 

How to benefit from low interest rates

There are several key moves you to make when interest rates are low or falling – to take advantage of “money being cheaper,” as the financial pros like to say. 

Low interest rates strategies for borrowers

  • Refinance your loans: If you have a mortgage or student loans, consider refinancing- that is, paying off your old loan by taking out a new one. This new one will have a lower interest rate, of course; ideally, it should also be a fixed-rate loan, to lock in that lower rate. You’ll need to have good credit to qualify, but if you do, you stand to save a lot of money on interest fees.
  • Consolidate your debt: If you’re juggling multiple credit card balances or personal loans, taking out a debt consolidation loan can help you get all your liabilities under control. Debt consolidation loans by combining them into one big debt – and one monthly payment. This might make repayments more manageable, particularly if you can take advantage of a lower interest rate.
  • Transfer credit card debt: Use low interest rates as an opportunity to pay off your credit card debt faster by doing a balance transfer to a credit card with a lower interest rate. You can consider a low interest credit card with a favorable ongoing interest rate or a balance transfer credit card. The latter typically offer a 0% introductory APR on balance transfers for anywhere from 12 to 21 months, so you only want to go with that option if you can pay off your balance fairly quickly – or at least, within that time frame.

Low interest rates strategies for investors

  • Buy property: If you’ve been thinking about buying a home, there’s no better time to take out a home loan than when interest rates are at historic lows. Even if you already have a house, you might want to consider investing in a second home or other property if you can lock in a good mortgage rate.
  • Use the interest savings: If you’ve got a mortgage or a car loan whose interest rate has gotten extremely low, don’t pay it off. Instead, put the extra “income” – the difference in the interest amount you’re charged on your loan – into investments. You could boost the amount you contribute to your 401(k) plan, for example. 
  • Sell bonds: Bond prices tend to go up when interest rates are low. If newly issued bonds are paying lower interest, older bonds with higher yields become more desirable. So, if you don’t need the income from your bonds, seize the chance to sell them at a profit, or “above par” as the investment pros say. 

What should you invest in when interest rates are low?

Income-oriented investors will probably find that a low-rate environment isn’t ideal, particularly if they are seeking fixed-income or fixed-interest investments. However, there are still some options when interest rates tumble. Among the better ones:

  • High-yield savings accounts: When interest rates plummet, a high-yield savings account will at least offer better returns than what you’ll get with a basic savings account at most traditional banks. While this won’t be enough to help you build wealth, it’s better than watching your savings get devalued by inflation.
  • Certificates of deposit (CDs): If you can snag a decent rate before interest rates hit rock bottom, locking it in with a CD will help your savings maintain their value against inflation. Just keep in mind that CDs tie up your funds for a certain amount of time – the higher the interest rate, the longer the period, generally – and withdrawing your money early usually results in a penalty.
  • Corporate bonds and municipal bonds: Bonds appeal to fixed-income investors because of their low volatility, and they tend to offer better yields than savings accounts and CDs. Corporate bonds – debt issued by companies – pay more interest than US government bonds (called Treasuries), admittedly at slightly higher risk, though they’re still relatively safe. Municipal bonds, which are issued by cities, counties, and states, also offer higher yields as well as some tax advantages: The interest they pay isn’t subject to federal or state taxes.
  • Real estate investment trusts (REITs): When interest rates are on the decline, REITs – publicly traded funds that own and operate commercial properties – can prove a smart investment. Low interest rates benefit real estate. If REITs borrow at lower interest rates, they can expand construction, take on more projects, refinance their current loans – all of which improves their performance, and the earnings they share with investors.

The financial takeaway

Low interest rates might not be great for savers, but they’re great for anyone paying off debt. They can also be beneficial if you’re looking to borrow, especially for major purchases like buying a house. 

As for investors, it’s a mixed bag. Interest rates near zero might not be ideal for those dependent on investment income, especially if they want low-risk vehicles that pay a steady return. But there are still plenty of ways to invest in a low-rate environment that can help you at least maintain your wealth. And some investments, such as real estate and bonds, might post better returns, or be sold for a profit.

Related Coverage in Investing:

Where to invest when interest rates are low – 6 fixed-rate vehicles that offer the best returns

REITs are a way to own real estate without becoming a landlord – here’s how they work and ways to invest

How to invest in dividend stocks, a low-risk source of investment income

Fixed-income investing is a strategy that focuses on low-risk investments paying a reliable return

The federal funds rate is an interest rate set by the US’ biggest bank – and it influences everything from CD earnings to the national economy

Read the original article on Business Insider

A bitcoin IRA lets you profit from the cryptocurrency’s potential gains in a tax-advantaged way

bitcoin
You can invest in bitcoin via an IRA. But it has to be a certain type, called a self-directed IRA, which is held by special custodians and comes with extra responsibilities for investors.

Not a day goes by without bitcoin being in the news. And given the cryptocurrency’s phenomenal price rise, from zero to approximately $32,000 in a little over a decade, you – like many other individual investors – may be tempted to buy in. But how?

Actually, you can invest in finance’s newest asset via one of its most familiar vehicles: the IRA. Yes, you can buy bitcoin for a good old individual retirement account.

Cue the excitement? Maybe. In many ways, bitcoin investments are well-suited to an IRA. But, as with any investment strategy, there are pros and cons to consider. 

What is a bitcoin IRA? 

Bitcoin is a type of cryptocurrency (sometimes called a digital or virtual currency) – the oldest, and most popular of the dozen varieties available for trading and investment. So a bitcoin IRA is a type of investment retirement account that includes bitcoin within its portfolio. 

Although these accounts may carry the name “bitcoin,” they also allow you to invest in other cryptocurrencies, like ethereum, litecoin, and bitcoin cash. 

You can’t put bitcoin into a pre-existing, regular IRA that holds your stocks, bonds, ETFs, or mutual funds. Instead, you have to set up a special one, technically known as a self-directed IRA (SDIRA). The reason: The Internal Revenue Service (IRS) deems cryptocurrencies like bitcoin a type of property, which is off-limits to regular IRAs. 

“A self-directed IRA has a little bit looser IRS rules, so you can hold things like property,” or other alternative investments, confirms Victoria Bogner, a certified financial planner and chief executive officer of McDaniel Knutson.

How bitcoin IRAs work

In some ways, bitcoin IRAs work like regular IRAs. While you can set one up with any amount of funds, they have annual contribution limits set by the IRS: You can only contribute $6,000 a year for 2020 and 2021 (or $7,000 a year if you’re age 50 or older). Any returns, income, or gains generated by the investments within them grow tax-free.

You can also establish a bitcoin IRA as either a traditional account (for which contributions are tax-deductible, and funds taxed upon withdrawal) or a Roth account (no tax break on contributions, but distributions are tax-free). 

Of the two, the Roth version might have an edge, says Bogner, especially “if you are of the mindset that Bitcoin is going to explode” in price in the future. Roth IRAs are preferred by investors who project they’ll be in a higher tax bracket when they retire and start withdrawing money from the account. Since the Roth is funded with after-tax dollars, they won’t owe anything on their bitcoin gains – even if the currency has gone up 10 or 20 times. 

How to buy bitcoin in your IRA

Bitcoin IRAs do operate differently in a few ways, though.

As the “self-directed” implies, these IRAs are directly managed by the account holder (as opposed to a financial advisor or money manager). And your regular brokerage, bank, or investment app probably doesn’t handle them. Self-directed IRAs are only available through firms that specialize in the type of asset you’re interested in. 

So, to open a bitcoin IRA, you’d work with special custodians that can hold and deal in cryptocurrency. Some custodians require an application, walking you through the process. If you move forward, you can then fund these accounts via a rollover of funds from an existing IRA or another tax-advantaged account, or contribute new funds. 

Some of the better-known, well-established custodians for bitcoin IRAs include:

This is still a young field, and information on a firm may be hard to come by. Frankly, some are little more than sales platforms. So, no matter which custodian you’re considering, be sure to do your due diligence on it. 

Visit its website or call its customer service line to confirm and compare its fee structure, operations. Ask how your bitcoins will be stored, exactly, and about security procedures and measures – you don’t want your account holdings vulnerable to hackers. 

Why invest in a bitcoin IRA? 

There are plenty of positives to consider with bitcoin IRAs. 

  • Portfolio diversification. Bitcoin tends to be “a great diversifier” for your financial assets, Bogner explains. Holding a bit of bitcoin “can be a good way to own something that doesn’t move exactly like the rest of your investments move,” she says. It could also be a hedge against inflation as the dollar’s value against some other currencies has declined.
  • The potential for great gains. While there have been bitcoin drops, there also have been returns that outpace other markets. If its history weren’t enough, the fact that only a limited number of bitcoins (21 million) can ever be mined suggests great future promise. 
  • Positioning for a long-term hold. Though bitcoin fluctuates in price, it has generally trended up since its inception in 2009. Given its volatility, individual investors should consider it a long-term hold. That means it may be a good fit for an account that you don’t plan to access until retirement, anyway. 
  • Demonstrated tax savings. The IRS taxes Bitcoin as an investment – it’s subject to a capital gains tax when you sell it at a profit. But not if it’s held in your IRA. That gain is tax-shielded, as any transactions within an IRA are. You only pay taxes on funds that you withdraw, when you withdraw them – in a traditional IRA; and never if in a Roth IRA (if you obey the rules).

Are bitcoin IRAs safe?

No investment is without risk. Potential issues also exist with bitcoin IRAs. 

  • Volatility. Cryptocurrencies, including bitcoin, can have wide-ranging and sudden price fluctuations. This could be a problem if a decline hits about the time you were planning on withdrawing funds. If you don’t have the time to wait for market corrections, this kind of account may not be a fit for you. 
  • Higher fees. Bitcoin accounts can cost more to maintain or set up than other IRAs. For instance, a bitcoin account can reportedly have an initial buy-in fee of 10% or more, depending on the type and the custodian. Establishing a $50,000 self-directed IRA account can cost as much as $660 in annual charges, a Coinnotes article noted. And there can be wallet holding fees, transfer fees, and dues. All these fees can add up, eating into your returns. 
  • Investment minimums. Bitcoin IRAS can have investment minimums, some considerably high (again, compared to regular IRAs). For instance, BitcoinIRA currently has a $3,000 minimum; BitIRA currently has a $20,000 minimum. 
  • Responsibilities. While they’re called custodians, firms that offer self-directed IRA services – especially in the relatively young bitcoin IRA space – are not necessarily as responsible as conventional brokerages, registered investment advisors, and other financial services firms are. They are not overseen by regulatory agencies like FINRA, they are not SIPC-insured (reimbursing your funds if the firm goes under) and they are not bound by fiduciary rules that demand they put your interests first. In short, with bitcoin IRAs – as with any self-directed IRA – you’re solely responsible for making the decisions and taking on the risks of investing.

The financial takeaway

Bitcoin IRAs can offer an opportunity for investors who believe in the crypto’s future, but who want some tax savings along with their gains. Plus, the ease of dealing with a familiar type of account.

But there can be higher fees and account minimums when compared to other IRAs, so determine whether the trade-off is appropriate for you. Bear in mind that there are other ways to hold bitcoin, in regular accounts on crypto trading platforms like Coinbase and Binance US.

If you decide to open a bitcoin IRA, choose a custodian carefully. And only commit to bitcoin an amount that you can afford to lose, and think long term. Says Bogner: “Twenty years later, hopefully it’s worth more than what you put in.” 

Related Coverage in Investing:

How to invest in bitcoin: The major ways to buy, their pros and cons, and the strategies to consider

Cryptocurrency is an electronic, private type of money – here’s how it works and how you can invest in it

What is Bitcoin? A beginner’s guide to the world’s most popular type of cryptocurrency, and tips for investing in it

What is diversification? A portfolio strategy that uses a variety of investments to limit risk

Alternative investments are exotic assets that can diversify your portfolio – here are the five major kinds and everything you should know about them

Read the original article on Business Insider

What is a stock market crash? Understanding its causes and consequences can help investors prepare for a sudden, severe drop in share prices

stock market crash 3
A variety of factors and events can cause a stock market crash, an abrupt and unexpected collapse in share prices across the board.

  • A stock market crash is a sudden or severe drop in overall share prices, usually within a day.
  • Stock market crashes can be due to economic or natural disasters, speculation, or investor panic.
  • Investors can prepare for stock market crashes by diversifying portfolios and shifting to CDs or bonds. 
  • Visit Business Insider’s Investing Reference library for more stories

The stock market is constantly moving, prices of individual equities rising and falling throughout the trading day. Whenever the majority of them – or a representative group of them, called a stock market index – takes an especially large dive, a panicked cry often arises:

“The stock market has crashed!”Stock market crashes are certainly scary: Hundreds of investments decline their value, investors lose thousands of dollars – on paper, anyway. 

But what causes them? And what are the after-effects?

Here is a closer look at what a stock market crash really is and what you need to know before one impacts your portfolio. 

What happens when a stock market crashes?

There are many definitions of what a stock market crash is. Some categorize a crash strictly as a stock market or a stock market index (a representative sampling of stocks) losing more than 10% of its value in a single day. Others provide a more general view, simply stating that a crash is a significant or dramatic loss in the stock market’s value, and the prices of shares overall, usually within a short period of time. 

Any way you look at it, a stock market crash happens when confidence and/or value placed in publicly traded assets goes down, causing investors to sell their positions, and move away from active investing, and towards keeping their money in cash, or the equivalent.

The impact of a crash can vary as well. Sometimes, it’s limited. For example, on Oct. 19, 1987, after five years in a strong bull market, the Dow Jones Industrial Average (DJIA) and S&P 500 both dropped over 20%, following markets throughout Asia and across Europe. The crash was short and markets quickly recovered.Within a few days, the DJIA regained more than 43% of the points it lost and within nearly two years the market had recovered almost 100%. 

At other times, the effects are widespread, and longer-lasting. The most notorious example is the Crash of 1929. Stock prices dropped first on Oct. 24th, briefly rallied – and then went into free fall on Oct. 28-29. Ultimately, the market lost 85% of its value. Though not the sole cause, this crash was one of the contributing factors of the Great Depression, the worst economic period in American history, lasting nearly 10 years.

What causes a stock market crash?

Historically, stock market crashes often occur after a long period of economic and/or market growth. Confidence in the economy, steady stock gains, and low unemployment are all drivers of bull markets, as these sustained rallies are known. As more and more stocks are purchased, prices go up – both of individual equities and of the stock indexes themselves. 

But in the world of securities, prices can’t keep rising indefinitely, and bull markets can only last for so long before something happens to turn the tide. Sometimes it’s a general shift in sentiment, as in 1929, but usually some precipitating event occurs. 

Numerous things can cause a stock market to crash, including:

  • Panic: This is one of the most common contributing factors to a crash. Stockholders who fear the value of their investments are in danger of dropping will sell their shares to protect their money; as prices begin to drop, the fear spreads, more sales ensue, and this can lead to a crash. Anything from a major player in the market having financial troubles to fears about the impact specific legislation may have can cause scores of investors to panic and sell off stock. 
  • Natural or man-made disasters: These can include all sorts of catastrophes, from floods to wars to pandemics. Case in point: the coronavirus-induced crash of March 2020. As realization of the spread of COVID-19 began to take hold, the economic outlook for the US and countries worldwide began to look grim. While countries announced travel limitations, mandatory business shutdowns, and quarantines, consumers stocked up on essential supplies causing shortages, companies began protecting profit margins through layoffs and furloughs, and investors started selling off stocks.
  • Economic crises: A problem in industry or one section of the economy often has a ripple effect. One example is the subprime mortgage crisis, which unfolded over 2007-2008. Earlier in the decade, deregulation in the banking industry had led to an increase in mortgages to high-risk borrowers since the beginning of the decade. When these borrowers began defaulting on payments, home prices dropped, and the housing market collapsed. Even worse, many of the now-worthless mortgages had been packaged and sold off to institutional investors – who in turn lost billions on them. Big firms began to fold, and the stock market reacted sharply. From Sept. 19 to Oct. 10, the Dow Jones Industrial Index declined 3,600 points. 
  • Speculation: When you have people and companies investing in a sector in the hopes that an asset or security will grow or based on future performance expectations, you have speculation that often creates a bubble. If the performance disappoints, and hype doesn’t live up to the reality, the bubble bursts and a mass sell-off occurs. 

The 20 biggest drops in the New York Stock Exchange, ranked by percentage drop in the Dow

Rank Date Dow Jones Industrial Average
% drop drop in points  
1 October 19, 1987 −22.61 −508.00  
2 March 16, 2020 −12.93 −2,997.10  
3 October 28, 1929 −12.82 −38.33  
4 October 29, 1929 −11.73 −30.57  
5 March 12, 2020 −9.99 −2,352.60  
6 November 6, 1929 −9.92 −25.55  
7 December 18, 1899 −8.72 −5.57  
8 August 12, 1932 −8.40 −5.79  
9 March 14, 1907  −8.29 −6.89  
10 October 26, 1987 −8.04 −156.83  
11 October 15, 2008 −7.87 −733.08  
12 July 21, 1933 −7.84 −7.55  
13 March 9, 2020 −7.79 −2,013.76  
14 October 18, 1937 −7.75 −10.57  
15 December 1, 2008 −7.70 −679.95  
16 October 9, 2008 −7.33 −678.92  
17 February 1, 1917 −7.24 −6.91  
18 October 27, 1997 −7.18 −554.26  
19 October 5, 1932 −7.15 −5.09  
20 September 17, 2001 −7.13 −684.81  

Source: Dow Jones S & P Indices

An example of a stock market crash

Sometimes, crashes are due to several factors. One example is the Dotcom Bubble-induced Crash of 2002.

It started with speculation. A boom of investing in internet companies prevailed through much of the late 1990s. E-commerce was the new frontier for investors and money flooded the rapidly evolving technology sector and inflated valuations beyond profits these companies could ever realistically provide. 

Venture capitalists swooped in early to provide funding to dotcoms that were on the rise towards going public, quickly cashing out after their overpriced debuts. Excitement over internet tech and the future of business mixed with companies that had yet to turn a profit pumped up an economic bubble. 

In 2000, the Federal Reserve increased interest rates (partly to stem the overheated investment activity) and poor financial performance from dotcoms began to surface, bursting the bubble and throwing the NASDAQ index into a bear market. By October 2002, the tech-heavy Nasdaq Composite index had fallen more than 75% from its March 2000 height of 5,048.62.

A recession began, which was exacerbated by the Sept. 11, 2001 terrorist attacks in New York City that shut down the New York Stock Exchange and other markets for several days. In between the economic uncertainty and the shadow of war, stocks crashed when trading resumed on Sept. 17. The government had to step in with economic stimulus policies before the economy as a whole began to recover from two major blows so close together. 

Can a stock market crash be prevented?

There really is no way to prevent the stock market from crashing. However, governments have added safeguards to prevent severe drops and upsets in market stability. 

Once such tactic is the circuit breaker, instituted after the 1987 crash. If the S&P 500 Index experiences a drop of 7% or more over the previous day, trading in all US stock markets are halted. Depending on the severity of the drop, trading could be suspended for either a 15-minute period or the rest of the day. The purpose of this measure is to give analysts and investors time to gather enough accurate information before making trade decisions. 

Large amounts of stocks might also be purchased by private investors to try and stabilize a market. In fact, that used to be quite effective a century ago, shortening the Panics of 1873 and 1906. The government itself can step in, lowering interest rates to encourage investors to borrow and buy.

But even with these mitigating factors, crashes still happen. 

What should you do if the stock market crashes?

First thing: Don’t panic and sell out. Yes, it’s hard to hold on and watch your portfolio balance shrink. But unloading when prices are falling is rarely a winning move. Markets tend to shift back over time and you could end up losing money in the long term if you sell when shares are low. 

Remember that crashes can be short-lived, and prices may quickly rebound.

This is especially important for older folk or retirees who are looking to live on their investment income or capital gains. They may not have enough time to recoup their losses before needing to use that money for day-to-day expenses. Becoming more anticipatory with market shifts becomes more important the closer you are to this point.

One advance strategy is to ensure that you have a strong mix of defensive stocks in your portfolio. These are securities that are much less influenced by disruptions in the market and tend to be in industries considered to be essential, such as utilities and food. If the market crashes, they may feel some financial pain. However, it will be much less than with cyclical stocks, which are in industries greatly dependent on a flourishing economy to grow.

If you see economic conditions start to shift toward leaner times, and stocks seem to be entering a prolonged sluggish phase – a bear market – you may want to pull your investment dollars out of the market and place them in a safer financial product that can still earn money. Shifting to CDs or bonds when volatility in the market is getting perilous can be a good move to safeguard your money until things stabilize. 

The financial takeaway

The natural cycle of markets is to rise and fall. While crashes in the stock market can result in crippling losses, economies inevitably bounce back. This makes a strong case for taking a long-view approach to investing. That means creating a strong portfolio that will hold up to dives in market values and provide a healthy mix of securities that will grow when times are good and see you through when times are lean. 

Though the thought of a market crash may be scary, recovery will eventually come. You just have to invest carefully to minimize your risks and keep a close eye on economic conditions. 

Related Coverage in Investing:

8 of the biggest stock market crashes in history – and how they changed our financial lives

The Dow Jones Industrial Average is one of the most-watched stock index in the world – here’s how it works and why it’s so influential

The different shapes of recovery: Understanding how quickly and strongly an economy can bounce back after a recession

The main causes of the Great Depression, and how the road to recovery transformed the US economy

Business cycles chart the ups and downs of an economy, and understanding them can lead to better financial decisions

Read the original article on Business Insider

A margin call means your broker is asking you to repay the money it lent you to buy stocks – and if you don’t, it could mean big losses for your portfolio

margin
If you can’t promptly meet a margin call by adding funds to your investment account, your broker has the right to sell some of your securities.

  • A margin call occurs when a broker demands repayment of some of the money it lent you to buy investments.
  • A margin call usually happens when the securities you bought have dropped drastically in value.
  • If you fail to pay the margin call, the broker has the right to begin liquidating your assets.
  • Visit Business Insider’s Investing Reference library for more stories.

Sometimes, stock market investors are able to borrow money from their broker to buy stocks or other securities. This tactic is called buying on margin, or margin trading

Margin trading increases your buying power and amplifies profits. 

But the possibility of encountering a margin call is the big “catch” of margin trading. Basically, it’s a request by your broker to pay back some of the money you borrowed – pronto. If you don’t, the broker can seize some of your portfolio’s assets and sell them. 

Before you begin using margin, you need to understand what margin calls are and why they can be so dangerous to your portfolio – and your finances. 

How does margin trading work?

But before we get into margin calls, a brief explanation of margin trading itself. 

When you buy an investment – stocks, bonds, exchange-traded funds (ETFs) – on margin, you pay some money in cash and borrow the rest, usually up to half of the purchase price. The investment itself is used as collateral for the money you borrow. It’s like when you take out a mortgage for a house: The new home is the collateral, or provides the backing, for the loan.

As with a house, your down payment – the amount of cash you furnished for the investments – is your equity or ownership stake.

To calculate your equity (in dollars), subtract your borrowed amount from the current value of your securities. For example, if you bought $12,000 of securities using $6,000 of cash and $6,000 of margin, your initial equity would be $6,000:

$12,000 (value of securities) – $6,000 (borrowed amount) = $6,000 (equity)

And to find your equity percentage, you’d simply divide your equity by the value of your securities:

$6,000 (equity) / $12,000 (value of securities) = 0.50

Since your borrowed amount never changes, your equity percentage will rise or fall in tandem with the performance of your securities. 

What is a margin call?

A margin call occurs when the equity in your margin account falls below your broker’s minimum requirements. There are two types of margin calls:

  • Federal Regulation T Call: Occurs if you don’t provide enough initial equity during the purchase of the securities
  • Maintenance margin call: Occurs if your equity falls below the broker’s minimum threshold.

The first type of margin call, the Fed or Regulation T call, will only happen at the beginning of a trade. This call is triggered when investors don’t have enough equity in their account to meet the 50% initial margin requirement as set by FINRA, the Financial Industry Regulatory Authority.

The second, and more common, margin call is the maintenance margin call. This kind of call is issued by a broker when the investor’s equity falls below the maintenance margin requirement (the minimum balance, in either cash or securities, that you’re required to keep in the account). FINRA requires brokers to set their minimum margin levels no lower than 25%. However, many brokers set higher minimums of 30% or more.

The maintenance margin call usually happens because your investments have dropped in price – so far in price that your equity percentage falls below your broker’s minimum. 

In effect, your broker’s getting nervous: Your stock (or whatever asset you purchased) seems close to being worth less than the amount they loaned you to buy it. So they want you to put in more. 

It’d be like your mortgage lender discovering that, because of declining real estate values, your house had dropped in value – and so it demands that you immediately increase your monthly mortgage payments. 

Example of a margin call

Let’s return to the example of an investor who buys $12,000 of stocks using $6,000 of cash and $6,000 of margin. What would happen if the value of the securities dropped to $8,000? As the calculations below show, the investor’s equity percentage would drop to 25%:

$8,000 (value of securities) – $6,000 (borrowed amount) = $2,000 (equity)

$2,000 (equity) / $8,000 (value of securities) = 0.25 (equity percentage)

Now imagine that the broker requires a maintenance margin minimum of 30% and issues a margin call asking for a deposit of additional cash or securities to raise the equity back to the minimum. In this example, you’d need to add at least $400 of equity to reach the 30% minimum:

$8,000 (value of securities) x .30 (minimum equity percentage) = $2,400 (minimum equity)

$2,400 (minimum equity) – $2,000 (current equity) = $400 (additional funds needed)

What happens when you get a margin call?

There are a variety of ways to meet a margin call – or cover it, as the pros say. One of the simplest ways would be to just add cash to the margin account. In the margin call example above, the investor would need to add at least $400 of cash to meet the margin call.

Depending on your broker, you may also have the option of depositing other marginable securities into your account to satisfy a margin call. 

Finally, you could choose to sell some of your securities.

To calculate how many of your securities to sell, divide the margin call amount by the margin requirement. So, to continue our ongoing example, an investor with a 30% margin requirement may liquidate approximately $1,333 of securities to meet a $400 margin call ($400 / .30 = $1,333.33).

What happens if I can’t pay a margin call?

If your broker issues a margin call, you’ll want to act immediately to cover it. Usually, you’re given two to five days. 

If you don’t meet the call, your broker has the right to liquidate positions. Sell your assets, in other words (without giving you the opportunity to choose which are sold) to bring your account back up to its margin requirement. 

Having securities liquidated to cover a margin call can be devastating to an account. Once depreciated assets have been sold, they no longer have the opportunity to recover any of their value. The “on paper” losses become fully realized and “locked in.”

The financial takeaway

Margin calls are what make margin trading – borrowing money to buy securities – so dangerous.

Ways to avoid margin calls include keeping a sizable cash cushion in your margin account at all times. Regularly monitor your margin positions, to make sure they haven’t dropped in value to dangerous levels. 

Or if you want to guarantee that you’ll never face a margin call, you can forgo margin trading altogether – and fully pay for all your securities with cash.

Related Coverage in Investing:

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Why invest in the stock market? Because it can be more dangerous not to

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Robinhood tells users to raise their cash buffers on several popular stocks hours before the market open

Read the original article on Business Insider

What is estate planning? A strategy to safeguard your family and your finances, and ensure your plans for them get carried out as you wish

estate plan family
Everyone, regardless of financial status or age, can benefit from having an estate plan – assuming they have assets to leave and people to leave them to.

  • Estate planning directs how your assets get distributed if you die or are incapacitated.
  • An estate plan checklist includes a will, powers of attorney, and account beneficiary designations.
  • Using an estate planning lawyer ensures your plan meets all legal requirements and stays updated.
  • Visit Business Insider’s Investing Reference library for more stories.

It’s easy to see why estate planning is so often neglected – even by people who are financially savvy in other ways. Thinking about life after your death can be uncomfortable. However, it’s one of the most important things you can do.

Estate planning isn’t just for the ultra-wealthy, either. If you have property, investments, anything of value, you need an estate plan. If you have family or dependents of any kind, you need an estate plan.

Yet, only 32% of American adults have a will or other estate planning documents, according to Caring.com’s 2020 Estate Planning and Wills Study, because they simply haven’t gotten around to it or believe they don’t have enough assets. That hesitation can cause problems down the road.

No matter how much or how little you have, estate planning determines the future of your belongings, your money, and your family after you die. It can also ensure you have a say in who makes decisions about your health and finances while you’re still alive.

Here are the estate planning basics you need to know.

What is estate planning?

“Estate” is simply a fancy word for your stuff. So an estate plan inventories everything you have, from car to home, from bank accounts to life insurance policies. And then it outlines in writing what you want done with them. It becomes your voice beyond the grave, letting you direct who handles your affairs and inherits your assets.

The major elements of an estate plan state, clearly and definitively: 

  • Who gets what when you die
  • Who should execute your wishes
  • Who will handle your affairs if you become incapacitated

Why is estate planning important?

Suppose you pass away without a will, the most basic (and some would say, most important) estate-planning document. In that case, your assets can get tied up in probate, a time consuming and potentially costly legal process in which the court ensures your final debts are paid, and assets are distributed according to state law. It can also cause disagreements among your heirs as they fight over who gets what.

Then there are federal and state estate and inheritance taxes. Although they often target ultra-high-net-worth individuals, they can impact six-figure estates too, especially on the state level. There are ways to avoid these “death taxes,” ensuring your property passes onto your heirs without the government taking a big slice of it first. But you need an estate plan to execute these moves well in advance of your demise.

What are the basic documents for estate planning?

Many people think estate planning is essentially drafting a will. It’s a good start, but it is just one aspect of a comprehensive estate plan. Here’s an overview of the basic documents you need.

  • Last will and testament. A will details where you want your assets to go after your death and names an executor who will ensure they get to the right people or charities. I can also specify whom you want to serve as guardian of your minor children.
  • Durable power of attorney. A durable power of attorney designated someone to act on your behalf, legally and financially, if you’re unable to handle your own legal and financial matters. If you don’t have a durable power of attorney, your family members may not have the authority to sign checks, file tax returns, collect your government benefits, manage your investments and handle other financial transactions if you become incapacitated. They’ll have to ask a judge to appoint someone to manage these tasks, which can be time consuming and expensive.
  • Health care power of attorney. A health care power of attorney appoints someone to make medical decisions on your behalf if you become incapacitated. This can include choosing which doctors treat you, deciding which tests to run, whether you should have surgery or certain medications or therapies.
  • Living will. A living will provides instructions on the medical treatment you do and don’t want if you can’t communicate these decisions on your own. It relieves your family members from having to make difficult decisions about your care if you are terminally ill, in the late stages of dementia, seriously injured, in a coma, or near the end of your life. It can address things like the lengths medical professionals should go through to keep you alive, pain management, and organ donation.
  • Beneficiary designations. When you purchase a life insurance policy or open a retirement account, you’re typically asked to complete a beneficiary designation form. This form names the person or persons who will inherit the proceeds when you die. Beneficiary designations override any instructions for these accounts set out in your will, so it’s important to review and update them regularly to ensure they’re distribution upon your death matches your intent.

Other important documents for an estate plan

Some other estate planning documents can come in handy, depending on your circumstances.

  • Living trust. A living trust can work as a tool for avoiding the probate process – that is, filing a will. You set up the trust, and place the assets you want to bequeath inside it. When you die, the trust distributes the assets as per your wishes. If you have a lot of assets, a trust can help you and your heirs avoid estate and inheritance taxes. 
  • Digital asset protection trust. What happens to your e-mail accounts, text messages, cloud-based storage accounts, websites, and social media accounts when you die? You can’t give them away in your will because these digital assets may not be solely owned by you but by a tech company. A digital asset protection trust can help you legally transfer domain names, social media accounts and other digital assets to your heirs upon your death.
  • Letter of intent. You may want to leave information or instructions that don’t belong in a will for your heirs. This is where a letter of intent comes in handy. You can leave funeral and burial instructions, details about financial accounts, contact information for your attorney and financial advisors, where your executor can find titles, deeds, tax returns, birth certificates, and other important records. A letter of intent doesn’t carry the legal weight of a will, but it can be helpful to your loved ones.

What are the main steps in estate planning?

OK, you have a sense of what an estate plan entails, paperwork-wise. How do you go about creating those documents, and going about estate planning in general? Here are the three fundamental steps to get you started creating an estate plan that addresses your needs and wishes.

1. Get help from an estate planning attorney

Creating an estate plan may seem like a daunting task, but you don’t have to handle it all on your own. In fact, estate planning should never be a DIY project.

But if you want it done properly, you need to call in a pro.

While you can find a lot of information and fill-in-the-blank estate planning forms online, trying to save a few hundred dollars in up-front costs can end up costing your heirs thousands later on. That’s because most states have very specific requirements that must be met for your will and other estate planning documents to be valid. If these requirements aren’t met, if the language isn’t correct or the wording is imprecise, your instructions could be thrown out and your affairs handled according to state law.

That’s why it’s important to work with a qualified attorney or financial planner to create your estate plan. If you don’t already have someone to help you, ask friends, family members, or other financial professionals you work with for a referral.

An estate planning attorney, also known as a trust and estates lawyer, also stays up to date with changes in tax laws and other legislation that could affect your assets and how you dispose of them. Working with other professionals, like accountants and money managers, they can help you develop estate-planning strategies. And also ensure your plan is reviewed regularly.

2. Identify guardians for minor children

If you have minor children, part of the estate planning process involves selecting one or more guardians for those children. If you don’t name a guardian, the court will decide who will raise your children, and you can’t assume the judge will automatically appoint the person you think would be the best choice.

When selecting guardians, many people get hung up on timing. For example, a grandparent might be a good guardian for their toddler right now but might not be the best option a decade later, when the child is a teenager. However, your guardian selection isn’t set in stone. Think about who would be the best person if something happens to you in the next two to three years. You can select new guardians at any time as circumstances change.

3. Take inventory of what you own and owe

Make a list of your assets and debts, including your financial institutions’ names, account numbers, and names of contacts there. Keep this list, along with copies of your will and other important estate planning documents in a secure location. You might also want to give a copy to the executor named in your will or make sure they know where to find them in case anything happens to you.

The financial takeaway

Estate planning is an important step in ensuring your legal and financial affairs will be handled when you die. It also makes life easier for your loved ones by drastically reducing the stress, expense, and red tape involved in handling your estate.

Drafting a will is just one component of an estate plan. If properly done, a comprehensive plan includes plenty of others, including powers of attorney, health directives, and beneficiary designations for your bank and brokerage accounts.

It might feel overwhelming to handle all of these tasks. You don’t have to handle estate planning on your own – in fact, you shouldn’t. With the help of a qualified estate planning lawyer, and other financial professionals, the process can be a lot more manageable. 

It probably won’t be the most pleasant project. Contemplating your own mortality never is. But a comprehensive estate plan can at least provide peace of mind.

Related Coverage in Investing:

Inheriting an IRA? Here are all the options and withdrawal rules beneficiaries should know

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Estate planning is an important strategy for arranging financial affairs and protecting heirs – here are 5 reasons why everyone needs an estate plan

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Borrowing from your 401(k) plan can be a fast, advantageous way to meet serious financial needs – here’s everything you need to know about 401(k) loans

401k loan
If you need funds quickly, a 401(k) loan offers several advantages over other loans or 401(k) plan withdrawals – but there are many rules to follow.

  • Borrowing from a 401(k) means withdrawing funds from your plan that you later repay with interest.
  • A 401(k) loan avoids the taxes and penalties that come with outright withdrawals.
  • Borrowing from a 401(k) has drawbacks, like the suspension of contributions and overall loss of account growth.
  • Visit Business Insider’s Investing Reference library for more stories.

Any financial expert will tell you it’s best to keep your retirement savings tucked away until, well, retirement. That certainly holds true for one of the most common ways to save for those post-career years: employer-sponsored 401(k) plans

But life can get in the way of the best investment plans. And if you have an immediate need for cash, borrowing from your 401(k) may make the most financial sense. Especially when you compare that option to other loan alternatives – or withdrawing money entirely from the plan.

However, there are many rules, both from the IRS and individual employer plans, that apply to 401(k) loans. If those are not followed, you may end up paying taxes and penalties that can seriously hamper your finances. 

Understanding exactly what’s entailed in borrowing from a 401(k) is key to determining if the strategy will suit you. Let’s take a closer look.

What is a 401(k) loan?

In a 401(k) retirement plan, you make regular pre-tax contributions and the money grows tax-free. In return for those tax advantages, you must follow several IRS rules, chief among them, no withdrawals without penalties until age 59½. If you do withdraw early, you’ll be subject to a mandatory 20% federal tax withholding and in most cases a 10% tax penalty.

A 401(k) loan is basically a way you can take money from your own account without paying these taxes or penalties. You don’t get charged, because this is only a temporary withdrawal: You will be putting the money back, eventually. And you won’t be depleting your retirement savings permanently.

You will pay interest on the sum you take out, but this money goes back into the plan account. So, in effect, you are both the borrower and lender of a 401(k) loan.

IRS regulations govern 401(k) plans overall, but there is also some flexibility for employers to impose their own rules and restrictions. Most employers that provide 401(k)s plans allow 401(k) loans, says Gregg Levinson, senior consultant at Willis Towers Watson. He estimates that about a third of 401(k)(k) participants borrow from their accounts at some point (not counting the COVID-19 pandemic year of 2020).

Will my employer know if I take a 401(k) loan?

Your employer has to be informed if you plan to borrow from your 401(k) loan – the withdrawal and repayment process is set up through them. This is not to say that the whole company or your immediate boss will necessarily know. Only, perhaps, the payroll department. 

How to borrow from a 401(k) 

Your first step when considering borrowing from your 401(k) is to contact your employer benefits department or your 401(k) plan provider to get details on how your plan’s loans work (assuming, of course, they’re offered in the first place). 

Here’s what to look for in 401(k) loan rules:

  • Borrowing limits. The IRS mandates that you may borrow no more than 50% of your account value or $50,000, whichever is less. Some employers and plans will also impose a minimum loan amount, say, no less than $1,000.
  • Interest. Your interest rate is determined by your employer but must be “reasonable” and similar to the rate you’d find at a financial institution, according to IRS rules. In most cases employers charge prime plus one percentage point.
  • Repayment.  IRS rules call for full repayment of your 401(k) loan, with interest, within five years in equal payments that include principal and interest paid at least every quarter. Your own plan may follow those terms, or impose more stringent ones. Many employers use payroll deductions for repayments. Your employer may also allow for longer repayment limits, as recommended by the IRS, if you use the loan for a primary home purchase – sometimes as long as 25 years. 
  • Number of loans allowed. How many loans can you take from your 401(k) plan? Again, that depends on your employer. Most of them only allow for one at a time; you have to fully repay one sum before they’ll allow you to borrow again. So weigh carefully how much you’ll need. The IRS itself permits simultaneous loans, as long as the combined amount doesn’t exceed the general limits. 

As long as you adhere to the mandates, all should go well. But if you don’t, your loan could be considered a withdrawal, and tax payments and penalties will follow.

Is it smart to borrow from a 401(k) plan?

Compared to other financing methods, borrowing from a 401(k) plan has its advantages. On the plus side, a 401(k) loan offers:

  • No need for approval. It’s your money, so you’re getting it is automatic. No loan applications or credit checks. And borrowed 401(k) funds  do not show up on your credit report as a debt.
  • Quick access to funds. Often, you can get the money within two weeks.
  • Interest rates that are often lower than those charged by credit cards and many personal loans offered by banks
  • Benefits from the interest. You’re paying yourself to borrow, instead of a lender. Because it goes into the account, the interest is sort of a boon, not just an expense. 
  • No prepayment penalty. Unlike some consumer loans, most plans don’t charge a fee for loans repaid in full early. 

What are the downsides of borrowing from a 401(k)?

401(k)s loans have their drawbacks, too.  Downsides include:

  • Loss of tax-deferred earnings. Taking money out of your account shrinks it, obviously, and also its earning potential – especially if you take the full five years to repay the loan. The overall effect on your retirement savings will depend on how much you borrow, how long you take to pay it back, and the state of the stock market. Some plans don’t allow you to make new 401(k) contributions until the loan is repaid, further hampering the compounding ability of retirement savings.
  • Double taxation. Loan repayments and interest are made with after-tax dollars, in contrast to the dollars used for contributions. But they’re not distinguished within the account; everything goes back into the same pre-tax pot. So, when you eventually start taking regular distributions from your plan, you’ll pay income tax on that money; in effect, you’re being double-taxed on the interest. 
  • Sudden repayment. In most cases, if you leave your employer for any reason you will need to fully repay the loan usually within one to six months, depending on the plan rules and the date of your last payment. If you don’t, your former employer and the IRS will consider the loan a distribution. You’ll then owe income taxes on the amount and, if you are under age 59½, a 10% penalty. (For Roth 401(k)s, you likely won’t owe taxes but you will be on the hook for the 10% penalty.)

“People often underestimate how long they will be with an employer and find themselves in the position of having to come up with the full amount outstanding on the loan or face a large tax bill and penalties,” says Levinson.

The financial takeaway

Most financial experts agree taking a 401(k) loan should be a last resort. Employees of a certain age, who are beyond the penalty-incurring years, might find that taking a distribution might actually work better for them.

Still, borrowing from your 401(k) plan can be an option if you need funds quickly. It’s certainly a better course than an outright withdrawal, especially if you’re under 59½, which incurs penalties as well as taxes.  

Before you jump to borrow from your 401(k), it’s important to consider the pros and cons. Understanding how 401(k) loans work, the consequences of leaving your employer or losing your job before repayment and the opportunity risks involved in tapping your retirement savings early are all key considerations. 

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The worst thing you can do with your 401(k) when you leave a job, according to a financial expert and bestselling author

A 401(k) can be the most lucrative way to save for retirement, so take advantage if you can

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How to withdraw from your traditional 401(k) account early – the strategies to avoid penalties and fees

Read the original article on Business Insider

Impact investing finances companies that aim to do good in the world – here’s how it works and how to get involved

impact investing
Impact investing focuses companies, funds, or firms that are dedicated to improving the environment or society while also providing a financial return for investors.

  • Impact investing targets companies or projects committed to specific social or environmental causes.
  • While many perform well, the return on impact investments may be lower than more traditional investments’.
  • Impact investing is largely limited to private equity, but individuals get involved via broader ESG funds.
  • Visit Business Insider’s Investing Reference library for more stories.

In the past, investing for a profit and “making a difference” were two of life’s lodestars that most people followed separately. But times are changing. 

Investors are increasingly looking to direct their funds towards companies that are making positive social or environmental impacts in the world. The essence of impact investing is putting your principal where your principles are. 

But how exactly does someone find impact investing opportunities? Is it safe and profitable to invest in social impact? Here’s what you need to know.

What is impact investing?

Impact investing is the process of investing in companies, funds, or firms that are dedicated to improving the environment or society while also providing a financial return for investors. 

There are a wide variety of issues that an impact investor may seek to address. These include (but are certainly not limited to):

  • Poverty
  • Hunger
  • Education gaps
  • Climate change
  • Pollution
  • Child or forced labor
  • Wage inequality
  • Diversity
  • Animal cruelty

Some impact investments are concessionary, meaning the company’s top priority is impact rather than investor profit. But non-concessionary impact investments promise a “double bottom line,” meaning that they hope to achieve their social or environmental goals without significantly hindering returns.

A recent report by the Forum for Sustainable and Responsible Investment (US SIF) found that $17 trillion of US-based investment assets in 2020 used sustainable investing strategies (a 42% increase from 2018). Put another way, a third of all assets under management in the United States now take sustainability issues into consideration.

Impact investing, ESG, socially responsible investing: What’s the difference? 

Environmental, social, and governance (ESG), socially responsible investing (SRI), and impact investing are sometimes used interchangeably. All three do involve the strategy of considering ethical values alongside financial values when evaluating investments. The issues that concern them overlap too. 

But there are also some key differences. 

ESG standards help socially conscious investors gauge a company’s commitment to ethical business practices. While no single ESG rating system is used industry-wide, popular ESG data-providers include MSCI, Morningstar, Bloomberg, Sustainalytics, and more.

With SRI, investors purposefully avoid companies with products or business principles that don’t align with their values. For example, SRI investors may choose to eliminate all companies that produce tobacco products or use child labor from their portfolios.

The biggest difference between ESG and SRI is that ESG tends to be inclusive and SRI exclusive. An ESG-conscious investor may still invest in companies that aren’t ranked as highly as others, especially if they’ve expressed a commitment to improvement. But, with SRI, negative investments are typically screened out completely based on the investor’s filtering criteria.

Impact investing is sometimes thought of as a subset of SRI. It can be even more exclusive in that the investments chosen are often companies or non-profits that are fully committed to specific causes. So while SRI investors may invest in any company that doesn’t violate their values, an impact investor may look for companies that are fighting for values such as eradicating hunger, poverty, or other worthy pursuits.

Admittedly, it can seem a bit hair-splitting. One key point, though, is that impact investing, as the name implies, targets investments, initiatives, and companies that show measurable results – not just good intentions.

Why does impact investing matter?

Impact investing could encourage more people to get involved in efforts that have been traditionally relegated to philanthropy or charitable contributions. With the potential to achieve at least some return, more dollars may be directed towards companies that are trying to address society’s problems.

Admittedly, impact investments tend to generate lower returns than the stock market as a whole. A 2017 study by the Global Impact Investing Network (GIIN) of 71 private equity impact funds found their average net return rate to be 5.8% (well below the S&P 500’s average rate of return).

To be clear, this financial give-up only applies to impact investing in the strictest sense. If by “impact investing,” you actually mean ESG investing, you can expect much better returns. Multiple studies have shown that investors can build ESG-focused portfolios without compromising returns. In fact, Morningstar found that in 2019, US-based. ESG funds actually outperformed their conventional fund peers. 

A recent ruling from the US Department of Labor may eliminate impact investing vehicles from 410(k) or corporate pension plans. The rule prohibits fiduciary financial advisors from selecting investments based on any goals other than achieving the highest possible return for their clients. 

The rule doesn’t specifically call out ESG or impact investing. Still, any investments that have a below-average anticipated rate of return (as many impact investments do) could be eliminated from employer-sponsored retirement plans moving forward.

Types of impact investments

Impact investing is a diverse field – there are many ways you can invest for good. How can you find impactful companies to invest in? 

Again, this depends on how strictly you define impact investing. If you actually mean ESG investing, you have many options. First, you can buy stock shares of companies that receive high ESG ratings. Or for broader diversification, you can invest in ESG mutual funds or ETFs. Leading examples include:

Online trading programs have also led the way in increasing access to values-based investing and lowering the costs. Betterment and Wealthsimple are two examples that have built their own ESG or SRI portfolios.

If you want to take the next step of investing in specific companies that are promoting social good (i.e. impact investing) things become a bit murkier. Most impact investing funds aren’t publicly traded. Instead, they tend to be private equity firms (open only to institutional or accredited investors) or companies.

Accredited investors include individuals with a net worth of at least $1 million or annual income of at least $200,000 for the last two years. Or, investors who are able to demonstrate a certain level of financial sophistication.

Finding impact investing opportunities

There are several lists available online that rank impact investing funds. One example is BTheChange.com, which breaks its list of winners into five different categories:

  • Best for Environment
  • Best for Community
  • Best in Governance
  • Best for Workers
  • Best for Customers

The Toniic Directory is another helpful list of impact investments that includes both private equity and companies offering bonds or other fixed-income opportunities. 

Accredited-level investors may want to look for private equity firms that focus on impact investing. Notable impact investing firms include Sonen Capital, Calvert Impact Capital, and Reinvestment Fund

Some examples of  impact investing

Let’s say that you’re passionate about environmental issues like reducing carbon emissions and the use of non-recyclable materials. To find an impact fund that suits you, you may start by checking out the “Best for the Environment Funds” on BTheChange.com.

After perusing the list, you visit the website for Arborview Capital, a firm that invests in businesses that support each of the environmental goals listed above and more. Feeling strongly that your values align, you make the decision to invest in the Arborview Capital Partners II LP fund. 

In another example, imagine that you feel strongly about investing in local businesses that serve low-income communities. In that case, you may be drawn towards investing with the Reinvestment Fund.

Reinvestment Fund’s promissory note program supports the “triple bottom line” of People, Planet, and Profit. After reviewing your note options, you decide to invest in a 7-to-9-year promissory note that will pay you back at an interest rate of 2.25%.

The financial takeaway

If you’re just getting started with socially conscious investing, you may want to start with ESG ETFs and mutual funds. As publicly traded assets, they are easy to buy (or sell) and generally earn solid returns as well.

But if you have a net worth that’s on the high side or considerable investment expertise, you may be willing to deal with less liquidity and lower returns in exchange for making a bigger difference. And, in that case, it could be highly rewarding to invest in private funds and firms that are wholly focused on making a positive impact in the world.

Related Coverage in Investing:

How the pandemic helped drive a surge in ESG demand

You can make great investment returns while also helping the world. Here are 20 ESG funds that have beaten the market over the past year.

Sin stocks are shares in companies whose business can be considered unethical – here’s why they’re so enticing and who the major players are

What is an angel investor? Who they are, what they do, and how they help startups grow

Equity crowdfunding is a way individuals can invest in private, promising young companies

Read the original article on Business Insider