A stock market is a place where people buy and sell shares of publicly traded companies. These shares represent ownership in the company and can increase or decrease in value based on various factors such as the company’s performance, economic conditions, and investor sentiment.
When a company goes public, it issues shares of stock that investors can purchase. People can then buy and sell these shares on the stock market. The stock market provides a platform for investors to trade these shares with each other.
How does the price of a company’s stock move?
Supply and demand determine the price of a stock. If more people want to buy a stock than sell it, the price will go up. If more people want to sell a stock than buy it, the price will go down.
The bull represents a growing market while the bear represents a falling market. The name comes from the way these animals attack.
There are two main types of stock markets: primary and secondary. The primary market is where new stocks company issue and sell to the public for the first time. The secondary market is where investors trade previously issued stocks.
Overall, the stock market plays an important role in the economy by allowing companies to raise capital and investors to participate in the success of these companies.
How’s the stock market related to the economy?
The performance of the stock market can be an indicator of the health of the economy, as it reflects the collective sentiment and expectations of investors about the future prospects of companies and the economy as a whole.
When the stock market is doing well and prices are rising, it often indicates that investors have confidence in the economy and expect companies to perform well in the future. This can lead to increased investment, job growth, and economic expansion.
But, when the stock market is performing poorly and prices are falling, it may indicate that investors are pessimistic about the economy and the future prospects of companies. This can lead to decreased investment, job losses, and economic contraction.
In addition, changes in the economy, such as interest rates, inflation, and government policies, can also impact the stock market. For example, if the Federal Reserve raises interest rates to combat inflation, it may lead to higher borrowing costs for companies and decrease their profits, causing their stock prices to fall.
Therefore, the stock market is an important component of the overall economy. It can be affected by, and also impact various economic factors.
I will cover more on the main types of stock exchanges in the US and globally in my next post. Thanks for reading!
If you want to watch my videos on the same topics, you can check out my Youtube channel here. https://www.youtube.com/channel/UC1wFKF1FTBI90qdn4HH2QhQ
So, there’s been some big news in the banking world. First, Silicon Valley Bank, which had a lot of high-profile tech investors as clients, collapsed on Friday. Federal regulators have taken over the bank since then. It’s actually the largest U.S. bank to fail since the 2008 financial crisis. Then, on Sunday, regulators started worrying about New York’s Signature Bank. This bank had a lot of money tied up in the unpredictable cryptocurrency market.
Both Silicon Valley Bank and Signature Bank are under the Federal Deposit Insurance Corporation (FDIC) control. This happened after Silicon Valley Bank experienced a run on the bank last week, with people withdrawing billions of dollars in deposits.
men with finance business report and money vector illustration
The different business model of this bank
Do you know how Silicon Valley Bank wasn’t really a name you’d hear outside of Silicon Valley and the tech industry? Well, that’s because their clients were mainly venture capital firms, startups, and wealthy tech employees. They were in the game for around forty years and even managed to compete with big financial institutions. But in the end, SVB collapsed in just a few days.
Apparently, around 90% of SVB’s accounts had over $250,000 in deposits, which is higher than most banks. This means most of their deposits weren’t backed by government insurance, according to a report. Also, experts pointed out that SVB’s business model was more like a local bank from the 1800s or 1900s, focusing on deposits and local customers, while bigger banks had more diverse funding sources and customers.
In 2020, SVB’s deposits surged, but unfortunately, they invested those extra billions in long-term Treasury bonds just as the Federal Reserve raised interest rates. This led to a decline in the value of government bonds, and more depositors withdrew their money. Last week, SVB announced a loss of $1.8 billion from selling some of its bond holdings, leading to a run on the bank. Federal regulators ended up taking control of the bank last Friday.
In today’s post, I will talk about what you should consider if you haven’t started investing in stocks yet or if you are a beginner investor.
Why do people fear investing in stocks?
Before we do that, let’s look at the reasons why people may be afraid to invest in stocks. Here are some of the most common reasons:
Lack of knowledge: Many people are afraid to invest in stocks because they don’t understand how the stock market works or how to analyze stocks. They may feel overwhelmed by the amount of information available and worry about making a mistake.
Fear of losing money: Investing in stocks always carries some degree of risk, and many people are afraid of losing money. They may worry about a stock market crash or about investing in the wrong company.
Past negative experiences: Some people may have had negative experiences with investing in the past, such as losing money or being scammed by a fraudulent investment scheme. These experiences can make them hesitant to invest in stocks again.
Perceived lack of control: Investing in stocks can feel like a gamble to some people, and they may worry about not having control over their investments. They may feel more comfortable with traditional savings accounts, where they feel they have more control over their money.
Peer pressure: Some people may feel pressure to invest in stocks because of their friends or family members, but they may not feel confident in their ability to make good investment decisions.
So what is the solution?
Infact, investing in stocks for long-term growth can be a great way to build wealth over time if done correctly. By following some simple tips, you will mitigate the risk associated with investing and will grow your wealth over time. Here are some tips on how to invest in stocks (and other assets) for long-term growth:
Set your investment goals: Before you start investing in stocks, it’s important to define your investment goals. Do you want to save for retirement, a down payment on a home, or another long-term goal? Understanding your goals can help you create a long-term investment plan.
Determine your risk tolerance: Investing in stocks comes with risk, and it’s important to understand your risk tolerance before you start investing. Conservative investors may want to focus on blue-chip stocks with a history of stable returns, while more aggressive investors may be comfortable with higher-risk, high-growth stocks.
Research companies and industries: When investing in individual stocks, it’s important to research individual companies and industries to make informed investment decisions. Look for companies with strong financials, competitive advantages, and growth potential, and consider investing in industries that are poised for growth in the long term. This does require quite a bit of research by looking at companies’ financials. For conservative investors, it is best to start with a broad-based index fund or an ETF. By setting up monthly or weekly contributions, you can ignore market fluctuations. Predicting the future of a specific company is uncertain. Thus this risk is much higher compared to investing in a fund, which is a pool of many companies from different sectors.
Build a diversified portfolio: Diversification is key to managing risk and maximizing returns when investing in stocks. Invest in a variety of companies and industries to spread your risk (through index funds or ETFs). Vanguard, Charles Schwab, and Fidelity are all good brokerage companies offering index funds. It’s important to research and compare the fees, historical performance, and other factors of different index funds and providers before making any investment decisions. Also, consider adding other asset classes, such as bonds and real estate, to your portfolio.
Invest regularly and stay disciplined: Investing in stocks for long-term growth requires discipline and consistency. Set up automatic contributions to your investment account and stick to your long-term investment plan, even in times of market volatility. As I mentioned in my previous posts, investing in funds is a great way to do that. Also, by following a strategy called dollar cost averaging you can remove emotions from your investment decisions.
Monitor and adjust your portfolio: Finally, it’s important to regularly monitor and adjust your portfolio as needed. Rebalance your portfolio periodically to maintain your desired asset allocation, and consider adjusting your investments as your financial goals or risk tolerance change over time.
Conclusion
Overall, investing in stocks can be a great way to build wealth over time. However, it is important to do your research and understand the risks involved. If you are feeling hesitant about investing in stocks, consider consulting with a financial advisor or taking a course on investing to gain more knowledge and confidence.
Whether investment should be done for the long term (retirement) or short term (if you are looking to pay for downpayment of a house), we should consider these key points:
Short-term gains can be risky: While making quick profits through short-term investments is possible, it often involves taking on more risk. Fluctuations in the stock market can cause investments to lose value quickly, making short-term gains unsustainable.
Long-term investments offer more stability: By investing for the long term, you are able to ride out market fluctuations and take advantage of compounding interest over time. This can provide more stability in your portfolio and increase your chances of achieving your financial goals.
Patience is key: Investing for the long term requires patience and discipline. It is important to avoid making impulsive decisions based on short-term market movements and instead focus on the long-term potential of your investments.
Diversification is important: To mitigate risk, it is critical to diversify your portfolio by investing in a mix of different asset classes and sectors based on returns and risks. This can help to offset any losses in one area with gains in another.
Consider your goals and risk tolerance: Your investment strategy should be aligned with your personal financial objectives and risk tolerance. While long-term investments may be suitable for some, others may prefer a more active approach to investing. Some safe ways to make a reasonable return in the current market situation are investing in CDs and high-yield savings accounts. These are currently giving around 4%-5% interest rate annually. The US treasury bills and notes are also offering similar rates. It is essential to consider what works best for you and your financial situation and how soon you need the money.
In summary, while short-term investments can offer quick gains, long-term investments provide more stability and the potential for compounding interest over time. By focusing on a long-term investment strategy and diversifying your portfolio, you can mitigate risk and increase your chances of achieving your financial goals.
Start with a low-cost index fund: One of the easiest and most effective ways to invest for beginners is to start with a low-cost index fund, which tracks a specific market index, such as the S&P 500. These funds offer broad diversification and typically have lower fees than actively managed funds.
Invest regularly and consistently: Investing is a long-term game, so it’s important to invest regularly and consistently over time. Consider setting up automatic contributions to your investment account weekly or monthly to ensure you’re investing regularly. Also, it is best to start early to get the maximum benefits.
Diversify your portfolio: Diversification is critical to managing risk and maximizing returns. Invest in a mix of asset classes, such as stocks, bonds, and real estate, and within each asset class. You can easily invest in various companies through index funds and properties through REITs to spread your risk.
Keep your emotions in check: Investing can be emotional, especially when markets are volatile. However, it’s important to keep your emotions in check and avoid making impulsive investment decisions based on fear or greed. Stick to your investment plan and focus on the long term. Dollar-cost-averaging is a great stregy to use as it takes the emotions out of your investments.
Monitor and adjust your portfolio: Finally, it’s important to regularly monitor and adjust your portfolio as needed. Rebalance your portfolio periodically to maintain your desired asset allocation, and consider adjusting your investments as your financial goals or risk tolerance change over time.
Remember, investing is a long-term game, and success comes from consistency, patience, and discipline. By following these simple strategies, beginners can set themselves up for long-term investing success.
The bureau of labor statistics (BLS) just released the inflation number for January 2023 for the United States.
There is a 0.5% increase from the December number, and inflation sits at still a whooping high of 6.4% over the last 12 months from January 2022.
As you can see in the BLS chart above, the year-to-year inflation is 6.4% for all the items, 10.1% for food, 8.7% for energy, and 5.6% for all the things except food and energy. Also, in their press release, they mentioned the index for shelter was the largest contributor to the monthly inflation number.
By shelter, they mean rents and owner equivalent rent cost of housing.
If you look at this detailed table from them, it shows the breakdown in prices for all the individual items.
Source: BLS
Under the energy category, fuel oil is still up by 27.7% for the 12 months. Natural gas is also up by 26.7% in the 12 months.
There is a 14% rise in Dairy and related products in the food category.
You can see that the highest inflation happened in cereal and bakery products. This was mainly because of the rise in egg prices because we felt that in the grocery stores.
What caused egg prices to rise so much?
Economists think the bird flu was the main reason behind increased egg prices because about 40 million egg-laying hens died in 2022 because of this disease.
At the same time and the demand for eggs continues to rise because it provides a cheaper source of protein to many Americans. Thus both these supply and demand factors contributed to a significant rise in egg prices.
Was this inflation expected?
This came as a little bit of a disappointment because people were expecting the overall inflation not to rise if not fall from the December level, even though fuel prices seem to be falling.
Inflation is still high on many essential things, and it continues to be the biggest hit to poor Americans. It acts like an indirect tax on them.
Unfortunately, most of this inflation we are experiencing is caused by supply-side factors, which are difficult to fix in the short run.
Policy implication
The government can only focus on controlling the demand aspect of inflation in the short run. As a result, the Fed will continue to tighten the monetary policy and raise interest rates until inflation reaches around 2%
The federal reserve has been trying to control inflation using interest rate hikes to slow the demand in the economy.
To learn more about inflation, how it is calculated, and the factors that cause it, please see my post here.
How does this affect us individuals and the economy as a whole?
In their most recent meeting today, the Fed increased the key interest rate or the federal funds rate by 0.25%. Until their next meeting, the target federal funds rate range will be between 4.5% to 4.75% compared to the previous level of 4.25%-4.5%.
But what is the Federal funds rate and why does it matter to us?
It is the short-term interest rate that commercial banks pay or earn to maintain their required reserves. Commercial banks can borrow from other banks overnight (if they fall short of required reserves) or lend the extra money to other banks overnight (if they have more than the required reserves).
The Federal open market committee (FOMC) sets this target federal funds rate range in their meetings after looking at the overall economic data on prices and the job market. They meet 8 times in a calendar year.
Then the Fed uses its monetary tool – interest on reserve balance to steer the Federal funds rate in its target range.
This federal funds rate is critical because it affects all the short-term rates such as those on mortgages, car loans, and credit cards, basically, the interest rates you and I care about.
The federal funds rate also has an impact on the stock market because investors keep a close eye on the Fed announcements to predict how the economy will likely perform in the coming months.
This is the key rate through which Fed controls inflation and unemployment level in an economy.
So now, hopefully, you understand why this rate is essential.
Why did Fed raise the interest rate by 0.25%?
Coming back to today’s news, Fed raised this rate again to control inflation. This rate hike was expected because the Fed has been raising the interest rate since mid of 2022 to control inflation.
It is important to note that this rate hike is smaller than the previous hikes. Last year, Fed was very aggressively raising interest rates by 0.75% or 75 basis points and 0.5% or 50 basis points.
This is because inflation, though, still above the Fed’s target rate of 2%, is now rising at a lower rate than last year and the Fed’s tight monetary policy is working.
“Inflation has eased somewhat but remains elevated,” the Fed noted in their press release. The current year-on-year inflation rate in December 2022 from the BLS report is 6.5%.
The Fed restated today that they would keep raising this key interest rate until inflation comes back to their goal of 2%.
The FOMC seeks to achieve maximum employment and a long-term inflation rate of 2 percent.
What is inflation and what caused it in 2022?
Inflation happens when the prices of everyday items we consume rise over time. It happens because of demand and supply imbalance.
While some inflation is normal if it is at a level that is noticeably visible to everyone, it becomes a cause of concern. This is because your dollar loses its purchasing power.
In 2022, the United States and many other countries in the world experienced really high inflation from their average level. This was because of supply chain issues and Russia Ukraine war.
Some people even blamed the Biden government for giving too much money into people’s hands through stimulus checks. People thought the American rescue plan, was meant to give economic support to people who lost their jobs, but people got their purchasing power back and thus the demand for everyday items didn’t slow down.
However, this demand was not matched by the supply because of shipping constraints. The United States imports a large number of everyday items from China. But because of China’s zero COVID policy, there were many supply chain bottlenecks.
Thus, overall, the demand for goods and services in the economy exceeded the supply of the same and therefore the prices of many items rose.
Additionally, the Russia-Ukraine war caused the price of oil to go up globally, as the price of oil is set in the international market supply and demand forces.
So how does interest rate affect inflation?
The Fed has tried to cool the economy by taking tight monetary measures. These measures aim to reduce money circulating in the economy by raising interest rates.
When the Fed raises the Federal funds rate, it’s indirectly increasing short-term borrowing costs in the economy. This makes everyday loans such as auto, home, credit cards, and education more expensive.
Once the cost of borrowing increases, people buy less of goods and services, and businesses borrow less for expansion and hire fewer people. Both of these will slowly bring the total demand for goods and services down to its optimal level and inflation gets under control ultimately.
Today’s post focuses on students who want to major in economics and the career options available to them.
I feel there are some key considerations you should have before you decide to be an Economics major or want to do a specialization in Economics at graduate school.
Math is something you can’t escape
Even though economics is part of social sciences, it is the only course that requires a considerable amount of quantitative analysis. Thus, one of the prerequisites is that you must be good at math. College-level economics involves calculus in both Macroeconomics and Microeconomics. This is in addition to the required math courses you will have to complete in your four-year degree. Below I list the core courses which you will be taking at most universities:
Macroeconomics 1 and 2 (focuses on a country’s inflation, GDP, Growth, unemployment, and policy-making – the macro or the big picture)
Microeconomics 1 and 2 (focuses on the economics of an individual, a firm, and the government – the micro/smaller picture)
Statistics (focuses on data analysis and its inferences)
International trade (the advantages and disadvantages of it, country’s balance of payments, etc.)
Econometrics with basic programming skills (focuses on how we can explain a certain phenomenon by a variety of other phenomena using data and regression analysis. Also great for predictions and forecasting)
Mathematics for economics 1 and 2 (Economics theories explained through mathematical models)
Money and financial systems (Banking and monetary system of a country)
These are some of the required core courses that you will have to take in addition to many electives such as development economics, public economics, labor economics, environmental economics, behavioral economics, financial economics, and other such courses. Please note that the electives I listed are not comprehensive and are just for an overview, as each University will have slightly different options.
Further, if you plan to do a Masters or Ph.D. in Economics, the level of math needed increases manifold. Thus, you must understand calculus well. There will be a lot of mathematical models you will be studying which explain how our economies work. A lot of these models would involve complex math functions and differential equations. For that, having a solid math background in high school is a must.
What are the career options for economics majors?
Economics teaches critical and analytical thinking, so there is a wide variety of career options available to economics majors. Someone with a bachelor’s degree in economics can work at entry-level in the following industries:
Consulting
Banking
Investment banks
Actuary and insurance sector
Teaching at a high school (requires a teaching credential or a master’s degree)
Economic research firms
Other firms requiring research and data analysis
Not-for-profit organization
The finance department of the government
Bureau of Labor Statistics (BLS) or equivalent in your country
US treasury or equivalent in your country
Fed or central bank in your country
World bank
IMF
United Nations
Policy-making
Economic think-tanks
However, the last eight usually require a graduate degree in economics. Most of these jobs will involve data analysis, so having some type of programming background will be very useful. Knowledge of SAS, STATA, or any other econometrics software will give you the edge at the interview.
My two cents on Economic Consulting as a career choice
From my experience working in economic and financial litigation consulting previously, I noticed that people with good quantitative analysis and presentation skills had a higher chance of moving up the corporate ladder. Intermediate advanced MS excel skill and knowledge of statistical software such as SAS was critical for the work I did in my company.
Finance and accounting knowledge will be essential to work in financial consulting, commercial banks, stock exchanges, and investment banks. So my advice is to take a few basic accounting and corporate finance courses in college if you are considering these options.
Most economics entry-level jobs start with a salary of $70-$85K per year. The amount of income that economics majors make is above many other majors.
As a career choice, it is very financially rewarding with a huge potential for monetary and intellectual growth.
I can explain the nature of the litigation consulting industry better as I had worked there. Most people with an undergrad degree in economics start with an analyst position and move up a level or two gradually with experience.
However, after a certain level, most consulting firms and investment banks require a Master’s degree/MBA or Ph.D. in economics or related fields such as finance, accounting, or Law.
So typically economics majors work for 3-4 years as entry-level analysts and then apply for graduate school.
What do most economics majors do for grad school?
There are many possibilities for economics majors but most of them chose one of the following fields.
Masters in economics
Masters in public policy
MBA
Ph.D. in Economics
Graduate Law degree
Job options for people with a graduate degree in economics.
One of the most widely available job titles for people with a graduate degree in economics is an Economist. These professionals analyze economies and how to optimize an area’s resources for its production, output, and material wealth. They collect and analyze data, research trends, and evaluate economic issues for the resources, goods, and services.
As of September 8, 2022, BLS lists the median salary for an economist as around $106K per year.
This article from the American economic association also supports what I have mentioned in my post based on my observation.
Job options after a Master’s degree or more always start at the managerial level. The industries or fields are essentially the same, except you start at the mid to upper level. Investment banks, commercial banks, consulting, and economic research firms are always looking to hire economists.
People with Ph.D. in economics also go towards the academia and research side, with many teaching Economics at the University level.
Here is another article listing various career options for economics majors and their respective salaries.
Also, having an economics degree can help individuals start their businesses as they can do a cost-benefit analysis of their resources.
Last but not the least, you can always write an economics blog as a side hustle and perhaps make it your full-time job like me, if you are passionate about the course. Since I didn’t teach economics at a college, I am fulfilling my long-term desire through this blog. 😊
What are the challenges of careers in economics?
As most economics majors end up working as an analyst in consulting firms and investment banks, they have a hard time maintaining a work-life balance. Both of these industries require an immense amount of time commitment as they focus on client needs. I remember working all night several times. For me, managing my family in that very demanding job with no support at home was quite challenging.
Again, I am only aware of consulting and investment banking, as these are two industries I had experience working in. I also worked directly in conjunction with financial lawyers, so I am aware of how demanding the work schedule could be.
On average people who work in consulting and investment banking work 60 hours a week. There is also a considerable number of late-night and weekend work. Some of these jobs also require frequent travel, so just be aware of that when you consider applying for these positions.
Conclusion
It all depends on what is more important to you and the stage of life you are in. An economics degree, if you are working in the corporate side or with the government can be a great choice for reaching your financial goals. Also, you get to work on a wide variety of cases, so it satisfies and enriches your intellectual curiosity.
People who teach economics at colleges or universities publish papers in addition to teaching classes. So, if this is something you will enjoy in the future, a graduate degree in economics is a great choice.
In 2022, the U.S. stock market experienced what we call in finance a bear market. There was a prolonged drop in stock market prices because of the Russia-Ukraine war and tightened monetary policy. The S&P500, the U.S. broad market index kept falling by more than 20% from its high at the beginning of 2022.
With continuous interest rate hikes, S&P 500 index showed a downward trend in 2022 and hasn’t recovered to its Jan 2022 level Source: Google Finance
But if this scared you and you concluded investing in stocks is not a good idea, you must think again.
Financial literacy is critical for building wealth. It is important for any person to know how market trends work, but particularly important for younger adults who are in their 20s.
Although I have taken the U.S. stock market as an example for this post, the principle applies to almost any country with a developed stock market.
In this blog, I will highlight two key points:
Investing in stocks should always be done for the long term. If you look at the data over the long run, the overall stock market gave an average annual rate of return of 10% to 14%.
This chart from Google Finance shows that S&P 500 index, which is the benchmark index for US stock Market has an upward trend over the long run.
Source: Google finance S&P500 index
Sure, there are years (including 2020, 2022 as you see in the chart below) when it has fallen sharply because of various economic reasons. However, in the long run (5 yrs or more), if you see the trend line, it is going upwards.
Source: Google finance S&P500 index. I added my captions to explain the dips
So, yes if you just invested at the beginning of 2022 and wanted to take out your money after that, you would lose money on your investment. But if you plan to withdraw the same money in the next 5 or 10 years, I am sure it is going to fetch a much higher return.
2. Business Cycles are real
The reason for this is due to the occurrence of business cycles or sometimes what we call economic cycles. Most stable economies exhibit boom and bust. The chart below shows how there are periods of expansions and recessions where the GDP and stock market grow and contract respectively.
Most governments including the U.S. government through their fiscal policy and the Fed, through monetary policy, take corrective measures to bring the economy back on track. For the US, the target rate of inflation is 2% and the target unemployment is around 5%.
Over the long run, most stable countries show a pattern of economic growth as seen by the black trend line sloping upwards.
So yes, if you invest in the stock market for a long term, greater than 5-10 years, you should get a positive return. It will still be positive even after adjusting for inflation.
So don’t panic and start selling when the market starts falling, instead, wait and let it recover.
This actually would be the best time to start investing or adding more towards your monthly contributions. The best way to do that is by following a safe investment strategy such as dollar cost averaging. I have discussed that in detail in my previous articles on personal finance.
Have a balanced portfolio
But don’t put all your money in the stock market. For any investor, it is critical to have a balanced portfolio. Make sure to have an optimal mix of riskier and safer asset classes based on your age and risk tolerance.
Bonds are a relatively safer investment option compared to stocks, real estate, and gold, and therefore, have low returns on them.
Anyone who is less than 50 years old can have more of their money invested in the stock market versus anyone who is 50 and above. As you approach retirement age, you would like to have less money invested in the stock market and more in safer options. So, whenever you want, you can withdraw your money without worrying about market fluctuations.
Investing in stock is done to make your money grow over time. Yes, overtime is the keyword here. It is not meant for becoming rich overnight or for short-term gains.
Also, it is best to start investing early to reap the maximum benefits. Although, starting at any age is better than not starting at all unless you are close to your retirement age. Ideally, as soon as you get your first job you should think about investing a portion of your salary. You can start with 10-15%.
Create an emergency fund and pay off debt first
But before you start any type of investment, ensure you have enough cash to cover at least 3-6 months of expenses in an emergency fund. Usually, people like to keep it safe in an FDIC-insured high-yield savings account. This is the liquid money that will cover any type of contingency, which you can withdraw whenever you want to.
So it is essential you save enough money to cover the downpayment of your house, job loss, car breaking down, or any unforeseen event where you need immediate cash.
This is especially true if people fear a recession coming in 2023. Having a buffer in a safe place such as a savings account will give you peace of mind.
Also, don’t forget to clear all the high-interest loans (over 5%), such as credit cards. Western countries have taught the world to live on credit. We buy almost every single day so many things on credit cards. But sometimes people don’t realize it and by living above their means, go into a debt spiral.
The interest rate that you are paying on credit card loans is usually higher than what you earn from savings.
We must remember that we do most investments for the long run. We won’t get a 10%-12% guaranteed return from investing in stocks the very next year. It takes at least a couple of years to average out market fluctuations.
Cherry-picking stocks is not worth it
As I mentioned in my other article, it’s always best not to invest too much money in individual stocks. It’s too much work to go through the company’s financials, thoroughly reading their annual reports (10-Ks) and quarterly reports (10-Qs) to understand the company’s fundamentals and prospects.
Even professionals and seasoned investors cannot time when to buy or sell stocks based on the earnings call of the companies. The reason is simple. The stock price that we see on the market has already incorporated any type of news that is available to the public. Thus everybody already knows and you won’t know any better story.
You will not know any insider news about the company’s prospects unless you are the owner of that company or in the senior management. Speculating what the price is going to be tomorrow will be nearly impossible to do.
Diversification is the answer
Index funds or ETFs in this case are the best and safe options because they diversify your risk across so many different stocks. So even if one or a few companies underperform, you will be still fine.
With ETF you have to set reminders for periodic contributions. Which type of fund is right for you depends on many factors. I have a detailed article on this topic here if you want to learn more.
My two cents
So, after you have saved for an emergency fund and paid off high-interest debt, start by investing at least 10%-15% of your paycheck every month. You can put this money in some type of broad-based index fund on an ETF. You make monthly contributions so that your investment grows over time. The good thing about index funds is that they are automated. Money automatically transfers to your brokerage account from your checking account.
The key takeaway from this article is that do not panic if you see the stock market going down in a particular year. This is not the time to sell. In the current scenario, it is a good idea to invest the money that you have sitting idle in your bank account. Do it after paying off your high-interest debt and establishing an emergency fund to meet your 6 months’ expenses.
Spend wisely and realize the importance of saving and investing. Most millionaires are not just born wealthy. They just make good investment decisions early in their life and build wealth. Instead of spending a lot of money on things that actually depreciate in value, such as buying a fancy car, they save and invest that money from the beginning. As their investment grows, they begin to reap its benefits for a substantial part of their life. Investment in a diversified portfolio is an easy passive way of getting rich, where money does the work for you.
Do you wonder where to save and invest when the interest rates are still rising?
In this post, I list some of the options I have looked at, used myself, and thought would be worth sharing with you all. This post is about savings and investment options in the US. But even if you are not from the US, some of the info will still be of good value to you if your country is experiencing interest rate hikes, so please continue reading till the end.
I would start with the safest option – the US treasury bills. These are currently paying between 3.9% and 4.6% annual interest, a significantly higher rate than what they did in the past 5 years.
Below is the chart I got from St. Louis Fed, where you can see the interest rate on 4 weeks’ T-bills in the last 5 years. As you can see from the chart, the interest rate has been growing since March 2022.
T-bills rates have been rising sharply since March 2022
What are T-bills and are these a good investment option right now?
For those of you who do not know what T-bills or treasury bills are, these are short-term borrowing of the US government from the people. These are backed by the complete faith of the US government, and thus, are virtually risk free.
The US treasury’s official website called treasurydirect.gov auctions new T-bills twice a month with the duration of four weeks, eight weeks, 13 weeks, 17 weeks, 26 weeks, and 52 weeks. On their website, they publish this table showing the current interest rates for each t-bill. As we would expect, they pay slightly higher interest with a longer duration.
When and how do T-bills pay?
T-bills are always issued at a discount to the par value and pay interest and the principal at maturity. What it means is that if you want to buy $100 worth of T-bills, you will actually be paying less than $100 now. Suppose you buy them for $95, and once the bill matures you will get the full $100 back. So the difference between the $100 and $95 is the interest that you earn, in this example it is 5%.
One of the tax advantages of T-bills is that they do not incur state or local income tax. However, you have to pay federal income tax on the interest earned.
Another benefit of investing in short-term T-bills such as 4 weeks or 8 weeks, is that these are relatively liquid investments. So this is something to consider if you have extra cash sitting in your savings account, you can move some of it to invest in 4 weeks t-bills, as a part of your emergency fund.
Also, there is no maximum amount of investment that you can do in T-bills. It can be up to millions of dollars, unlike the series I-bonds, which I will discuss next.
What are I-Bonds?
Government-issued I-bonds (also called treasury savings bonds) hit the headlines this year for a record high-interest payment. If you bought series I bonds between the end of April 2022 to the end of October 2022, they paid 9.62% annual interest.
I-bonds are mainly for long-term investment for 5 years or more. The interest we earn from them comes from a fixed rate and a variable rate. The variable rate is adjusted twice a year based on the inflation rate. As inflation rises or falls, the variable rate moves in the same direction to offset it. So they are inflation-protected.
I-bonds can earn interest for as long as 30 years or until you cash it out. They are also perfectly secure as they are backed by the U.S. government.
The current interest rate valid for the next 6 months for I-bonds is 6.89% on an annualized basis. It is almost 3% lower than what it was a few months ago, but it is still not bad compared to last year.
I bonds are not liquid as they need to be kept for a longer duration such as 5 years. If you withdraw the money before 5 years, you will lose 3 months of interest rate.
Also, keep in mind that i-bonds are not for emergency funds, as they are not liquid in short term. You can’t cash them out before 12 months.
Also, the maximum investment per person is only $10,000 per year, and up to $5,000 in the paper I bonds (with your tax refund).
High yielding Savings account
The next option would be to save your money in some high-yield saving accounts like Marcus by Goldman Sachs, and Capital one. These accounts don’t have any minimum balance requirements and monthly fees and pay 3% or more currently. These are also FDIC-insured. Below is the table I compiled using Bankrate data showing the different options.
Bank
APY
Monthly Fees
Minimum balance
Additional Notes
Citbank
3.6%
$0
$0
Upgrade
3.5%
$0
$1000
Upgrade is a financial technology company, not a bank. Premier Savings accounts are provided by Cross River Bank, Member of FDIC.
SoFi
3.25%
$0
$0
LendingClub
3.25%
$0
$0
$100 to open an account. A min balance of $2500 needed to earn top APY
Marcus by Goldman Sachs
3%
$0
$0
Marcus has a competitive yield on its savings account and only requires $1 to earn a competitive APY
CapitalOne
3%
$0
$0
Stock Market Investing
As I have said before, the best approach would always be to invest in a broad-based index fund or an ETF, rather than investing in individual stocks. This is especially true for risk-averse investors. Index funds are a great way to diversify your portfolio, which even the seasoned investor, Warren Buffett recommends.
Some of the index funds that I personally like and have invested my money in are Vanguard S&P 500 Index fund VFIAX, and Vanguard value index fund VVIAX. By following dollar cost averaging, you take away the emotional factor of investing and don’t get impacted by market fluctuations. Over the long run, the index fund that mimics a broad index should do as well as the market and will yield a return of 10-12% a year.
There is almost a continuous upward movement in these three stock indices from 1981 till present, showing significant positive returns over the long term. Source: CNBC
The stock market can go up and down for various reasons. It could be related to macro economic factors like changes in interest rates and inflation, but it is very hard to predict that. However, over the long run, all the leading stock indices, like S&P 500, NASDAQ, and Dow Jones have done great in providing great returns, as you see in the three charts above.
Also, if you want to compare how the market has done, as measured by the return on S&P 500 vs the inflation rate as measured by CPI, you can see the chart below. The market fluctuates, as we see from the blue line peeks, but most of it has been positive peeks, with the exception of a few years. Thus, over the last 50 years or more, on average, the annual market returns have been much greater than the inflation rate.
https://datawrapper.dwcdn.net/Kh8rl/4/
Real Estate Investment
If you are thinking of investing in a real estate, the question is whether you should buy a house now or should you wait. Well, I would say that if you could wait a little bit longer maybe after the next six months that would be a better time.
The next interest rate hike is most likely going to happen at Fed’s December 14 meeting. In their last meeting on Nov 2, the Fed indicated that the interest rates will continue to rise until the US economy returns to the desired inflation rate of 2%. To learn more about how Fed works, please stay tuned for my upcoming post.
Because the interest rate will keep going up in 2023, the demand for houses will likely fall. Once the demand for houses is low, the price of houses will also decline further.
The interest rate would still be high probably for the next 6 to 9 months but when they start dropping you can always refinance it.
Conclusion
But let me close by saying, with rising interest rates, the first thing you should do is pay off any type of credit card debt if you have one. If you look at the rates compiled by the Bankrate website, the average credit card rate is 19% as of Nov 30, 2022. So yes, before you invest anywhere, please take care of that.
