Category: Investing

Cash Clarity: Navigating Money Markets

Posted on by Brian Colvert

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Money Market Accounts and Funds

Making informed decisions about where to park your cash is crucial. Whether you’re saving for a short-term goal or looking for a safe place to store funds between investments, understanding money markets and the differences between money market accounts and money market funds can help you make the best choice for your financial plan. In this post, we’ll delve into the intricacies of these two popular options, exploring their benefits, risks, and ideal scenarios for use.

Understanding Money Markets

Money market accounts (MMAs) are interest-bearing accounts offered by banks and credit unions. They are similar to savings accounts but typically offer higher interest rates in exchange for higher minimum balance requirements. One of the key features of money market accounts is their safety, thanks to Federal Deposit Insurance Corporation (FDIC) insurance.

Key Features of Money Market Accounts

  1. FDIC Insurance: Money market accounts are insured by the FDIC up to $250,000 per depositor, per institution. This means that even if the bank or credit union fails, your deposits are protected.
  2. Higher Interest Rates: MMAs usually offer higher interest rates compared to traditional savings accounts. Rates can vary depending on the institution and the amount of your deposit.
  3. Liquidity: Money market accounts provide easy access to your funds. You can typically write checks, make transfers, or use a debit card to withdraw money, making it a flexible option for managing cash.
  4. Minimum Balance Requirements: These accounts often require a higher minimum balance than regular savings accounts. Failing to maintain the minimum balance can result in fees or lower interest rates.

Exploring Money Market Funds

Money market funds (MMFs) are a type of mutual fund that invests in short-term, low-risk securities such as U.S. Treasury bills, certificates of deposit (CDs), and commercial paper. Unlike money market accounts, MMFs are not FDIC insured. Instead, they are regulated by the Securities and Exchange Commission (SEC).

Key Features of Money Market Funds

  1. Not FDIC Insured: The primary distinction between MMFs and MMAs is that money market funds do not offer FDIC insurance. While they are generally considered safe, there is no guarantee of principal preservation.
  2. Investment in Short-Term Securities: MMFs invest in high-quality, short-term securities, which tend to be relatively low-risk. This makes them a suitable option for conservative investors seeking liquidity and stability.
  3. Potential for Higher Yields: Money market funds often offer competitive yields that can exceed those of traditional savings accounts and MMAs, depending on market conditions.
  4. Liquidity and Accessibility: MMFs are highly liquid, allowing investors to easily buy and sell shares. They are often used as a place to park cash temporarily within brokerage accounts.

Comparing Money Market Accounts and Funds

Safety and Security

When it comes to safety, money market accounts have the upper hand due to FDIC insurance. This provides peace of mind, knowing that your deposits are protected up to $250,000 per institution. On the other hand, money market funds, while typically safe, do not offer this same level of security. The value of your investment in a money market fund can fluctuate, and there is a risk, albeit small, of losing principal.

Interest Rates and Yields

Money market accounts generally offer higher interest rates than traditional savings accounts, but they may not always match the potential yields of money market funds. MMFs can provide higher returns, especially in a rising interest rate environment, as they invest in short-term securities that benefit from higher rates. However, these yields are not guaranteed and can fluctuate based on market conditions.

Accessibility and Liquidity

Both money market accounts and funds offer high liquidity, but they differ in how you can access your funds. MMAs provide check-writing privileges, debit card access, and easy transfers, making them suitable for everyday cash management. In contrast, MMFs are more commonly used within brokerage accounts and might require selling shares to access cash, which can take a day or two to settle.

Minimum Balance Requirements

Money market accounts often have higher minimum balance requirements than regular savings accounts. If your balance falls below the required minimum, you may incur fees or receive a lower interest rate. Money market funds typically have lower initial investment requirements, making them more accessible for investors with smaller amounts of cash to invest.

Ideal Scenarios for Money Market Accounts

  1. Emergency Fund: Money market accounts are an excellent option for holding your emergency fund. The combination of FDIC insurance, higher interest rates, and easy access to funds makes them a safe and practical choice.
  2. Short-Term Savings Goals: If you’re saving for a short-term goal, such as a vacation or a down payment on a car, a money market account can help you earn more interest while keeping your funds accessible.
  3. Safety and Security: For conservative investors who prioritize the safety of their principal, MMAs provide the security of FDIC insurance.

Ideal Scenarios for Money Market Funds

  1. Temporary Cash Parking: Money market funds are ideal for parking cash temporarily between investments. They offer higher potential yields and easy liquidity within brokerage accounts.
  2. Investment Portfolio Component: MMFs can be used as a conservative component of an investment portfolio, providing liquidity and stability while earning competitive yields.
  3. Low Minimum Investment: For investors with smaller amounts of cash to invest, money market funds offer a lower entry barrier compared to some MMAs.

Making the Right Choice- Are Money Markets Right for You?

When deciding between money markets, consider your financial goals, risk tolerance, and need for liquidity. If safety and security are your top priorities, and you prefer the peace of mind that comes with FDIC insurance, a money market account may be the better choice. However, if you’re looking for higher potential yields and are comfortable with the slight risk associated with money market funds, an MMF could be more suitable.

Conclusion

Understanding the differences between money market accounts and money market funds is essential for making informed decisions about where to park your cash. Both options offer unique benefits and can play important roles in your overall financial strategy. By considering your individual needs and preferences, you can choose the right option to help you achieve your financial goals.

For personalized advice tailored to your specific situation, don’t hesitate to reach out to us.   

Certificates of Deposit: An Old-School Investment Making a Modern Comeback

Posted on by Brian Colvert

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Certificates of Deposit

In the ever-evolving landscape of investment opportunities, some strategies remain steadfast, proving their worth across decades. One such strategy is the use of Certificates of Deposit (CDs). Often overlooked in favor of more glamorous investment options, CDs are now regaining attention due to their stability and attractive returns in the current high-interest-rate environment. Today we are delving into the mechanics of CDs, their benefits, and why they should be considered a valuable component of a well-rounded investment portfolio.

What is a Certificate of Deposit (CD)?

A Certificate of Deposit (CD) is a financial product offered by banks and credit unions that provides a fixed interest rate for a specified term. When you invest in a CD, you are essentially lending your money to the bank for a predetermined period, which can range from a few months to several years. In return, the bank pays you interest at a rate that is typically higher than that of regular savings accounts. At the end of the term, known as the maturity date, you receive your initial investment back along with the accrued interest.

The Mechanics of CDs

CDs operate on a simple premise: you deposit a sum of money for a fixed term, and in exchange, the bank agrees to pay you a fixed interest rate. The key components of a CD include:

  • Principal: The initial amount of money you invest.
  • Term: The length of time your money is held by the bank, which can range from a few months to several years.
  • Interest Rate: The fixed rate at which your money grows during the term.
  • Maturity Date: The date on which the term ends and you can withdraw your principal plus interest.

For example, if you invest $10,000 in a one-year CD with an interest rate of 5%, you will earn $500 in interest over the term. At the end of the year, you will receive $10,500.

Benefits of Investing in Certificates of Deposit

1. Stability and Security

One of the primary advantages of Certificates of Deposit is their stability. Unlike stocks or mutual funds, which can fluctuate in value, CDs offer a guaranteed return. This makes them an attractive option for risk-averse investors or those seeking a safe place to park their money during uncertain times. Additionally, CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor, per institution. This means that even if the bank fails, your investment is protected.

2. Predictable Returns

With a fixed interest rate, CDs provide predictable returns. You know exactly how much interest you will earn over the term, allowing you to plan your finances with confidence. This predictability can be especially valuable for retirees or others who rely on their investments for steady income.

3. Higher Interest Rates

CDs typically offer higher interest rates than regular savings accounts. In the current high-interest-rate environment, this difference can be significant. For example, while a savings account might offer an interest rate of 0.5%, a one-year CD might offer 5%. This higher rate can make a substantial difference in your overall returns, especially for larger investments.

4. Protection Against Market Volatility

In times of market volatility, Certificates of Deposit can serve as a safe haven for your money. Unlike stocks or bonds, which can lose value in a downturn, the principal and interest of a CD are guaranteed as long as you hold the CD to maturity. This can provide peace of mind during turbulent economic periods.

Why CDs Are Regaining Popularity

In recent years, CDs have been overshadowed by other investment options due to historically low interest rates. However, as interest rates have risen, CDs have become more attractive. Here are a few reasons why CDs are regaining popularity:

1. Rising Interest Rates

As central banks have raised interest rates to combat inflation, the returns on CDs have become more appealing. Investors can now find CDs offering 5% or more, making them competitive with other fixed-income investments.

2. Low-Risk Environment

With economic uncertainty and market volatility, many investors are seeking low-risk options. CDs provide a secure place to invest money without the risk of loss, making them an attractive choice for conservative investors.

3. Diversification

CDs can be an excellent tool for diversifying an investment portfolio. By including a mix of stocks, bonds, and CDs, investors can balance risk and return, ensuring that a portion of their portfolio remains safe and stable.

4. Liquidity Planning

For those who may need access to their funds at specific times, CDs offer predictable liquidity. By laddering CDs—purchasing multiple CDs with staggered maturity dates—investors can ensure that they have access to cash at regular intervals while still earning higher interest rates.

Considerations When Investing in CDs

While CDs offer many benefits, there are some considerations to keep in mind:

1. Limited Liquidity

When you invest in a CD, your money is tied up for the duration of the term. If you need to access your funds before the maturity date, you may incur early withdrawal penalties, which can eat into your returns. It’s essential to ensure that you won’t need the money before the CD matures.

2. Inflation Risk

While CDs provide a fixed return, inflation can erode the purchasing power of your money over time. If inflation rates are higher than the interest rate on your CD, your real return (adjusted for inflation) may be negative. It’s crucial to consider inflation when evaluating the potential returns on a CD.

3. Opportunity Cost

By locking your money into a CD, you may miss out on other investment opportunities that could offer higher returns. It’s essential to balance the security of a CD with the potential for higher returns from other investments.

How to Get Started with CDs

If you’re considering adding CDs to your investment strategy, here are a few steps to get started:

1. Research Interest Rates

Shop around to find the best interest rates on CDs. Different banks and credit unions offer varying rates, so it pays to compare options.

2. Determine Your Investment Amount

Decide how much money you want to invest in CDs. Consider your overall financial goals and how much liquidity you need.

3. Choose Your Term

Select a term that aligns with your financial needs. Shorter terms offer more liquidity but may have lower interest rates, while longer terms lock in higher rates but require you to commit your funds for a more extended period.

4. Ladder Your CDs

Consider laddering your CDs to provide regular access to funds while maximizing your returns. This involves purchasing multiple CDs with different maturity dates.

5. Monitor and Reinvest

Keep an eye on your CDs and their maturity dates. When a CD matures, evaluate the current interest rates and decide whether to reinvest in a new CD or use the funds for other purposes.

Conclusion

In today’s high-interest-rate environment, Certificates of Deposit are once again becoming a valuable tool for investors seeking stability and attractive returns. With their guaranteed interest rates, FDIC insurance, and protection against market volatility, CDs offer a secure investment option for those looking to balance their portfolios. By understanding the mechanics of CDs and considering their benefits and limitations, you can make informed decisions to enhance your financial strategy. Whether you’re a conservative investor or simply looking for a safe place to park your money, CDs deserve a closer look in the modern investment landscape.

Next Steps:

Are you wondering if Certificates of Deposit are right for your specific situation? Feel free to set up a call with us to get personalized advice.

Real Estate Investing: Fees, Cash Flow, and Risks

Posted on by Brian Colvert

Today we are diving deeper into alternative investments and looking at real estate investing.  In the latest episode of The Field Guide Podcast, Brian Colvert, CFP® is covering crucial aspects of investing in real estate. From understanding who truly benefits from these investments to evaluating fees, cash flow, and risks. You’ll learn about different real estate investment options, including REITs, personal property investments, and limited partnerships.

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Understanding Fees and Performance

In real estate investments, fees are an integral aspect that can significantly impact the overall returns. These fees can include management fees, acquisition fees, performance fees, and more. Management fees are charged by the investment managers for overseeing the property or portfolio. This is typically expressed as a percentage of the assets under management. Acquisition fees are one-time charges incurred when purchasing a property, covering costs related to sourcing and acquiring the asset. Performance fees, also known as carried interest, are contingent on the investment achieving certain performance benchmarks and are often a percentage of the profits generated.

It’s essential to consider these fees in the context of the expected returns. High fees might be justifiable if the investment consistently delivers superior performance. However, in scenarios where returns are mediocre or negative, these fees can erode the investment’s value significantly. Therefore, understanding and scrutinizing these fees is crucial to ensure that the investment is structured in a way that aligns the interests of both the investor and the investment manager.

Cash Flow vs. Capital Appreciation

When investing in real estate, it’s important to differentiate between cash flow and capital appreciation. Cash flow refers to the income generated by the property, such as rental income, which provides a steady stream of revenue from day one. This approach is favored for its ability to produce consistent returns regardless of market fluctuations, making it a more stable and predictable investment. On the other hand, capital appreciation focuses on the increase in the property’s value over time. Investors who pursue this strategy often look for properties that can be improved or are in areas poised for growth, aiming to sell at a higher price in the future. While capital appreciation can offer significant returns, it also comes with higher risks and uncertainties.

For many investors, especially those seeking immediate and reliable income, prioritizing cash flow can be a safer and more pragmatic approach. Ultimately, the choice between cash flow and capital appreciation depends on the investor’s financial goals, risk tolerance, and investment horizon.

Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts (REITs) offer a convenient way to invest in real estate without the need for direct property ownership. REITs are companies that own, operate, or finance income-generating real estate across various sectors, such as commercial, residential, and industrial properties. They are publicly traded on major stock exchanges, making them easily accessible to investors.

While REITs can provide diversification and liquidity, approach them with caution. One primary concern is that the management of REITs can become overly focused on growth. This sometimes at the expense of property maintenance and occupancy rates. This can lead to situations where the managers benefit from substantial fees, while the investors face diminished returns due to vacant or underperforming properties.

Although REITs can play a role in a diversified investment portfolio, it’s crucial to thoroughly research and select REITs with a track record of strong management and solid property performance.

Direct Real Estate Investment

Direct real estate investment involves purchasing and owning property outright, giving you full control over the asset. This method is appealing for several reasons. First, it allows for direct oversight of the property. This enables investors to make strategic decisions regarding maintenance, improvements, and tenant management. Direct ownership can also offer significant tax benefits, such as depreciation deductions and mortgage interest write-offs. Moreover, by eliminating intermediaries, investors can potentially achieve higher returns since they are not paying management fees to an external entity.

However, direct real estate investment requires substantial capital and a commitment to actively managing the property. This includes handling tenant relations, maintenance issues, and ensuring the property remains profitable. Investors must also prepare for market fluctuations and the potential for periods of vacancy.

Despite these challenges, for those willing to invest the time and resources, direct real estate ownership can be a highly rewarding venture, providing both steady cash flow and the potential for significant appreciation over time.

Limited Partnerships (LPs)

Limited Partnerships (LPs) offer another attractive avenue for real estate investing, particularly for those who prefer a more hands-off approach. In an LP structure, there are general partners (GPs) who manage the investment and limited partners (LPs) who provide the capital. This setup lets investors benefit from the expertise and management skills of the GPs without involving them in the day-to-day operations of the property.

One of the key advantages of LPs is the ability to participate in large-scale real estate projects that might be beyond the reach of individual investors. Additionally, LPs often provide regular income distributions from the property’s cash flow, making them appealing for those seeking steady returns.

However, investing in LPs requires thorough due diligence. It’s essential to understand the GPs’ track record. Look at the specific properties being invested in, the exit strategy, and the liquidity terms. Investors should be aware that their capital may be tied up for several years, depending on the partnership agreement. LPs can be a valuable part of a diversified investment portfolio. They offer the potential for both income and appreciation with less direct involvement than owning and managing property outright.

The Importance of Due Diligence

Real estate investing is a compelling alternative investment, primarily due to its ability to generate cash flow. When a property consistently cash flows, the underlying market value becomes less of a concern. The investment remains profitable regardless of market fluctuations or interest rate changes. As long as tenants continue to pay, the investment can perform well, making real estate a non-correlated asset to traditional markets.

Despite some arguments about real estate’s correlation to market downturns, such as in 2008, its correlation is generally lower than many other investments. Real estate can be a valuable addition to any portfolio, depending on your current financial situation, risk tolerance, and the effort you’re willing to put into managing the investment. Whether you choose to own and manage the property yourself or invest through partnerships, due diligence and understanding your risk tolerance are paramount.

Final Thoughts

Real estate offers various investment opportunities, each with its own set of benefits and challenges. Whether through REITs, direct ownership, or limited partnerships, it’s essential to align your investment strategy with your financial goals and risk tolerance.

At Bonfire Financial, we’re here to guide you through these decisions. We will help you navigate from point A to point B with confidence. If you’d like to explore real estate investments further or need assistance with your financial planning, please reach out to us! We’re here to help you every step of the way.

Schedule a call with us today!  Book here now! 

Collectibles as an Investment: Where Fun Meets Finance

Posted on by Brian Colvert

Unlike other alternative investments, collectibles as an investment offer a unique blend of financial potential and personal passion. Whether you’re drawn to classic cars, fine wines, rare art, or vintage baseball cards, the process of investing in collectibles is as much about the joy of discovery and appreciation as it is about the financial returns. Brian Colvert, CFP® explores why this often-overlooked area of investing can be both rewarding and enjoyable on the most recent episode of The Field Guide Podcast.

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The World of Collectibles

Collectibles can range from classic cars to fine wines, from rare art to baseball cards. Remember the Beanie Baby craze? Almost anything can become a collectible if it has the potential to appreciate in value. The key is to recognize what will be worth more in the future. This takes not only knowledge but also a genuine passion for the items you are investing in.

The Dual Investment: Money and Time

Investing in collectibles involves much more than simply purchasing items. It requires extensive research into the industry, the specific products, and the nuances that affect their value. Understanding why a particular item might appreciate or depreciate, identifying its rarity, and distinguishing the subtle differences that make one item more valuable than another are all part of the due diligence process.

Why Passion Matters

To successfully invest in collectibles, you must dive deep into the industry. For example, let’s take collectible cars. If you think you’re going to collect Toyota Priuses and they’re going to appreciate in value, we all can agree that’s probably not going to happen. Those will probably depreciate like most cars do.

Versus if you had bought a McLaren P1 a few years ago when it first came out, it was roughly around a million dollars, and today the market value is roughly around two to two and a half million. So, that car is appreciating and getting more valuable as time goes on. Understanding the factors that contribute to such appreciation is essential.

The Nuances of Value

Why does a specific car, wine, watch, or painting by a particular artist increase in value? Several factors come into play: limited production numbers, unique manufacturing processes, or exclusivity through special clubs or memberships. These nuances are what make collectibles intriguing and why passion is necessary. Without a deep interest, the research required can be overwhelming.

Emotions vs. Investment

When investing in collectibles, it’s important to set aside personal preferences. Whether you enjoy looking at a piece of art, driving a classic car, or drinking fine wine, these emotions should not influence your investment decisions. Instead, focus on how the item was made, market trends, and future demand. Conducting thorough due diligence is critical.

The Risks and Rewards

Investing in collectibles can be challenging and volatile. The market for these items can fluctuate significantly, and there is always a risk involved, especially with high-value purchases. That’s why having a genuine passion for the collectible is essential. It drives the willingness to learn and understand the market, increasing the likelihood of making informed and successful investments.

A Balanced Approach

While collectibles can be a fun addition to any portfolio, they should only make up a small portion. Diversification is key to managing risk, and putting too much money into collectibles can be risky. However, with the right approach, it’s possible to enjoy the process and potentially see financial gains.

Taxation of Collectibles

When it comes to taxes, collectibles are subject to a different set of rules compared to stocks and bonds. The IRS categorizes collectibles as capital assets, which means they are subject to capital gains tax when sold for a profit. The long-term capital gains tax rate for collectibles is capped at 28%, which is higher than the 20% maximum rate for other long-term capital gains. If you hold a collectible for less than a year before selling it, the gain is considered short-term and is taxed at your ordinary income tax rate.

Here are a few key points to keep in mind:

Basis and Gain Calculation: Your gain or loss on a collectible is the difference between your selling price and your basis (usually the purchase price plus any costs associated with acquiring the item).
Record Keeping: Maintain detailed records of your purchases, including receipts, to accurately report your basis.

Charitable Donations: If you donate a collectible to a qualified charity, you can generally deduct the fair market value of the item, provided you’ve held it for more than a year.

Insuring Your Collectibles

Proper insurance is crucial to protect the value of your collectibles. Standard homeowners’ insurance policies typically provide limited coverage for collectibles, often capping at a specific amount that may not cover the full value of your collection. Therefore, specialized insurance policies or riders specifically tailored to collectibles are advisable.

Here’s what you should consider:

Appraisal: Get a professional appraisal to determine the current market value of your items. This ensures that you have the proper coverage amount.

Documentation: Keep detailed records of each item in your collection, including photographs, receipts, and certificates of authenticity.

Coverage Types: Look for policies that offer comprehensive coverage, including protection against theft, loss, and damage.

Regular Updates: Regularly update your policy to reflect any changes in the value of your collection. Collectibles can fluctuate in value, and an outdated policy might not provide adequate coverage.

In Conclusion

Investing in collectibles can be both enjoyable and profitable if approached with the right mindset and preparation. It requires a combination of passion, knowledge, and careful research. While it’s important not to over-invest in any one collectible, incorporating them as a small part of your portfolio can add a fun and potentially rewarding dimension to your investment strategy.

Our Role in Your Collectible Investments

At Bonfire, we acknowledge the unique value of collectibles, even if we don’t specialize in this area. We can help you assess your overall portfolio to ensure it is balanced and not overly concentrated in any one type of collectible. We are also eager to learn about different collectible markets and how they might fit into your investment strategy.

Book a free consultation call with us today! 

Enjoy your journey in the world of collectibles, and remember, we are here to help you ensure your overall investment strategy is sound. Happy collecting, and we look forward to hearing about your unique passions!

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