Only 3.5% of employees max out their retirement account
When you start your professional career, most employers give you the ability to opt-in to their employer-sponsored retirement plan, usually a 401K.
For most people, it’s a no-brainer. However, as you progress through your career, you are thinking about retirement goals and whether or not you should max out your 401k.
In this article, I’ll discuss reasons why you should and should not max out your 401k and other financial considerations to take into account.
A Brief History Of The 401K
The 401k was created in 1979 by benefits consultant Ted Benna. Benna designed the plan for a client who declined to use it because he feared it would be appealed once the government found out about the potential tax loss.
The first 401k was started in 1981. Fast forward 30 years, and there is approximately $6.9 trillion invested in 401(k)s and is the primary retirement vehicle for most Americans.
Ok. History lesson over. Let’s get to the good stuff.
Why You Should Max Out Your 401K
1. To Take Advantage Of Tax-Deferred Investment Growth
You can contribute up to $19,500 tax-deferred, or $26,000 if you are 50 or older. Many people view this as an advantage as they expect to be in a lower tax bracket when they retire and can enjoy years of tax-free growth.
2. To Recieve An Employer Match
You don’t necessarily need to max out your 401k to get your employer match. Still, you’ll likely need to contribute significantly depending on your employer.
Many employers match between 4% – 6% up to a certain amount, say $10,000. For example, if you made $125,000 and your employer matches up to 6% contribution, up to $10,000. In that case, you would need to contribute $10,000 to receive the full employer match. Otherwise, you’re leaving money on the table.
3.It’s Easy to Employ A Set It & Forget It Strategy
Employer-sponsored retirement plans make it incredibly easy to contribute to a 401K. The contributions are automatic, and your fund sponsor often helps you pick an asset allocation that is right for you. Automatic contributions eliminate the temptation to use the extra funds to go on vacation or clothes shopping.
Out of Sight, Out Mind works for many people.
I’m sure some personal finance snobs disagree, but this strategy works for most Americans.
Moving On…
Why You Should Not Max Out Your 401k
1.You Have High-Interest Consumer Debt
Suppose you have high-interest consumer debt such as credit cards or an expensive auto loan (5%+). In that case, you should dedicate any additional income towards reducing your debt burden.
With the average credit card interest rate around 16%, that’s a risk-free return that’s hard to beat in any investment account.
2. You Don’t Have Emergency Savings
I’m not a huge proponent of holding significant emergency savings, but if you don’t have between 1-2 months of cash on hand, it’s wise to start saving before you max out your 401k.
It’s not a question of IF there will be unexpected expenses; it’s more of a matter of WHEN—car repairs, medical bills, etc. You should have at least 3-6 months of cash on hand as mandatory home repairs can happen quickly and be quite expensive if you are a homeowner.
3. You Don’t Earn Enough Money
The reality is you need to be a high-earner to max out at your 401k. Controlling for major cities such as NYC and San Francisco, if you make around $130,000 or more, you should comfortably be able to max out your 401k.
On the other hand, if you earn $50,000, it would be nearly impossible to max out your 401k. It’s all relative to salary, my friends.
We hear about way too many people who achieved financial independence seemingly too easily. Unfortunately, most of those people already had very high-wage jobs to start with. So, maxing out any tax-advantaged accounts isn’t much of a challenge for them.
4. Existing Financial Obligations
Perhaps you have a mortgage, a family to care for, college tuition, or other childcare expenses. Sometimes you may need to sacrifice for today and reduce your 401k contributions.
It’s important to note, If you are consistently sacrificing retirement goals for living today, you may need to revisit your spending habits. Saving and investing for retirement should be a priority for all Americans.
Retirement Stats
The number of 401k millionaires soared 84% year over year, with the number of 401ks over $1million topping 412,000. Sure, it’s comparatively tiny to the millions of retirement accounts out there, impressive stat nonetheless.
Meanwhile, non-millionaires are also doing well. The same study also shows the average 401(k) held $129,300 at the end of the second quarter of 2021, up 24% from a year ago.
And while nearly 40% of wage-earners made elective retirement contributions in 2018, which sounds good until you realize there are even more people who are not contributing.
Frequently Asked Questions
Other Important Financial Goals To Consider
If you’re maxing out your 401k, you’re in an excellent position financially. As noted above, only 40% of Americans contribute to an elective contribution.
That said, it’s essential not to leave any blind spots in your financial planning. Additional financial considerations Include:
Life Insurance
Proper coverage is critical, especially if you have a family. Experts recommend 10X your salary in coverage and an additional $100,000 for each dependent. There are plenty of onlinecompanies that make life insurance applications seamless.
Disability Insurance
Most people are often underinsured or not insured at all when it comes to disability insurance. Many employers offer disability insurance, but it’s often inadequate, and private coverage is needed. I recommend coverage from a company called Breeze.
Having a Will & Trust
Should something happen, it’s essential to have a will, so your assets are not stuck in probate. Fabric offers life insurance and wills so that you can knock off two birds with one stone. Alternatively, Trust & Will also offers estate services entirely online.
This Alpha Picks Review explores if this investing group lives up to the hype by outperforming the S&P 500 nearly 2.5x since inception.
Quick Summary:
Alpha Picks is an investing group by Seeking Alpha, which is run by a former hedge fund manager who is now a portfolio manager analyst at Alpha Picks.
Every month, subscribers receive 2 new stock picks backed by the analysts’ research. Since its inception in 2022, Alpha Picks has returned 129%, vs. 49%, outperforming the S&P 500 by nearly 2.5X.
Alpha Picks is Seeking Alpha’s in-house investing group.
Alpha Picks is a stand-alone investing group that is part of Seeking Alpha’s “Investing Groups.”
As I noted in my Seeking Alpha Review, Seeking Alpha hosts several contributor-based investing groups, but this investing group is run by an investment professional hired by Seeking Alpha.
Alpha Picks subscribers get 2 monthly stock picks selected by their in-house investment team run by Steven Cress, a former Hedge Fund Manager and senior trader at investment banking powerhouse Morgan Stanley.
So far, the portfolio’s performance has been stellar— since its inception in December 2022, it has returned approximately 129% vs. 49% for the S&P 500 as of this writing. However, as we know, past performance does not indicate future performance.
In addition to monthly stock picks, the service offers monthly webinars where the investing team reviews the portfolio holdings and provides members with market insights.
Since its inception in 2022, Alpha Picks returned 129 % vs. 49% for the S&P 500 over the same period.
Like most portfolios nowadays, it does hold some popular tech stocks like Meta, Google, and SalesForce, but honestly, I’ve never heard of most of the companies in the portfolio.
The portfolio consists of approximately 30 stocks, with individual stock weightings between 2-4% of the total holdings, with a few outliers.
Every month, Steve and his team provide a webinar update to discuss portfolio holdings and market updates, such as macro themes like inflation and interest rates. I’ve watched the webinars – they are about 30 minutes long, and Steve robotically reads off a prompter.
Not all returns are created equal – let’s dig into the data:
Approximately 24% of the holdings are in the Industrial sector, followed by 19% in Energy, 17% in Information Technology, and 16% in Consumer Discretionary.
One stock, Super Micro Computer, Inc., drives most of the portfolio’s returns. Since its purchase, it has returned over 234%, constituting nearly 9% of the portfolio’s holdings.
I checked my Morningstar account and saw that Super Micro Computer has a beta of 1.28. This means the stock is 28% more sensitive than the overall stock market, so logically, the stock has generated solid performance over the past year.
New subscribers have 3 ways to start using Alpha Picks.
Buy at least 5 ‘Strong Buy’ rated Alpha Picks from the existing portfolio
Buy the entire portfolio using the allocations in the ‘Portfolio’ tab
Use Alpha Picks as an idea-generation tool.
I use Alpha picks as an idea-generation tool and choose stocks that fit my investment strategy. However, like an investing service, it’s not a cure-all for all investing needs.
Portfolio Holdings At A Glance
Number of Holdings: 38 Weightings: Individual stocks between 2 – 4% of total holdings Top 3 Holdings: AppLovin Corp, Modine Manufacturing, Powell Industries Top 3 Sectors: Industrial, Energy, Information Technology Weighted Average Portfolio Beta: 1.06
Investment Process
Below I explore Alpha Pick’s buying and selling criteria and how they perform their investment analysis.
Buying Criteria
Alpha Picks uses a data-driven process to identify the most appropriate stock picks from Seeking Alpha Premium’s quant recommendations.
The team selects two ‘Strong Buy’ rated stocks per month. One pick is added on the first trading day of the month, and the other is added on the 15th of the month or the next trading day.
Each “Buy” must meet the following criteria:
‘Strong Buy’ quant rating for at least 75 consecutive days
A U.S. Common Stock (i.e. No ADRs)
Not a REIT
Has a 3-month average market capitalization greater than $500M
Stock price greater than $10
Has not been recommended in the past 1 year
In addition to the above criteria, the team seeks stocks that have a combination of:
Value: Stocks that are considered undervalued compared to their intrinsic worth. These stocks trade for less than their actual or estimated earnings, dividends, sales, etc. Value investorslook for bargains, believing the market has undervalued these stocks.
Growth: Stocks with high potential for future revenue and earnings increases. These companies are expected to grow at an above-average rate compared to other stocks in the market. Growth investing involves more risk but also has the potential for higher returns.
Profitability: Profitable companies are generally considered more stable and less risky to invest in. Metrics like return on equity (ROE), net margin, and earnings per share (EPS) are commonly used to measure profitability.
Momentum refers to a stock’s tendency to continue moving in the direction of its current trend. Momentum investors capitalize on existing trends, buying stocks that are going up and selling those that are going down.
Revised Forward-Looking Earnings Estimates: This term is a mouthful but super important. It means analysts have updated their earnings predictions for a company’s future. If estimates are revised upward, it’s often a bullish sign, indicating expected growth. On the flip side, downward revisions could signal trouble ahead.
So, what the above tells me is that the team applies a combination of quantitative and fundamental analysis to identify investment opportunities.
Steve and his team then form an investment thesis for new recommendations using the above criteria.
As a subscriber, I could visit Alpha Pick’s homepage and find the investment thesis posted chronologically.
The investment thesis covers basics like an overview of the company, macro trends the company may benefit from, and an explanation of its business model.
One cool differentiator I see is an analyst named Zackary replies to subscribers’ questions in the comment box, creating an engaging dialogue.
Selling Criteria
Subscribers are notified via email when the team closes out or reduces a position in the portfolio.
When a stock no longer scores well on fundamentals, valuation, and momentum relative to its sector, or if a stock is rated as ‘Hold’ for more than 180 days, it becomes a ‘Sell’ and is removed from the portfolio.
Alpha Picks sells the entire position in a stock if any of the following occur:
The rating falls to “Sell” or “Strong Sell.”
The company announces an M&A event in which it is the target, or it announces a merger of equals.
The rating falls to “Hold” and remains a “Hold” for 180 consecutive days (as long as the stock is not a ‘winner’ – see below).
Alpha Picks’s “quant research” shows that their portfolio performs better when they let their winners “run.”
A stock is a ‘winner’ when it doubles from the price at which it was purchased. For ‘winners’, if the rating on the stock falls to ‘Hold’ and remains there for 180 consecutive days, the team will only sell the initial investment in the stock. They will keep the remainder of the position in the portfolio.
They only eliminate ‘winners’ if:
Rating falls to “Sell” or “Strong Sell”
Company announces an M&A event in which it is the target
The Alpha Picks team is small. It’s run by stock picker Steven Cress and a junior analyst, Zachary Marx.
Steven Cress
Steven Cress, a former hedge fund manager and senior quantitative trader at Morgan Stanley, makes stock picks.
According to his LinkedIn profile, Seeking Alpha purchased the company he founded, and that’s how he became associated with Seeking Alpha.
Best For
Alpha Pick’s buy and buy-and-hold approach to investing makes this stock-picking service ideal for long-term investors and those seeking long-term capital appreciation.
Buy and hold investors
Investors seeking capital appreciation
Given its broad market exposure, Alpha Picks is not ideal for income-oriented investors, day traders, or single-sector investors.
PROs and CONs Explained
Let’s explore the PROs and CONs of Alpha Picks a little more deeply.
PROs:
Investment Team with Legit Pedigree: Senior Portfolio analyst Steve Cress has serious experience. He founded his own hedge fund and spent many years as a Senior trader at Morgan Stanley.
Market Outperformance: The portfolio has outperformed the market nearly 3X. I calculated a weighted average beta of just 1.06, making its performance even more intriguing.
CONs
Limited Track Record: Alpha Picks has only been around Since July 2022, so while their success is impressive, what really matters is providing investors with year-over-year returns.
Requires familiarity with Rating Factors: Alpha Picks assumes you know the company’s rating factors and methodology, so if you aren’t, you’ll need to do some research after signing up.
Price and Value
Alpha Picks is $449 for the first year ($50) off the full price of $499.
If you don’t fancy Alpha Picks by Seeking Alpha, don’t fret. There are several excellent alternatives.
1. Motley Fool Stock Advisor
Why it Stands Out: The Motley Fool Stock Advisor shines with its specific stock recommendations, backed by detailed analysis and a strong track record of performance. This valuable feature aids investors of all levels to identify potential investment opportunities in the stock market. While Alpha Picks has had tremendous success, Motley Fool Stock Advisor has been around for many years, making spectacular bets on the largest tech stocks.
Returns: +926% since inception as of December 2nd 2024.
Best For: Both novice and experienced investors who appreciate guidance on stock picks and investment strategies
Pros: Provides specific stock recommendations, offers in-depth reports, and a solid track record of performance.
Cons: Requires a subscription; not all recommended stocks may suit every investor.
Why it Stands Out: The CNBC Investing Club is a subscription-based investing service that provides stock picks, portfolio analysis, and market analysis. Jim Cramer created the Investing Club to help all investors build long-term wealth in the stock market. The CNBC Investing Club is now the official home of Jim Cramer’s Charitable Trust.
Returns: 21.9% between 2019 – 2023
Best For: Active traders, Momentum-oriented traders
Pros: real-time investment advice, monthly meetings with Jim Cramer, community engagement
Alpha Pick’s impressive performance over the past year certainly presents a tempting opportunity for many investors.
However, considering the group has only been in action for aactivever a year, I would tread cautiouslcaution you to y if you think you will strike it rich with this investing group.
I am more of an index fund type of guy, so I even felt a little strange when I signed up for Alpha Picks, but I thought it could help expand my view.
For $40 a month, you’re not breaking the bank for a subscription; at worst, you’ll hopefully learn something new about investing.
What’s the Difference Between Seeking Alpha Premium and Picks?
Alpha Picks is an investing group. If you sign up just for the investing group, you don’t have access to all other contributor-based articles. Meanwhile, if you have a Seeking Alpha Premium subscription, you have access to all articles and tools but not the investing group.
If you sign up for a Seeking Alpha Pro subscription, you have access to the Alpha Picks Investing Group and all the articles and tools Seeking Alpha has to offer.
Our Review Methodology
Investing in the right financial products is crucial for achieving your financial goals. That’s why our review methodology is designed to give you a comprehensive understanding of various investing platforms and tools. Here’s a breakdown of what we focus on:
Tools and Features
We dig deep into the suite of tools that each platform offers. Whether it’s automated investment features, tax optimization, or specialized charting tools, we evaluate how these features contribute to smarter investing decisions. We ask questions like:
What is its main offering, and how does it compare to its peers?
How effective are the risk assessment tools?
Are there any value-added services like educational content?
Price and Value
Price matters, especially when it comes to investing, where every penny counts. We analyze:
Subscription fees
Hidden Charges
Price compared to the overall value received
We’ll let you know if the platform gives you the most bang for your buck.
Ease of Use
User experience can make or break an investment platform. We assess:
Interface Design – Is it intuitive and easy to use?
Mobile app availability and functionality
Customer Support – where applicable.
Nobody wants to navigate a clunky interface when dealing with their hard-earned money.
Stock Breakdown
Good investing is rooted in great research. We examine:
The quality of stock analysis tools
Returns on an absolute and comparative basis
Availability of real-time data
Depth of research reports
We check if the platform provides actionable insights to make informed decisions.
How We Do It
Hands-On Testing: I signed up for Alpha Picks to actually provide real insight. This is how I give a unique perspective. We’re unlike some other sites where they simply rehash marketing materials.
Customer Reviews: What are other users saying? We look at reviews and customer feedback to gauge public opinion.
Comparative Analysis: Finally, we compare each platform against competitors in terms of features, pricing, and user experience.
We take a comprehensive approach so that you don’t have to.
By sticking to this methodology, we aim to guide you toward investment tools that align with your financial objectives. Happy investing!
Why You Should Trust Us
Our reviews are unbiased and data-driven. While we may receive a commission if you purchase a product through our link, it does not impact our editorial integrity. In addition, all articles are independently reviewed by individuals with extensive experience in investing and personal finance. Lastly, for further validation, we often refer to authoritative financial sources like Morningstar, The Wall Street Journal, and Kiplingers, to name a few.
Stagflation, the unwelcome combination of high inflation and stagnant economic growth, can be a nightmare for investors.
Here are the 5 popular investments to beat Stagflation.
When the economy is experiencing Stagflation, traditional investment strategies may not be as effective, and navigating this treacherous financial landscape may feel like walking through a minefield.
In this blog post, we’ll explore the world of Stagflation and identify some of the best investments during these trying times.
Key Takeaways
Stagflation is a complex economic challenge, so countercyclical investments like commodities, defensive stocks, and real estate are the best assets to invest in.
Diversifying your portfolio with value & cyclical stocks can help reduce risk & maximize returns during Stagflation.
Avoid risky investments such as growth stocks and bonds during this period.
Best stagflation investments: Commodities and precious metals, defensive stocks, real estate, and REITs.
What is Stagflation?
So, what exactly is Stagflation?
Put simply, it’s a situation in which economic growth is low (stagnant) and inflation is high simultaneously.
This toxic combination of slow economic growth and rising prices can pose a significant challenge for investors.
Traditional investment strategies may not yield the intended results. Stocks tend to underperform due to slow economic growth, and bond returns are diminished because of high inflation and fluctuating interest rates.
There are several economic theories about what causes Stagflation, but that goes beyond the scope of this article.
The World Bank indicates that families with low or fixed incomes and retirement savers are often hit the hardest during this period.
Best Assets to Invest in During Stagflation
In times of Stagflation, it is smart to prioritize assets like commodities, defensive stocks, and direct investments in real estate or REITs.
These assets can provide stability and potential growth, helping you maintain healthy investment portfolios despite economic uncertainty.
1. Commodities and Precious Metals
Commodities like gold, oil, precious metals, and agriculture tend to perform well during Stagflation, and there are several logical explanations why:
Hedge Against Inflation: Commodities like gold, oil, and agricultural products typically serve as a hedge against inflation. During stagflation, inflation rates are high, and commodities can provide a buffer against the eroding value of currency.
Supply Constraints: Stagflation occurs when economic growth is stagnant, but inflation rises. In such periods, the supply of goods often becomes constrained, which can drive up the prices of commodities.
Non-Correlation with Stocks: Commodities often have a low or negative correlation with stocks, making them a good diversification option. This is particularly useful during Stagflation when equities often perform poorly.
Global Demand: Commodities can also be influenced by demand on a global scale. Even if a specific economy faces stagflation, global demand can increase commodity prices.
Tangible Assets: Commodities are considered “real assets,” meaning they have a tangible physical form, e.g., gold coins. Real assets often perform well during inflation because their value is not just a financial abstraction.
Invesco DB Commodity Index Tracking (DBC) is an example of an exchange-traded fund that provides exposure to commodities such as energy, agriculture, and base metals. This ETF could be researched to see if it is a good Stagflation investment.
NOTE: Compared to equities, commodities were a boon for investors during the 1970s. The chart below shows real and nominal returns of commodities during this period, which was widely known as one of the most significant periods of stagflation.
Defensive stocks, also known as non-cyclical stocks, are those in the consumer staples and healthcare sectors that can provide stability and potential growth during stagflationary periods.
From a quantitative perspective, defensive stocks have a beta of less than 1. This means that if the stock market falls, cyclical stocks will outperform the market, making them excellent stagflation investments.
There are several reasons defensive stocks are considered good investments during periods of stagflation:
Stable Demand: These stocks belong to industries with relatively inelastic demand, such as healthcare, utilities, and consumer staples. Even in tough economic conditions, people still need to eat, use electricity, and seek medical care, making their demand stable.
Dividend Yields: Defensive stocks often provide steady dividends. When capital gains from stocks are uncertain, these dividends offer a consistent income stream for investors making them popular during Stagflation.
Lower Volatility: These stocks are generally less volatile compared to the broader market, offering some level of protection against market downturns (why are they less volatile)
Cash Flow: Companies in defensive sectors often have strong and predictable cash flows. This enables them to weather economic downturns more easily compared to cyclical companies.
Price Insensitivity: Consumers are less sensitive to price changes for essential goods and services. This helps maintain revenues for companies in defensive sectors during inflationary periods.
Hedge Against Uncertainty: In times of economic instability or stagflation, investors often seek safer, less volatile investment options. Defensive stocks can serve as a hedge against economic uncertainty.
Portfolio Diversification: Including defensive stocks in a portfolio can help in diversification, reducing the overall risk during economic downturns, including stagflation.
Lower Debt Levels: Defensive companies often operate with lower levels of debt compared to cyclical companies, making them less sensitive to interest rate changes, a common occurrence in stagflation.
As indicated by a Schoreders study, utilities, and consumer staples are the best performing stocks during a stagflationary environment.
Meanwhile, cyclical stocks such as IT and industrials are some of the worst performers during Stagflation.
Allocating funds to defensive stocks can safeguard your portfolio from the adverse impacts of Stagflation.
3. Real Estate and REITs
Real estate investments, including rental properties and publicly traded REITs, can serve as a hedge against inflation and provide reliable returns during Stagflation.
Historically, real estate has been one of the top-performing assets during Stagflation because it can offer tangible value and help protect your money from inflation.
3 Reasons why real estate and REITs make good Stagflation investments:
1. Tangible Asset: Real estate is a tangible asset, which makes it less susceptible to inflation’s erosive impact on purchasing power. The intrinsic value of property often remains stable or even increases during inflationary periods.
For example, The FTSE Nareit Index, which is a market capitalization-weighted index of U.S. equity REITs, gained 100% in total return between 1971, when data was first available, to the end of 1981.
2.Interest RateSensitivity: Although stagflation often leads to higher interest rates, real estate investments that were acquired with fixed-rate mortgages can benefit from having locked-in lower payments while rental income and property values are rising.
3. Consistent Rental Income: Real estate properties can generate a steady stream of income and landlords can increase rental prices during inflationary periods, making it an ideal investment during Stagflation when other investments may be underperforming.
In addition to directly investing in real estate, investing in Real Estate Investment Trusts (REITs) can also provide exposure to the real estate market and the potential for stable returns during Stagflation.
You can invest in physical real estate through popular real estate crowdfunding platforms like Fundrise and Groundfloor. Or, invest in popular publicly-traded REITs through your online brokerage account.
4. Treasury Inflation-Protected Securities:
Another popular Stagflation investment is Treasury Inflation-Protected Securities, known as TIPS. These securities are government treasury securities that provide a real return that is linked to the Consumer Price Index, which is the widely accepted benchmark for inflation.
During times of Stagflation, you can at least get returns that are on par with inflation, thus keeping your investment portfolio protected.
You can invest in TIPs directly through the TreasuryDirect website, or through an ETF like the iShares TIPS Bond ETF.
5. Short Selling Cylical Equities
A less common way to invest during inflation is to short-sell cyclical equities. Cyclical equities are stocks of companies that produce or sell items that are considered non-essential – like an iPhone. So in times difficult economic times, individuals will be less likely to buy non-essential items like a new car, or television.
Cyclical sectors have a market beta of greater than 1, meaning they generally underperform when the stock market falls, thus presenting a short-selling opportunity.
Short selling is an investment strategy where an investor borrows shares of a stock from a broker and sells them in the open market, with the intention of buying them back later at a lower price. The goal is to profit from the decline in the stock’s price.
Here’s how it works in simple terms:
Borrow Shares: The investor borrows shares of a stock they believe will decrease in value.
Sell Shares: The borrowed shares are then sold in the open market at the current price.
Buy Back Shares: If the stock price declines, the investor buys back the same number of shares at a lower price.
Return Shares: The investor returns the borrowed shares to the broker, keeping the difference between the selling price and the buying price as profit.
Risk: If the stock price increases instead of declining, the investor will incur a loss when buying back the shares at a higher price.
The strategy is considered high risk because the potential for loss is theoretically unlimited; a stock’s price can rise indefinitely, leading to mounting losses for the short seller.
Diversification, a vital element in any successful investment strategy, is even more important during Stagflation.
Spreading your investments across various assets or asset classes can lower your portfolio’s overall risk and potentially amplify your returns.
A well-diversified portfolio that includes a mix of value and cyclical stocks can help protect your investments during Stagflation.
Value stocks, which trade at a lower price compared to their underlying fundamentals, can offer long-term growth potential during economic downturns.
Meanwhile, cyclical stocks, which follow economic cycles, can present opportunities to buy low and sell high as the economy rebounds from Stagflation.
Investing in both stock types can mitigate loss risks and boost your returns during these tough times, as stock prices may fluctuate.
Value Investing
Value investing is an investment strategy that focuses on undervalued stocks with strong fundamentals, offering long-term growth potential during economic downturns.
By identifying and investing in undervalued securities, you can take advantage of opportunities for greater returns than the general market and potentially reduce the risk associated with your investments.
Nonetheless, awareness of the risks accompanying value investing is crucial. The stock might not bounce back in value, or it could become overpriced, leading to potential losses.
Cyclical Stocks
Cyclical stocks are those that tend to follow economic cycles, with their prices impacted by changes in the economy.
These stocks usually perform well during periods of economic growth but may not do as well during recessions. However, during Stagflation, cyclical stocks can offer opportunities to buy low and sell high when the economy rebounds, potentially providing attractive returns for investors.
Allocating funds to cyclical stocks during Stagflation can be lucrative, but cognizance of the strategy’s associated risks is vital.
Investments to avoid during Stagflation
According to a recent article from the Economist, during years of high inflation, stocks and bonds performed poorly. The article highlighted that between 1900 and 2022, bond returns turned negative when inflation was above 4%.
Meanwhile, stocks also went negative when inflation rose above 7.5%. During times of stagflation, it’s paramount to steer clear of investments that could fall susceptible to stagflation.
3 investments to avoid during Stagflation:
Growth stocks: Often trade at high valuation multiples. so during times of Stagflation, investor sentiment often turns negative, making these high valuations difficult to sustain.
Bonds: Most bonds pay a fixed interest rate. During times of high inflation, interest rates tend to increase. As a result, the yield on the fixed-rate bond is not as appealing to investors, thus causing the price of the bond to fall, which makes them poor investments during stagflation.
Cash equivalents: They may also lose value over time due to inflation, making them less effective as a hedge against rising prices.
Instead, focus on assets that have historically performed well during Stagflation, such as commodities, defensive stocks, and real estate.
By concentrating on these types of investments, including stagflation stocks, you can minimize the risks associated with investing during Stagflation and potentially maximize your returns.
Preparing for Stagflation: Financial Planning Tips
Beyond managing your investment portfolio, other financial planning measures can be taken to brace for Stagflation.
Reducing your debt and improving your credit can help you weather the storm of Stagflation and emerge on the other side in a stronger financial position.
Maintaining a diversified portfolio, as discussed earlier, is also crucial for mitigating the risks associated with Stagflation and maximizing your returns.
By taking a proactive approach to financial planning and seeking professional investment advice, you can better prepare yourself for the challenges of Stagflation and ensure that your financial future remains secure.
Final Thoughts
Stagflation presents unique challenges for investors, but with the right strategies and a well-diversified portfolio, it’s possible to navigate these turbulent times and even come out ahead.
By focusing on assets that have historically performed well during Stagflation, such as commodities, defensive stocks, and real estate, you can protect your investments and potentially achieve attractive returns.
Diversifying your portfolio with a mix of value and cyclical stocks can further reduce risk and maximize your returns during these challenging economic conditions.
By avoiding risky investments, implementing strategies like short-selling, and seeking professional financial advice, you can prepare for Stagflation and ensure that your financial future remains secure.
Remember, the key to success in any economic environment is adaptability, so stay informed, stay agile, and keep your eyes on the prize.
Frequently Asked Questions
What shares do well in Stagflation?
Stocks such as ExxonMobil, Chevron, Pfizer, Cisco Systems, United Parcel Service, gold, energy stocks, agricultural stocks, and real estate tend to perform well during periods of Stagflation.
What is Stagflation?
Stagflation is a troubling economic situation in which economic growth is low and inflation is high, posing difficult challenges for investors.
How can I diversify my portfolio during Stagflation?
To diversify your portfolio in a stagflationary environment, invest in a mix of value and cyclical stocks to safeguard your investments and maximize returns.
What investments should I avoid during Stagflation?
In Stagflation, it’s best to avoid growth stocks, bonds, and cash equivalents. They have the potential to stay stagnant or even lose their value.
What are some strategies for navigating Stagflation?
Navigating Stagflation can be accomplished by short-selling, focusing on real assets, and investing in sectors that have shown strong performance historically.
Unlock your financial future with income-generating assets that work for you, even while you sleep.
Investing in income-generating assets can help you build wealth over time. These assets provide consistent income while also potentially appreciating in value.
Below we explore 5 Income Generating Assets you may want to consider.
What Are Income Generating Assets?
Income-generating assets are investments that produce a steady stream of income, typically through interest, dividends, or rental payments. These include stocks that pay dividends, bonds, REITS, music royalties, and real estate.
As the name implies, income-generating assets focus on generating cash flow as opposed to capital appreciation. While capital appreciation can also occur, it’s not the primary objective of investing in these types of investments.
1. Dividend Stocks
Dividend stocks are shares of companies that regularly distribute a portion of their earnings to shareholders as dividends.
These stocks are a popular type of income-generating asset because they provide a steady stream of income, typically on a quarterly basis.
Investors favor dividend stocks not only for the regular income they provide but also for their potential for capital appreciation. Companies with a history of consistent and growing dividends are often well-established and financially stable, making dividend stocks a key component in many income-focused investment portfolios.
PROS
Steady Income Stream: Dividend stocks provide regular income, making them ideal for passive income seekers.
Lower Volatility: Companies that pay dividends are often more stable and less volatile than growth stocks.
Compounding Returns: Reinvesting dividends can lead to significant compound growth over time.
CONS
Dividend Cuts: Companies can reduce or eliminate dividends, impacting income and potentially the stock price.
Market Risks: Dividend stocks are still subject to market risks and can lose value during economic downturns.
2. Bonds
Bonds are a type of income-generating asset where investors lend money to an entity (such as a corporation, municipality, or government) in exchange for periodic interest payments and the return of the bond’s face value at maturity.
They are considered relatively safe investments, particularly government and high-quality corporate bonds, making them attractive for conservative investors seeking stable income.
PROS
Stable Income: Bonds provide regular and predictable interest payments
Lower Risk: Generally less volatile than stocks, making them a safer investment option
Diversification: Adding bonds to a portfolio can help reduce overall risk
CONS
Lower Returns: Typically offer lower returns compared to stocks, particularly for high-quality bonds.
Interest Rate Risk: Bond prices can fall if interest rates rise, as newer bonds may offer higher yields.
3. REITS
REITs must distribute at least 90% of their taxable income to shareholders as dividends making them attractive to income-focused investors. The income-generating properties and rental income streams provide relatively stable and predictable cash flow. While primarily income-focused, REITs also have the potential for capital appreciation, adding another layer of returns.
You can invest in publicly-traded REITs like you would a traditional equity. You can also invest in non-traded REITs through a real estate crowdfunding platform like Fundrise or Groundfloor.
REITs can be a valuable addition to an income-generating investment strategy. They offer high dividend yields, potential for diversification, and liquidity. However, like any investment, they come with risks that need to be carefully considered.
PROS:
Diversification: REITs provide exposure to real estate, which can diversify an investment portfolio and reduce overall risk.
Liquidity: Unlike direct real estate investments, REITs are traded on major stock exchanges, making them easy to buy and sell.
Professional Management: Investors benefit from the expertise of professional management teams who handle the property management and acquisition strategies.
CONS
Lack of control. As an investor in a REIT, you have limited control over the specific properties in the portfolio and how they are managed.
Interest rate sensitivity. REITs may be more sensitive to changes in interest rates, as higher interest rates can make it more expensive for REITs to borrow money and may reduce the value of existing fixed-income investments held by the REIT.
Dividend risk. REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends, but there is no guarantee that dividends will be paid or that they will be sustained at current levels.
Music royalties are a type of alternative investment where payments are made to music creators and rights holders for their music. They are a form of compensation for using intellectual property, in this case, the music itself.
Music royalties can provide a reliable and steady income stream for investors, with returns ranging from a few percentage points to double-digit returns.
The returns from investing in music royalties can vary widely and depend on several factors, including:
Popularity of the music
Type of royalty
Length of the royalty agreement
For example, mechanical royalties from physical and digital music sales may offer a fixed rate of return of around 9.1 cents per song per copy sold. In contrast, performance royalties may offer a variable rate based on the number of plays or performances.
In some cases, investors may be able to negotiate a higher rate of return by acquiring a music catalog or song that is particularly popular or has a proven track record of generating royalties.
Steady Income Stream: Music royalties can provide a steady income stream as long as the music continues to be used and generate revenue. This makes them an attractive investment for investors seeking consistent returns.
Low Correlation with Other Asset Classes: Music royalties have a low correlation with traditional asset classes such as stocks and bonds, making them a valuable diversification tool for an investor’s portfolio.
Predictable Income: Royalties from well-known songs with a proven track record of revenue generation can provide predictable income and a measure of security for investors.
CONS
Lack of Transparency: The music industry can lack transparency, making it difficult for investors to determine the value of music royalties.
Difficulty in Valuing Music Royalties: Music royalties have no standardized valuation methods unlike other assets, such as stocks or real estate. This can make determining their value for capital gains or tax purposes difficult.
5. Real Estate Crowdfunding
Real estate crowdfunding is when investors pool their money together through a crowdfunding platform to fund some or all of a real estate project.
The types of crowdfunded real estate projects can vary from individual properties to large multi-family apartment complexes and retail spaces.
Crowdfunded deals generally have a long investment horizon of at least 3 years. However, some platforms specialize in deals that can be as short as 6 months.
Crowdfunded real estate investments are private investments. They do not trade on an exchange like the NYSE. Instead, the investments are structured as a private REIT, an LLC, or a debt note, like a Limited Recourse Obligation.
No Property Management: When you invest in real estate crowdfunding, you get the benefits of investing in real estate without the stress of property maintenance, tenant management, and insurance, to name a few.
Non-Correlated Returns to the Stock Market: Private real estate has a correlation of 0.14 and -0.12 with publicly traded stocks and bonds, as noted in a TIAA study on private real estate investing.
CONS
No Independent or Public Source of Performance Data: Because real estate crowdfunding offerings are private investments, they do not provide the same level of information as you commonly see for publicly traded REITs.
High Fees: Private real estate investments tend to have higher fees compared publicly traded REITs. Most crowdfunding platforms have a 1% asset management fee, while the average publicly-traded REIT ETF has an expense ratio of 0.41%. In comparison, REIT mutual funds have an average expense ratio of 0.85%, according to the Motley Fool.
How To Buy Income Generating Assets
There are several avenues available to you if you are interested in buying income-generating assets.
Dividend Stocks and Bonds: You can use traditional brokerages like Charles Schwab and Fidelity
REITS: Publicly traded REITs can also be purchased through traditional brokerages
Index funds have soared in popularity over the past 30 years, making them one of household investors’ most popular investment choices.
The index fund recently celebrated its 30th birthday.
Over the past 30 years, index funds have soared in popularity among investors largely due to their implicit diversification, low fees, and passive investing strategy.
But with all those benefits, there are still drawbacks, such as no opportunity for customization, and limited potential for outperformance.
Either way, if you want to get started in stocks, understanding the advantages and disadvantages of index funds is crucial.
This article will examine the PROS and CONS of Index Funds so you can make the most educated investing decisions.
Let’s get into it.
Pros of Index Funds
Index funds is that they offer a cost-effective, diverse, and low-maintenance investment strategy for long-term investors. Key benefits include low fees, broad diversification, tax efficiency, and consistent returns that closely track the performance of the market indices they represent.
Additionally, index funds provide a passive investment approach, which may outperformactively managed fundsover time, with less risk and lower costs.
According to a recent Wall Street Journal Article, actively managed funds charge an average fee of 0.70%, versus 0.16% for Passively managed funds.
Index funds generally have lower expense ratios than actively managed funds because they follow a passive investment strategy. For example, two popular index funds, VOO and SPY, which track the performance of the S&P500, have expense ratios of just 0.03% and 0.09%, respectively.
This means they aim to replicate the performance of a specific index through passive management, requiring less frequent trading and lower management and transaction costs.
Therefore, investors can keep more of their returns over time.
An article from Index Fund Giant Vanguard highlights the impact of fees:
“Imagine you have $100,000 invested. If the account earned 6% a year for the next 25 years and had no costs or fees, you’d end up with about $430,000.
If, on the other hand, you paid 2% a year in costs, after 25 years you’d only have about $260,000.
That’s right: The 2% you paid every year would wipe out almost 40% of your final account value. 2% doesn’t sound so small anymore, does it?”
Source: Vanguard Group
Source: Vanguard
Diversification
Index funds offer broad exposure to various assets, sectors, and regions within a single investment vehicle. By investing in an index fund, investors can effectively diversify their portfolios, spreading risk across multiple holdings and reducing the impact of poor performance by any single asset.
Easy Access and Simplicity
Index funds are easy to understand and access. Investors don’t need to research individual stocks or bonds and can instead focus on selecting the right index fund to suit their investment goals. Investors can access index funds through a discount broker like eToro.
This makes index funds attractive for beginner investors or those who prefer a passive investing strategy.
Most index funds trade as exchange-traded funds, making them widely available through brokerages and fund providers.
I started investing in index funds because I realized I knew little about investing, and it was the best decision I’ve ever made.
Performance
Numerous studies show that index funds often outperform actively managed funds over the long term, largely due to the lower fees associated with passive management.
Index funds can deliver consistent returns by tracking the market without the risks of poor management decisions or underperformance by individual securities.
Cons of Index Funds
While index funds have several advantages, investors should also be aware of their potential drawbacks.
Let’s look below:
Limited Potential for Outperformance
Index funds are passively managed, meaning they follow the composition of the underlying index. They do not employ active management strategies, such as stock picking or market timing, which means there is limited opportunity for outperformance.
Meanwhile, actively managed funds can dynamically select individual stocks and sectors, providing an opportunity for outperformance.
Let’s look below:
Concentration risk
Market capitalization-weighted index funds can sometimes be heavily weighted toward certain sectors or companies, leading to overconcentration in specific market areas.
For example, the Financial Times highlighted that just 5 companies, the five largest companies in the S&P 500 Index (Apple, Microsoft, Amazon, Facebook, and Alphabet), made up approximately 22% of the index’s market capitalization. This concentration level can expose investors to additional risks if these large companies underperform or experience severe declines.
Lack of customization
Lack of customization is a drawback of index funds because investors have limited control over the specific holdings within the fund.
This means that investors cannot tailor the portfolio to their individual preferences, values, or financial goals.
For example:
Investors interested in aligning their investments with their values, such as environmental, social, and governance (ESG) criteria or socially responsible investing (SRI) principles, may find it challenging to do so with a traditional index fund.
This is because index funds are designed to track a specific market index and do not allow for customization based on ESG or SRI considerations.
Tax Management: Index funds do not offer the same level of tax management as separately managed accounts or individual stock portfolios. For example, investors cannot sell specific holdings within an index fund to realize losses for tax purposes (tax-loss harvesting). This lack of customization may result in less tax-efficient outcomesfor some investors.
Limited Risk Management
Since index funds are passively managed and aim to replicate the performance of the underlying index, they do not have the flexibility to dynamically hedge their positions response to market volatility, or adjust their holdings based on an investor’s risk tolerance or investing objectives.
Meanwhile, actively managed funds can reposition their portfolios to mitigate risk during periods of heightened volatility, and an individually selected portfolio can be adjusted to meet an investor’s investing objectives and risk tolerance.
Overweighting in High-Risk Sectors
Market capitalization-weighted index funds can be disproportionately exposed to high-risk sectors during periods of market volatility. This is because they allocate more weight to companies with larger market capitalizations, which can lead to a concentration of risk when these companies are part of volatile sectors.
You are Less likely to Learn About Investing
Index funds have a set-it-and-forget approach. When I started investing in Index Funds, I bought VOO and called it a day. I didn’t learn about EPS or read-up on earnings releases. Sure, you can still do that, but you are less inclined when you have a basket of individual securities.
It sounds odd, but only when I started investing in individual stocks did I really understand what it means to become an investor.
The Bottom Line
Index funds provide a low-cost, diversified, and easily managed investment option, making them an attractive choice for long-term investors. However, their passive management may result in limited potential for outperformance and a lack of flexibility in addressing market changes.
The Research
I want to break down how I came up with the pros and cons of index funds for my recent article. Let me give you a behind-the-scenes look at my methodology.
Personal Experience
First and foremost, I’ve been dabbling in index funds for a while now. These aren’t just numbers and concepts; they’re part of my actual portfolio. Trust me, I’ve felt the rush when the market’s up and the cringe when it takes a hit.
Discussions with Peers
I’ve also had plenty of debates over coffee with my friends and colleagues who are into investing. Some swear by the “set it and forget it” ease of index funds, while others argue that individual stocks or actively managed funds offer more thrills—and maybe higher returns.
Reputable Sources
For the nitty-gritty details, I dove into credible finance journals, studies, and expert interviews. Websites like Investopedia and Morningstarwere goldmines for information.
Market Analysis
Real-time market analysis from platforms like Yahoo FinanceandBloomberg provided actionable insights. I checked out the performance trends of popular index funds to see how they really hold up in different market conditions.
Social Proof
I even scoured Reddit forums and Twitter threads. Believe it or not, there’s a lot of wisdom (and cautionary tales) out there in the social media world. People are willing to share their hands-on experiences, for better or worse.
Fact-Checking
Finally, every piece of information underwent a rigorous fact-checking process. If something seemed too good to be true, I dug deeper.
By combining all these elements, I aimed to create a well-rounded view of the pros and cons of index funds. So, when you read my post, know that it’s backed by research, real-world experience, and a good dose of skepticism.
Here’s what you need to know about how to invest in gold.
4 Ways to Invest in Gold:
Gold Bullion
Gold ETFs and Mutual Funds
Gold Futures and Options
Gold Mining Stocks
1. Gold Bullion
Buying gold bullion is the most tangible way to invest in gold. Many stock market skeptics buy gold bullion because it’s a physical asset you can hold.
PROS: Tangible asset, intrinsic value
CONs: Storage costs, security risks, no dividends
Gold Bars and Coins: Purchase from reputable dealers. Ensure purity and authenticity
Jewelry: Not the best investment due to high markup and less liquidity
Price of Gold (1994 – 2004). Source: Macrotrends.net
2. Gold ETFs and Mutual Funds
Gold ETFs and Mutual Funds are probably the easiest way to directly invest in gold without the hassle of physical ownership.
You can invest in ETFs that track the price of physical gold, such as SPDR Gold Shares or securities of gold mining companies.
PROS: Easy to trade, lower costs than physical gold.
CONS: Management fees, not tangible.
Gold ETFs: Track the price of gold. Examples include SPDR Gold Shares (GLD) and iShares Gold Trust (IAU).
Gold Mutual Funds: Invest in gold mining companies. Examples include Fidelity Select Gold Portfolio (FSAGX).
3. Gold Futures and Options
Trading gold futures and options is an advanced method of taking a positional view of the price of gold.
Trading Gold futures and options should only be done by advanced traders. It is best for beginner investors to avoid trading gold futures and options.
PROS: High leverage(with futures), potential for significant gains
CONS: High risk, requires expertise
Most gold futures and options trading is done by companies who use gold in their manufacturing process and therefore trade options and futures to lock in their production costs.
4. Gold Mining Stocks
Gold mining stocks are another way to invest in gold. However, they don’t necessarily directly correlate to the price of spot gold and can be influenced by other economic factors like expectation reports and changes in laws in which the country is located, production costs, and U.S. macroeconomic factors (like inflation) can dramatically impact the price of gold mining stocks.
2 Categories of Gold Mining Stocks: Junior and Major
Junior mines are newer mines without often unproven mining claims. Meanwhile, major mines are established mines with production and infrastructure in place. Both types of gold mining stocks can be publicly traded, and you can use a stock screener like Finviz to help you identify potential investment opportunities.
Explore whether investing in popular gold mining companies like Barrick Gold Corporation (GOLD) or Newmont Corporation (NEM) is right for you.
Popular Gold Mining Stocks
Newmont (NEM)
Barrick Gold (GOLD)
Franco-Nevada (FNV)
Kinross Gold (KGC)
Alamos Gold (AGI)
PROS: Potential for higher returns, dividends.
CONS: Higher risk, company-specific factors.
Tips for Researching Gold
Like stock research, understanding what catalysts may drive the price of gold up or down involves thorough research.
Some factors to consider when researching gold include:
U.S. macroeconomic factors (inflation, decline in value of the dollar)
Production Costs
Changes in laws in the country where the mine is located
Bottom Line
Investing in gold can be a valuable addition to a diversified portfolio, offering a hedge against inflation and economic uncertainty. However, it’s essential to balance gold with other assets due to its volatility and limited income potential.
Penny stocks carry significant risk, but the potential upside can be substantial for savvy investors. Here’s what you need to know about researching penny stocks.
Penny stocks are shares of small companies that trade for less than $5 per share. These micro securities are often found on over-the-counter (OTC) markets rather than major stock exchanges. Penny stocks are notorious for their price volatility and risk, which makes them a unique investment opportunity.
Quick Summary
Use a screener: To identify new penny stock opportunities.
Analyze Market News and Trends: Since penny stocks are highly sensitive to news, identifying positive or negative news can help predict price movements and trading opportunities.
Perform Technical Analysis: Use indicators that can adjust to the quickly changing and irregular nature of penny stocks and provide precise and timely signals. Some popular and useful technical indicators for penny stocks include moving averages (MA), relative strength index (RSI), and volume.
Have a Scanner running during market hours: This will help you identify potential momentum plays.
How to Research Penny Stocks
Knowing how to research penny stocks is the key to making winning stock picks.
Penny stocks are shares of small companies that usually trade under a dollar but less than $5 per share. Because of their low share price, penny stocks often trade over the counter instead of on major stock exchanges.
If you don’t have much money to trade in the stock market, penny stocks can be incredibly tempting.
Buying 10,000 shares of a stock at $0.05 is more appealing than buying a few shares of Apple or Tesla. Penny stock investors tend to buy these low-priced securities, hoping they’ll increase in value 10X.
1. Use a Screener to Identify New Penny Stocks
Because penny stocks often have limited news coverage, finding new investment opportunities can be challenging. It’s worth using a penny stock screener to help you identify potential investment opportunities.
Company Background Check: Describe how to investigate the company’s history, business model, and management team.
Financial Statements: Explain the importance of reviewing financial statements (income statement, balance sheet, cash flow statement).
2. Analyze Market News and Trends
Market News and Trends: Because penny stocks are highly sensitive to news, identifying positive or negative news can help predict price movements and trading opportunities.
3. Perform Technical Analysis
Use indicators that can adjust to the quickly changing and irregular nature of penny stocks and provide precise and timely signals. Some popular and useful technical indicators for penny stocks include moving averages (MA), relative strength index (RSI), and volume.
4. Have the Scanner Running During Market Hours to Hunt for Momentum Plays
Real-Time Scanning: Using stock scanners during market hours helps identify stocks with unusual volume, price movements, or other momentum indicators.
Momentum Plays: are stocks rapidly gaining in price and volume. Identifying them in real time can provide opportunities for profitable short-term trades.
What To Watch Out For When Researching Penny Stocks
1. Lack of Information
Limited Financial Data: Many penny stocks have incomplete or outdated financial statements.
Unverified Claims: Be wary of companies making grandiose claims without evidence.
2. Pump-and-Dump Schemes
Sudden Price Surges: Unexplained, rapid increases in stock prices followed by sharp declines can indicate manipulation.
Aggressive Promotion: Watch out for stocks heavily promoted through emails, social media, or forums.
3. Low Trading Volume
Liquidity Issues: Stocks with low trading volume can be difficult to buy or sell without significantly impacting the price.
Price Manipulation: Low liquidity stocks are easier to manipulate.
4. Insider Ownership
High Insider Holdings: Companies where insiders hold a large percentage of shares can manipulate the stock price.
Frequent Insider Transactions: Frequent buying or selling by insiders can indicate potential issues.
5. Unrealistic Financial Projections
Overly Optimistic Forecasts: Be skeptical of companies projecting unusually high growth rates.
Lack of Revenue: Companies with minimal or no revenue making high-profit claims.
Pros and Cons of Penny Stocks
There are several advantages and disadvantages investors need to be aware of before investing in penny stocks.
PROS
Affordable entry point
High growth potential
Market inefficiencies due to limited coverage
CONS
Shares can be subject to market manipulation
High risk and volatility
Lack of reporting information
Penny Stocks vs. Traditional Stocks
Lack of Public Information: Microcap stocks differ significantly from larger stocks due to the scarcity of publicly available information. While large public companies regularly file reports with the SEC and are widely covered by professional analysts, information on microcap companies is often hard to find. This lack of transparency makes microcap stocks more susceptible to investment fraud and less likely to have market prices based on comprehensive information.
No Minimum Listing Standards: Stocks traded on major exchanges must meet specific listing standards, such as minimum net assets and shareholder numbers. In contrast, companies on the OTCBB or OTC Link generally do not have to meet these standards, except for those in the OTCQX and OTCQB marketplaces, which have some requirements.
Risk: Microcap stocks are among the riskiest investments. Many microcap companies are new with no proven track record, and some lack assets, operations, or revenues. Additionally, the low trading volumes of microcap stocks can lead to significant price volatility with even small trades.
The Bottom Line
While there is the potential to make significant money investing in penny stocks, they come with considerably more volatility and price risk than investing in established blue-chip stocks. Before diving in, be sure to perform appropriate stock researchbefore diving headfirst into the world of penny stock investing.
