Growing Wealth Archives | Page 58 of 224

Oct

2023

Pros & Cons of Using a Moving Average to Buy Stocks

By Kate Ashford | Growing Wealth, Investing, Terminology | Comments Off

The moving average is a tool that can help investors decide whether and when to buy or sell a stock. It presents a smoothed-out picture of where a stock’s price has been in the past and where it’s trending now. Investors may compute moving averages over a variety of time frames, and they are useful to both long-term and short-term investors.

What Is a Moving Average?

A moving average is a metric often used in technical analysis. For a stock, it’s a constantly updated average price.

Unlike trying to track a stock price day-to-day, a moving average smooths price volatility and is an indicator of the current direction a price is headed. A moving average reflects past prices — usually a stock’s closing price — so it’s not a predictor of future direction, just what’s happening now or in the past.

You can compute moving averages using almost any time frame. Common time frames include 20-day, 30-day, 50-day, 100-day and 200-day moving averages.

While a moving average is useful on its own when analyzing different types of investments, it also forms the basis of other types of technical indicators, such as the Moving Average Convergence Divergence (MACD) and the McClellan Oscillator.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Types of Moving Averages

There are three common types of moving averages that investors might consider when deciding when to buy or sell a stock:

Simple Moving Average:

As the name states, this is the simplest type of moving average. You can calculate the simple moving average by finding the arithmetic mean of a set of data points. For instance, if you had an average daily price for a stock each day for the last 30 days, you would add them all together and divide by the number of days.

The Simple Moving Average (SMA) formula is as follows:

P = Price on a given date

n = The time period

Example: Suppose you were trying to find the simple moving average of a stock price over 10 days.

N = 10 days

Prices (in dollars) = 11, 12, 15, 13, 12, 7, 10, 11, 13, 12

SMA = (11 + 12 + 15 + 13 + 12 + 7 + 10 + 11 + 13 + 12) / 10

SMA = 11.6

Weighted Moving Average

A weighted moving average (WMA) gives more weight to certain price prices. If you overweight recent prices, for example, the measure becomes more responsive to recent price moves and less prone to the lag effect.

Exponential Moving Average:

An exponential moving average is a type of weighted moving average that calculates changes in a price cumulatively, rather than based on previous average. That means that all previous data values impact the EMA, since there is less variation over time.

Why Would an Investor Use a Moving Average?

Using a moving average to analyze a stock can help you filter out the “noise” that comes from random price fluctuations. By looking at the direction of the moving average, you can get a sense of whether the price is generally moving up or generally moving down. If a moving average is moving sideways (neither up nor down), the price is probably sticking within a window and not fluctuating much.

A moving average is sometimes plotted as a line by itself on a price chart to illustrate price trends. And different moving average lines can be used in tandem to spot changes in direction. For instance, an investor might be looking at a faster moving average (one with a shorter period, such as 10 days) versus a slower moving average (one with a longer period, such as 200 days). When these lines cross each other, it’s called a moving-average crossover, and can indicate that the trend is changing or is about to change.

Moving averages can also indicate support or resistance levels. Support levels are a price level where a downward trending line would be predicted to pause, due to demand or buying interest. A resistance level is a price ceiling where an upward trending line would be expected to plateau due to selling interest. Over time, watching moving averages can help investors identify these levels of support and resistance, and use them to make buy/sell decisions.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Pros of Using a Moving Average

A moving average offers several benefits to investors.

It smooths the data.

Day-to-day price swings can be confusing to track, and make it difficult to determine a stock’s direction. A moving average smooths out volatility, giving you a better look at how a stock is trending.

It’s a simple gauge.

As an analytical tool, a simple moving average is easy to interpret. If a stock’s current price is higher than an upward trending moving average line, the stock is headed up in the short-term. If a stock’s price is lower than a downward trending moving average line, the stock is headed down in the short-term.

Easy to calculate.

A moving average is a relatively easy metric, so the average investor can calculate it on their own.

Cons of Using a Moving Average

It’s important to keep the drawbacks of moving averages in mind when using them to determine whether to buy shares of a company.

They’re not predictive.

As with all investments, past performance is not an indicator of future performance, so a moving average — no matter which type you use — can’t tell you what a stock will do next.

There’s a lag.

The longer the period your moving average covers, the greater your lag — meaning how responsive your moving average is to price changes. A 10-day exponential moving average, for instance, will react quickly to price turns, while a 200-day moving average is more sluggish and slower to react to changes.

There’s trouble with price turbulence.

If prices are trending in one direction or another, a moving average may be a helpful metric. But if prices are choppy or volatile, the moving average becomes less useful, since it will swing along with the price. Allowing for a lengthier time frame may resolve this issue, but it can still occur.

Simple moving averages weigh all prices equally. This can be a disadvantage if a stock’s price has taken a significant but recent shift.

Weighted moving averages may send false signals.

Since WMAs put more weight on more recent data, they’re faster to react to price swings, which can occasionally be misleading.

The Takeaway

Moving averages are just one metric you can use to evaluate a stock. They can help quiet the noise of price fluctuations and show you what a stock is doing over time. That said, in some environments or with specific price patterns, moving averages may lag or send a misleading signal.

With that in mind, knowing what a moving average is can be helpful when learning how to size-up potential investments. It’s critical to consider the pros and cons, of course, but moving averages can be another tool in an investor’s tool chest.

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Sep

2023

What Happened During Tulip Mania?

By Ashley Kilroy | Growing Wealth, invest, Investing | Comments Off

One of the most famous instances of an asset bubble was the “Tulip Mania” that erupted in Holland during the 17th century. It was the first recorded major financial bubble, during which demand for tulips exploded, and prices for the flowers followed suit.

This led some investors to speculatively purchase tulips, resulting in losses when prices fell back down. Despite Tulip Mania occurring centuries ago, it can still be used as a history lesson for current traders and investors.

What Was Tulip Mania?

Tulip Mania was a speculative frenzy that erupted in Holland during the 17th century. The Dutch were newly independent of Spain and building themselves into prosperous traders. The mid-1600s was a period of wealth for them, as they benefited from rare imports brought through the Dutch East India Company.

Interest in exotic items was at an all-time high, and collectors became fascinated with not just tulips, but “broken” tulips. These tulips came from bulbs and grew into striped or multicolored patterns. As demand grew, more companies began selling bulbs.

The most famous tales about Tulip Mania sound like something out of a book. People of all walks of life bought the flowers in a frenzy at sometimes extremely high prices. They hoped for significant returns and to escape their social classes, but they met financial disaster. Those investors fell into ruin when the tulip bubble burst in 1637 – similar to the dotcom bubble in more recent times – and some of the stories even detail tragic endings; people losing everything and drowning themselves in the canals. All because a tulip-incited mass hysteria that created a financial crisis.

But, is it really true?

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

What Really Happened During Tulip Mania?

The “mania” in the story of Tulip Mania comes from an 1841 account by a Scottish author named Charles MacKay. His Memoirs of Extraordinary Popular Delusions and the Madness of Crowds detailed a “tulipomania” where people poured years of salaries into the speculative tulip trade. From farmers, to nobles, to chimney-sweeps, he documented every class buying in. Then, the memoir described mayhem following the market collapse in 1637. Ultimately, MacKay created a dramatic tale that was more fiction than fact.

There was a Dutch tulip bulb market during the Dutch Golden Age. However, traders were limited to buyers with the finances to invest in luxury items. Typically, this group included merchants, artisans, and the upper class.

Additionally, the price increase was not consistent. Between December 1636 and February 1637, some highly sought-after bulbs experienced a price spike. Some of the most expensive went for 5,000 guilders, which equaled the value of a nice home in 1637. Or, there is evidence that the highest bid totaled out to 5,200 guilders. That matched 20 times the yearly salary of a skilled worker. But these prices were the exception, not the rule.

That leaves the final part of the story: the fallout.

Tulip Mania Bubble Burst

Tulip Mania is the classic and most well-known historical example of a financial bubble.

Traders bought into the bulbs with the intent to resell and earn a profit. However, the flowers’ held no inherent value. Their status as a luxury item determined their prices and pushed demand. In fact, demand grew so high that professional traders began bidding on the product on the Stock Exchange of Amsterdam. People even used margined derivative contracts to increase the number of tulips they could buy despite their financial limits.

But before spring even hit, the bubble burst. The mania fell away after the tulips lost their value when the supply of tulips increased due to warmer weather. With so many of the crops, bulb traders realized the product wasn’t as rare as they thought. An auction in Haarlem in February of 1637 seemed to solidify the thought when the auctioneers failed to sell any bulbs.

When the prices dropped, traders had to sell their holdings for a lower value. However, this led to a few broken relationships and lost reputations, not any tragic deaths.

So, there was no morbid end when the Tulip Mania bubble burst. MacKay reported that Holland’s national economy fell apart due to the volatile market crash, but those claims appear exaggerated. The bubble only impacted those who were involved in the Tulip trade, and most investors were in an easily salvageable position. They financially recovered relatively quickly. On the other hand, growers did struggle to replace the lost buyers when certain contracts fell through.

What Tulip Mania Reveals About Financial Markets

While the story is more straightforward than MacKay made many believe, it is still a valuable moment in economic history. It became a parable that explains the nature of bubbles and the crashes that occurred throughout the history of the stock market.

Part of its value as a lesson stems from its moment in time. Multiple bubbles followed Tulip Mania, including the railroad mania bubble during the 1840s, where commentators encouraged investors to buy into U.K. railway stocks or in the early 2000s when Americans began speculating in residential housing before that bubble burst.

The dynamics behind each of these events is similar to the dynamics of the tulip bubble. Speculators drive up the price of an asset beyond its intrinsic value until the bubble eventually busts and those who bought at the top of the market end up losing money in the market downturn.

The Takeaway

Tulip Mania is perhaps the penultimate example of a market bubble, which still resonates today, even though it occurred in Holland centuries ago. Bubbles can also occur in the pricing of individual securities, sectors, or the broader stock market, eventually leading to a crash in prices.

A stock market crash is an alarming time that can send many investors into a panic. They see the drop and move immediately to selling. However, panic selling in the face of market volatility can have disastrous effects on a portfolio. Either you sell when the market is struggling and earn lower returns as a result, or you miss out on the market rebound.

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Sep

2023

What Is a Leverage Ratio?

By Laurel Tincher | Financial Independence, Growing Wealth, invest, Investing | Comments Off

Leverage ratios are a collection of formulas commonly used to compare how much debt, or leverage, a company has relative to its assets and equity. It shows whether a company is using more equity or more debt to finance its operations. Understanding a company’s debt situation is a key part of fundamental analysis during stock research. Calculating its financial leverage ratio helps potential investors understand a company’s ability to pay off its debt.

A high leverage ratio could indicate that a company has taken on more debt than it can pay off with its current cash flows, potentially making the company a riskier investment.

How to Calculate Leverage

A company increases its leverage by taking on more debt, acquiring an asset through a lease, buying back its own stock using borrowed funds, or by acquiring another company using borrowed funds.

There are several types of leverage ratios, which compare a company’s or an individual’s debt levels to other financial indicators. Some commonly used ones are:

Debt-to-Assets Ratio

This ratio compares a company’s debt to its assets. It is calculated by dividing total debt by total assets. A higher ratio could indicate that the company has purchased the majority of its assets with debt. That could be a warning sign that the company doesn’t have enough cash or profits to pay off these debts.

Formula: Total debt / total assets

Debt-to-Equity Ratio (D/E)

The debt-to-equity ratio compares a company’s debt to its equity. It is calculated by dividing total debt by total equity. If this ratio is high, it could indicate that the company has been financing its growth using debt.

The appropriate D/E ratio will vary by company. Some industries require more capital and some companies may need to take on more debt. Comparing ratios of companies in the same industry can give you a sense of what the typical ranges are.

Formula: Total debt / total equity

Asset-to-Equity Ratio

This is similar to the D/E ratio, but uses assets instead of debt. Assets include debt, so debt is still included in the overall ratio. If this ratio is high, it means the company is funding its operations mostly with assets and debt rather than equity.

Formula: Total assets / total equity

Debt-to-Capital Ratio

Another popular ratio, this one looks at a company’s debt liabilities and its total capital. It includes both short- and long-term debt, as well as shareholder equity. If this ratio is high, this may be a sign that the company is a risky investment.

Formula: Debt-to-capital ratio: Total debt / (total debt + total shareholder equity)

Degree of Financial Leverage

This calculation shows how a company’s operating income or earnings before interest (EBIT) and taxes will impact its earnings per share (EPS). If a company takes on more debt, it may have less stable earnings. This can be a good thing if the debt helps the company earn more money, but if the company goes through a less profitable period it could have a harder time paying off the debt.

Formula: % change in earnings per share / % change in earnings before interest and taxes

Consumer Leverage Ratio

This ratio compares the average American consumer’s debt to their disposable income. If consumers go into more debt, their spending can help fuel the economy, but it can also lead to larger economic problems.

Formula: Total household debt / disposable personal income

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Ways to Use Leverage Ratio Calculations

Understanding the definition of leverage ratio and the formulas for various types, is the first step toward using the measurement to make investing decisions. Investors use leverage ratios as a tool to measure the risk of investing in a company.

Simply put, they show how much borrowed money a company is using. Each industry is different, and the amount of debt a company has may differ depending on who its competitors are and other factors, such as its historical profits. In a very competitive industry or one that requires significant capital investment, it may be riskier to invest in or lend to a company with a high leverage ratio.

The interest rates companies are paying matters also, since debt at a lower rate has a smaller impact on the bottom line.

Regardless of industry, If a company can not pay back its debts, it may end up going bankrupt, and the investor could lose their money. On the other hand, if a company is using some leverage to fuel growth, this can be a good sign for investors. This means shareholders can see a greater return on equity when the company profits off of that growth. If a company can’t or chooses not to borrow any money, that could signal that they have tight margins, which may also be a warning sign for investors.

Investors can also use leverage ratios to understand how a potential change in expenses or income might affect the company.

How Lenders Use Leverage Ratios

In addition to investors, potential lenders calculate leverage ratios to figure out how much they are willing to lend to a company. These calculations are completed in addition to other calculations to provide a comprehensive picture of the company’s financial situation.

Overall, leverage ratio is one calculation amongst many that are used to evaluate a company for potential investment or lending.

How Leverage is Created

There are several different ways companies or individuals create leverage These include:

• A company may borrow money to fund the acquisition of another business by issuing bonds

• Large companies can take out “cash flow loans” based on their credit status

• A company may purchase assets such as equipment or property using “asset-backed lending”

• A company or private equity firm may do a leveraged buyout

• Individuals take out a mortgage to purchase a house

• Individual investors who trade options, futures, and margins may use leverage to increase their position

• Investors may borrow money against their investment portfolio

The Takeaway

All leverage ratios are a measure of a company’s risk. Understanding basic formulas for fundamental analysis is an important strategy when starting to invest in stocks. Such formulas can help investors weigh the risks of a particular asset investment and compare assets to one another.

There are numerous ways to use leverage ratios, and lenders can use them as well. In all, knowing the basics about them can help broaden your knowledge and understanding of the financial industry.

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Sep

2023

Is Stock Market Timing a Smart Investment Strategy?

By Inyoung Hwang | Growing Wealth, invest, Investing | No Comments

Timing the market, as it relates to trading and investing, requires a whole lot of luck. In effect, it means waiting for ideal market conditions, and then making a move to try and capitalize on the best market outcome. But nobody can predict the future, and it’s a high-risk strategy.

When seeing stock market charts and business news headlines, it can be tempting to imagine striking it rich by timing investments perfectly. In reality, figuring out when to buy or sell stocks is extremely difficult. Both professional and at-home investors make serious mistakes when trying to time their market entrance or exit.

Why Timing the Stock Market Doesn’t Work

Waiting to start investing could cost an individual thousands of dollars over their lifetime. It’s also important to know that by leaving money in a checking or savings account, a person is not protecting their money from inflation risk. That’s because the value of that cash in a checking or savings account erodes if the prices of goods and services increase.

Meanwhile, stock market timing is incredibly complex. Stock prices can be influenced by global macroeconomic events, political events in a country, developments in specific industries or companies, as well as the sentiment of investors as a collective.

Even professional investors struggle to “beat the market,” which often means simplifying trying to outperform a benchmark stock index. In fact, most investors can’t beat the market, and are likely better off sticking to index investing.

Fear and Greed in Investing

When investing, it’s also important not to let two key emotions – fear and greed – drive decisions. That means if the stock market is plummeting, investors may be fearful, but they can’t let those feelings push them toward a decision to sell. That could cause them to “lock in” losses. There’s even a Fear and Greed Index that investors sometimes use to make contrarian decisions.

Take for instance what happened during the 2008 financial crisis. After Lehman Brothers Holdings Inc. filed for bankruptcy in September 2008, the stock market entered a tumultuous stretch. The S&P 500 finally bottomed on March 9, 2009. However, the index eventually regained all its losses in the course of roughly the next four years. Investors who had hung on likely may have recovered their losses.

Meanwhile, greed can cause investors to make poor decisions as well. For instance, during the dotcom bubble, investors bought into many newly public Internet companies without always doing the research. Some of these stocks weren’t even turning a profit, making their businesses vulnerable to going belly up. Ultimately, many at-home investors suffered losses when the dot-com bubble burst.

Of course there are no guarantees when it comes to investing. There’s always risk and volatility involved. However, one of the most tried and true methods for building wealth has been a buy-and-hold strategy when it comes to stock investing.

💡 Quick Tip: When people talk about investment risk, they mean the risk of losing money. Some investments are higher risk, some are lower. Be sure to bear this in mind when investing online.

Why It May Be a Good Idea to Invest Immediately

One of the most important predictors of your returns is the length of time you’ve invested in the stock market. While it’s difficult to predict what the market will do in the near future, an investor can get a better sense over the long term.

When an investor lets their money grow, it has the chance to weather short-term ups and downs and grow over time. On average, the S&P 500, often used as a market benchmark, has grown 7% a year after adjusting for inflation. That doesn’t mean a person can predict what will happen this year, or even in the next 10 years, but looking at long term trends can give them a better sense of market dynamics.

An individual might put off investing because they want to pay off all debts first or achieve other goals, like buying a house. In some cases, that might be true, like paying off high-interest credit cards or saving for a short-term goal, such as a three to six-month emergency fund.

But once a person has an emergency fund and is out of credit card debt, they should consider investing, even if they have a mortgage or student loan debt. Even if they’re only investing for retirement, it’s a good idea to start as soon as possible.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Consider Investing as Early as Possible

The younger you are when you invest, the better the chances are that you’ll reach your financial goals. For example, imagine Person A invests $200 a month in a retirement account starting at age 25.

Person B invests the same amount starting at age 35. They both continue to add $200 a month to their account. When they both retire at age 65, Person A will have almost twice as much as Person B: $306,689, compared to $167,550, assuming a 6% rate of return, 2% inflation rate, and 15% tax rate.

That’s true even though Person A only contributed 33% more to her account. This is how compound interest grows investments, or the power of how earnings from one’s investments can continue to build wealth.

Percentage of Retail Investors in Stock Market

As mentioned, after the 2008 financial crisis, many people were reluctant to invest in the stock market. But in recent years, that’s changed. Retail investor participation in the U.S. stock market increased considerably in 2020 and 2021, for a variety of reasons.

As of 2023, retail inventors comprise about a quarter of all total trading volume in the stock market. That may change in the future, too, as younger investors – with quicker, easier access to investing tools, in many cases – look at getting into the markets.

The Takeaway

Timing the market is difficult, if not impossible, and involves trying to “time” trading or investing moves to coincide with an increase or decrease in the stock market. Nobody can tell what the future holds, so it’s generally hard to accurately pick the right investments at the right time. That’s not to say that some investors don’t get it right from time to time, but as an overall strategy, it’s likely not advisable.

If an individual is skittish about investing, their anxiety makes sense in light of the dramatic market ups and downs many have witnessed in the past two decades. But trying to time the market doesn’t work. Instead, investing in a diversified portfolio can be a good step toward building individual wealth.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

Sep

2023

How to Invest in Opportunity Zone Funds

By Brian O'Connell | Growing Wealth, invest, Investing | Comments Off

The Qualified Opportunity Zone program is an initiative aimed at incentivizing investors to allocate cash to economically distressed communities who could benefit from the capital.

The Qualified Opportunity Zone program, highlighted by the Community Development Financial Institutions Fund, was rolled out as part of the 2017 Tax Cuts and Jobs Act. The program allows some U.S. investors to offset capital gains taxes under certain conditions by investing in some communities.

What Is an Opportunity Zone Fund?

Opportunity Zone (OZ) Investment Funds are a type of alternative investment fund that offers capital gains tax relief for some investments aimed at revitalizing communities. Opportunity Zones represent what the Internal Revenue Service calls an “economic development tool,” designed to accelerate economic development and job creation in economically struggling U.S. communities.

The Treasury Department determines eligible Opportunity Zones, of which there are thousands spread across the United States. Corporations or partners establish an Opportunity Zone Fund and use it to invest in properties located in a recognized opportunity zone.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

How to Invest in a Qualified Opportunity Zone Fund

To take advantage of the tax-efficient investment benefits of OZ investing, interested partners must first register as a corporation or partnership, complete IRS form 8996, and file the form along with their federal tax returns. After gaining approval by the IRS, the fund must commit at least 90% of its assets to a specific Opportunity Zone. Once that threshold is cleared, the QOF is eligible for capital gains tax relief.

Qualified Opportunity Fund Investment Requirements

The money that Qualified Funds invest in distressed communities must also fit the Treasury Department’s criteria of an Opportunity Zone investor.

• The Fund must make significant upgrades to the community properties they invest in with fund dollars.

• The investment must be made within 30 months of becoming eligible as a Qualified Opportunity Fund.

• The investment must meet specific Treasury Department financial investment standards. In other words, the investments made in community properties must be equal or superior to the original value paid by the Opportunity Zone investment fund. For instance, if an Opportunity Zone Fund purchased a distressed property for $500,000, that investor has the 30-month window to steer at least $500,000 into the Opportunity Zone property improvements.

• Some Opportunity Zone properties qualify for opportunity funds (private and multi-family homes, business settings and non-profit properties) and some don’t. For example, golf and country clubs, liquor stores, massage parlors, and gambling facilities do not qualify as Opportunity Zone investments.

• The investor must commit to a timely investment in Qualified Opportunity Funds – the longer the time, the bigger the capital gain deferral. The IRS says the tax deferral may last until the exact date on which the Qualified Opportunity Fund is sold or exchanged, or by December 31, 2026. By law, the investor has 180 days from a capital gains sales event to turn those gains into an Opportunity Zone investment.

• The funding program is tiered, with a 10% tax exclusion offered to investors who hold a Qualified Investment Fund investment for at least five years. If the investor holds the investment for seven years, the tax exclusion rises to 15%. If the investor stays in for 10 years or more, the IRS allows for an adjustment based on the amount of the QOF investment based on its fair market value on the exact date the investment is sold or exchanged. Any appreciation in the fund investment isn’t taxed at all, according to the IRS.

• Opportunity Zone investors don’t have to physically reside in the communities they financially support, nor do they have to hold a place of business in that community. The only criteria for eligibility is making a qualified financial investment in an eligible, economically distressed community and the ability to defer the tax on investment gains.

Opportunity Zone Investment Considerations

Investors looking to defer capital gains taxes may view Qualified Opportunity Funds as an attractive proposition. Before signing off on any Opportunity Zone commitments, however, investors may want to review some key facts and investment risks worth keeping in mind when investing in OZs.

Real Estate as an Investment

Since Opportunity Zone funding focuses on distressed communities, most investments are real estate oriented, making it an alternative investment that may be part of a balanced portfolio. Typical Opportunity Zone investments include multi-family housing, apartment buildings, parking garages, small business dwellings/strip malls, and storage sheds, among other structures.

Recognize the Up-Front Cost Realities

Opportunity Zones are a high priority for public policy administrators, which is one reason QOFs require high minimum investments. Up front minimums of $1 million aren’t uncommon with Opportunity Zone Funds, and investors should know that going into any funding situation. In most cases, that means that accredited investors are more likely than other individuals investors to take advantage of OZ investing.

Your Cash May Be Tied up for a Long Time

To optimize the capital gains tax break, Opportunity Zone investors should count on their money being tied up for 10 years. Funds need that time to collect and disseminate cash, choose the appropriate potential properties for investment, and conduct the actual remodeling or upgrades needed to turn those properties into profitable enterprises. Thus, lock-up timetables can go on for a decade or longer.

Management Fees Can Eat into Portfolio Profits

Like any professionally managed financial vehicle, Qualified Opportunity Funds come with investment fees and expenses that can cut into profits. While many investors opt for Opportunity Zone investments for the tax breaks, those investors may also expect their investment to generate healthy returns. To get those returns, they can expect to pay the fees and expenses associated with any professional managed investment fund.

The Takeaway

Investing in Opportunity Zone funds allows some U.S. investors to offset capital gains taxes under certain conditions by investing in some communities. These funds are a type of alternative investment that may be an attractive addition to a portfolio.

Above all else, Opportunity Zone funds come with a healthy measure of risk, including investment risk, liquidity risk, market risk, and business risk. While the promise of a tax break and the opportunity to boost worn-down U.S. communities are appealing, any decision to invest in Opportunity Zones should be made with the consultation of a trusted financial advisor –- ideally one well-versed in tax shelters and real estate investing.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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Pros & Cons of Using a Moving Average to Buy Stocks

What Is a Moving Average?

Types of Moving Averages

Simple Moving Average:

Weighted Moving Average

Exponential Moving Average:

Why Would an Investor Use a Moving Average?

Pros of Using a Moving Average

It smooths the data.

It’s a simple gauge.

Easy to calculate.

Cons of Using a Moving Average

They’re not predictive.

There’s a lag.

There’s trouble with price turbulence.

Weighted moving averages may send false signals.

The Takeaway

What Happened During Tulip Mania?

What Was Tulip Mania?

What Really Happened During Tulip Mania?

Tulip Mania Bubble Burst

What Tulip Mania Reveals About Financial Markets

The Takeaway

What Is a Leverage Ratio?

How to Calculate Leverage

Debt-to-Assets Ratio

Debt-to-Equity Ratio (D/E)

Asset-to-Equity Ratio

Debt-to-Capital Ratio

Degree of Financial Leverage

Consumer Leverage Ratio

Ways to Use Leverage Ratio Calculations

How Lenders Use Leverage Ratios

How Leverage is Created

The Takeaway

Is Stock Market Timing a Smart Investment Strategy?

Why Timing the Stock Market Doesn’t Work

Fear and Greed in Investing

Why It May Be a Good Idea to Invest Immediately

Consider Investing as Early as Possible

Percentage of Retail Investors in Stock Market

The Takeaway

How to Invest in Opportunity Zone Funds

What Is an Opportunity Zone Fund?

How to Invest in a Qualified Opportunity Zone Fund

Qualified Opportunity Fund Investment Requirements

Opportunity Zone Investment Considerations

Real Estate as an Investment

Recognize the Up-Front Cost Realities

Your Cash May Be Tied up for a Long Time

Management Fees Can Eat into Portfolio Profits

The Takeaway

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