I’m thankful for you, reading this article. But I’m also thankful for turkey and potatoes and pecan pie. And in the spirit of Thanksgiving dinner, I’d like to serve you with a smorgasbord today. The appetizer comes from the engineering world. The main course brings in investing. And for dessert, I added a quick calculator to consider the risk of COVID at your Thanksgiving dinner.
Low and Slow
I’m a mechanical engineer. In the engineering sub-field of heat transfer, there’s an important quantity called the Biot number. The Biot (bee-yo) number compares the way heat enters a body at its surface against the way that heat travels through the body.
That might not make sense to you. That’s why the Biot number needs to be explained using food!
Why do we cook pizzas at 900ÂºF for 3 minutes? Great question, especially when compared against cooking turkeys at 350ÂºF for multiple hours.
Pizza has a small Biot number. It has a large surface area compared to its volume—it’s very thin. Any energy added to the pizza at its surface will quickly propagate to the center of the pie.
But turkey has a large Biot number. It’s roughly spherical, so its ratio of volume to surface area is vastly larger than a pizza’s. It takes time for energy added at the surface of the turkey to propagate to the center of the turkey.
And then there’s the matter of mass. This is separate from the Biot number, but equally important. Cooking a 20-pound turkey will take longer than cooking a 1-pound pizza. That’s easily understood. Heavy stuff takes longer to warm up.
Potatoes and Pumpkin Bread
Why do I have to bake pumpkin bread at 325ÂºF for an hour? Why can’t I bake it for 450ÂºF for 40 minutes? Or in a pizza oven, at 900ÂºF for a few minutes?
I don’t recommend it, but it’s an experiment you could conduct yourself. You’d find that you’d overload the exterior of the loaf with heat before giving that heat enough time to propagate to the center of the loaf. The outside burns. The inside remains raw. And everyone’s sad at the lack of pumpkin bread.
The more cubic or round or dense a food is, the more low-and-slow the cooking or baking will be. This applies to loaves of bread, cakes and pies, or dense cuts of meat. A meat smoker might run at 225ÂºF all day.
If a food is flat or thin or narrow, it can probably be cooked high and fast. Pizzas, bacon, stir fries all apply. Lots of surface area and lightweight.
But what about mashed potatoes? We only boil potatoes at 212ÂºF degrees for 15 minutes. That’s way colder and shorter than a turkey or pie. And potatoes are reasonably dense. What gives?
The answer is that water transfers heat more effectively than air. That’s why 60ÂºF air feels temperate to your skin, but 60ÂºF degree water is frigid. That’s why you can stick you bare hand in a 400ÂºF oven (for a few seconds), but sticking your hand in boiling water (212ÂºF) will scald you. Water moves heat better than air.
And moving or flowing fluid transfers heat better than stagnant fluid. This is why cold winter air has a “wind chill” factor—the blowing cold air removes more heat from your skin that stagnant cold air. And those Thanksgiving potatoes are surrounded by boiling and roiling water. They cook quickly.
Invest Like a Turkey
Enough engineering. Let’s bring it back to money.
You can approach investing like baking a pizza. Or you can invest like you would cook a turkey. I recommend the turkey version.
You can (try to) pick stocks that will double overnight. Or you could explore exotic asset classes with promises of “going to the moon.” You can even borrow money—or leverage—to further extend your investments. This is investing like a pizzamaker. It’ll be hot and fast and potentially over in five minutes.
But sadly, historical context provides ample data suggesting that pizza investing is not effective. Hand-picking stocks has more risk than reward. Short-term flips are closer to gambling than to investing.
That’s why you should invest like a turkey. Low and slow and long-term. Check on your progress occasionally. Adjust your timeline if needed. A half-cooked turkey does not resemble your final product, just like a half-funded portfolio can’t support your retirement. But mostly, stay on plan and trust the process. Plan for the long-term and let time take care of the rest.
Use last week’s retirement calculator to plan for the long-term…starting with your savings goal for 2021.
A Plate Full of Stuffing
And speaking of Thanksgiving, ensure that your investing portfolio resembles a Thanksgiving plate: diverse and well-balanced.
Could you imagine eating 1500 calories worth of gravy? Well, maybe. But it would be accompanied by plenty of turkey, stuffing, cranberry sauce and potatoes, too. You can even fit in a slice of something exotic, like pecan pie.
Similarly, a well-balanced investment portfolio reduces your risk from being over-exposed to any single asset type. I described my personal choices in my “How I Invest” article. But there are many ways to skin a turkey, and many ways to diversify a portfolio.
Will Your Turkey Get COVID?
Everyone seems to be all huffy about gathering for Thanksgiving. So-called “experts” are saying the holiday will act as a super-spreading event for COVID. First, Starbucks cancelled Christmas. And now China is cancelling Thanksgiving? What’s up with that?!
Don’t be an ignoramus. For most of the United States, a gathering of 10 or more people has a higher than 50% chance to contain at least person who is positive for COVID. Re-read that sentence.
If you’re going to gather for Thanksgiving, it’s helpful to understand the risk involved. For some, the risk is small and reasonable. For others, the probability of COVID being at your gathering will easily surpass a coin flip.
The following calculator is a simple, first-order estimate. It provides an example of how probabilities work. There’s more explanation after the calculator.
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I’m not an epidemiologist or virologist. Please take this math at face value. If an area has a positive infection rate P, then then odds of a person being negative is 1-P. The odds that all N people at your gathering are negative is (1-P)^N. Therefore, the odds of at least one positive case at your Thanksgiving gathering is 1-(1-P)^N.
I recommend looking up your area’s positive case rate here—COVID ActNow. Now, a large positive test rate is just as indicative of insufficient testing as it is of high infection rates. If you only have enough test supplies to test the sickest people, then you’re likely to have a higher rate of positive infections. More reading here from a guy named Johns Hopkins.
So feel free to play around with the infection rate. The true infection rate of an area is likely lower than what’s reported on COVID ActNow.
Keep Grandma healthy!
Thanks a ton for reading the Best Interest. I try to stuff this blog full of fun and helpful information, and having wonderful readers is the gravy on top.
I wish you a happy and healthy Thanksgiving. And don’t burn the pumpkin bread!
If you enjoyed this article and want to read more, Iâd suggest checking out my Archive or Subscribing to get future articles emailed to your inbox.
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Ever since the Financial Crisis of 2008, gold has become an increasingly popular investment choice. Many people see gold as safer than investing in the stock market, and it can be a good way to…
The post 7 Best Gold IRA Companies of 2021 appeared first on Crediful.
Short term investments are those investments that can yield their returns within a short period of time — usually within 1 to 3 years. (contrary to a long term investment such as saving for retirement).
In other words, short term investing are typically used to meet short-term financial goals (such as buying a house or go on a vacation).
A bank checking account is one of the best known and popular ways to save for such a goal.
But your traditional checking account only pays a meager return, if at all.
If you can’t find an alternative to a checking account, no need to fret.
There are plenty of short term investments that will help keep your money safe and earn a good return at the same time.
Below, we’ve curated the best short term investments to help reach your investment goals.
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Things to consider:
First thing first, before you make any short term investments, you should know about the risk, return and investing time frame of short term investments.
- Average return to expect: 1 to 4% per year;
- Risk: very low to low risk of losing money;
- Time frame: 0 to 3 years
Best short term investments:
If you’re saving and investing money for the short term, i.e., to use it as a down payment on a house, you will not invest that money in stocks or mutual funds, right?
That’s because, stocks are high risk investments. And if you need the money for a certain time, it might not be available due stock market volatility.
Instead, a smart choice is to save that money in a low-risk investment where you can protect the capital invested and earn interest/income at the same time.
If you have a different investing goal, such as saving for retirement, it’s best to look at stocks or mutual funds. Investing in stocks or mutual funds is considered a long term investment as opposed to short term investing.
If you’re interested in investing for the long term, here’s how the stock market works.
So, what are your options? Here are some of the best short term investments to consider to earn some interest on your money.
1. Savings account.
A savings account at a bank is an excellent choice. And they usually pay more interest than a regular checking.
They are quite safe. Savings account are insured by the FDIC, but only for up to $250,000.
That means if a bank goes bankrupt, the government will step up and give you your money back.
In addition, they are very liquid. You have access to your money fairly easy.
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2. Certificate of deposit (CDs).
If you want a good rate of return on money that you don’t plan on using within the next couple of years, CDs is a safe place to do invest it.
Banks sell certificate of deposit for a specific dollar amount and length of time. As an investor, you agree to leave a certain amount of money with the bank for a specific time.
When the time is up, the CD matures. Then, you get your money back, plus interest.
CDs are also FDIC insured for up to $250,000. They provide a safe and competitive yield. That makes them some of the best short term investments to consider.
The minimum deposit requires to open a CD depends on the bank. But it usually ranges from a few hundred dollars to thousands.
The CIT Bank is paying 1.30% for an 11-month CD. There is an opening minimum of $1,000. With most CDs, if you tap into your money before maturation, you will get hit with an early withdrawal penalty.
However, with this CIT Bank CD, there is no penalty if you withdraw early.
CIT Bank has various types of CDs. If you prefer longer terms CDs, check them out now at the CIT Bank website.
3. Money market fund
While you can keep your cash at a bank in a savings account because they’re safe there, you don’t have to.
You can try a money market fund. They are safe as well.
A money market fund is a type of mutual fund (but thy don’t focus on stocks or bonds).
Mutual funds companies such as Vanguard offer money market funds.
Money market fund is not insured by the government, so there is a possibility you can lose money. However, they are quite safe.
They’re safe, because they have a dollar invested in securities for every dollar you deposit in your fund.
The principal money you invested does not change in value. When you invest in a money market fund, you earn dividends. That’s a good advantage.
Another advantage of a money market fund as a short term investment is that it provides higher yield than bank savings account.
It also allows you to write checks without incurring any charges.
So, if you’re saving money for a home that you’re going to buy soon, a money market fund is a safe place to grow your money.
4. Short-term corporate bond funds.
Bonds, in general, are similar to CDs. An exception is that they, just as stocks, are securities that trade in the market.
So, they may fluctuate in value, but not as much as stocks.
Bond funds are a collection of bonds from companies (large, medium, or small) from different industries. Hence, the name “corporate bond funds.”
Investing in bond funds can be used as a short-term investment. Sometimes, investors consider corporate bond funds to diversify their investment portfolio.
Just like a money market fund, corporate bond funds are not FDIC insured. But they are just as safe as a money market fund.
Plus, you don’t just invest in one bond or two bonds. If one bond in your investment fund takes a hit, it only affects a small amount of your money.
So while they are riskier than money market funds saving accounts, CDs, short term corporate bonds pay you more. That makes them one of the best short-term investments out there.
5. Treasury bonds.
One of the best ways to invest money in the short term is to buy treasury bonds. Treasury bonds are issued by the U.S. government.
There are three types: treasury bills, treasury notes, and treasury bonds. They are like CDs. Once the bond matures, you get the full money invested, plus interest.
Treasury bonds may provide the same or a better interest rate than CDs. But a big advantage is that, while they’re not FDIC insured, they are backed by the U.S. government.
In other words, the government promises to repay your money, which is considered to be very safe.
So if you have more than $250,000, you should consider a treasury bond.
Another advantage is that while interest on a CD is fully taxable, Treasury’s interest is state-tax-free.
In conclusion, short term investments are those in which you make for a certain and short period of time for a specific goal.
Short term investments aren’t the best if you’re seeking high returns.
But if you’re a beginner investor you should consider placing some of your money into these best short term investments.
Remember: don’t invest your money in stocks when you plan to use it within the next five years, because a stock market drop can dry out your investment portfolio.
- The Best Ways to Invest $1000 For Good Return
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- How to Invest 100k to Build Real Wealth
Speak with the Right Financial Advisor
If you have questions beyond short-term investments, you can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc). Find one who meets your needs with SmartAssetâs free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.
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The contribution limits for the Roth IRA and Traditional IRA were just announced. Here’s what IRS limits are for the upcoming year.
The post Traditional And Roth IRA Contribution Limits Announced appeared first on Bible Money Matters and was written by Peter Anderson. Copyright Â© Bible Money Matters – please visit biblemoneymatters.com for more great content.
Inflation measures how much an economy rises over time, comparing the average price of a basket of goods from one point in time to another. Understanding inflation is an important element of investing.
The Bureau of Labor Statistics CPI Inflation Calculator shows that $5.00 in September 2000 has the purchasing power equal to $7.49 in September 2020. To continue to afford necessities, your income must pace or rise above the rate of inflation. If your income didnât rise along with inflation, you couldnât afford that same pizza in September 2020 â even if your income never changed.
For investors, inflation represents a real problem. If your investment isnât growing faster than inflation you could technically end up losing money instead of growing your wealth. Thatâs why many investors look for stable and secure places to invest their wealth. Ideally, in investment vehicles that guarantee a return thatâll outpace inflation.
These investments are commonly known as âinflation hedgesâ.
5 Top Inflations Hedges to Know
Depending on your risk tolerance, you probably wouldnât want to keep all of your wealth in inflation hedges. Although they might be secure, they also tend to earn minimal returns. Youâll unlikely get rich from these assets, but itâs also unlikely youâll lose money.
Many investors turn to these secure investments when they notice an inflationary environment is gaining momentum. Hereâs what you should know about the most common inflation hedges.
Some say gold is over-hyped, because not only does it not pay interest or dividends, but it also does poorly when the economy is doing well. Central banks, who own most of the worldâs gold, can also deflate its price by selling some of its stockpile. Goldâs popularity might be partially linked to the âgold standardâ, which is the way countries used to value its currency. The U.S. hasnât used the gold standard since 1933.
Still, goldâs stability in a crisis could be good for investors who need to diversify their assets or for someone whoâs very risk-averse.
If you want to buy physical gold, you can get gold bars or coins â but these can be risky to store and cumbersome to sell. It can also be hard to determine their value if they have a commemorative or artistic design or are gold-plated. Another option is to buy gold stocks or mutual funds.
Is gold right for you? Youâll need to determine how much risk youâre willing to tolerate with your investments since gold offers a low risk but also a low reward.
- Physical asset: Gold is a physical asset in limited supply so it tends to hold its value.
- Low correlation: Creating a diversified portfolio means investing in asset classes that donât move together. Gold has a relatively low correlation to many popular asset classes, helping you potentially hedge your risk.
- Performs well in recessions: Since many investors see gold as a hedge against uncertainty, it is often in high demand during a recession.
- No dividends: Gold doesnât pay any dividends; the only way to make money on gold is to sell it.
- Speculative: Gold creates no value on its own. Itâs not a business that builds products or employs workers, thereby growing the economy. Its price is merely driven by supply and demand.
- Not good during low inflation: Since gold doesnât have a huge upside, during periods of low inflation investors generally prefer taking larger risks and will thereby sell gold, driving down its price.
2. Real Estate Investment Trusts (REITs)
Buying real estate can be messy â it takes a long time, there are many extra fees, and at the end of the process, you have a property you need to manage. Buying REITs, however, is simple.
REITs provide a hedge for investors who need to diversify their portfolio and want to do so by getting into real estate. Theyâre listed on major stock exchanges and you can buy shares in them like you would any other stock.
If youâre considering a REIT as an inflation hedge youâll want to start your investment process by researching which REITs youâre interested in. There are REITs in many industries such as health care, mortgage or retail.
Choose an industry that you feel most comfortable with, then assess the specific REITs in that industry. Look at their balance sheets and review how much debt they have. Since REITs must give 90% of their income to shareholders they often use debt to finance their growth. A REIT that carries a lot of debt is a red flag.
- No corporate tax: No matter how profitable they become, REITs pay zero corporate tax.
- High dividends: REITs must disperse at least 90% of their taxable income to shareholders, most pay out 100%.
- Diversified class: REITs give you a way to invest in real estate and diversify your assets if youâre primarily invested in equities.
- Sensitive to interest rate: REITs can react strongly to interest rate increases.
- Large tax consequences: The government treats REITs as ordinary income, so you wonât receive the reduced tax rate that the government uses to assess other dividends.
- Based on property values: The value of your shares in a REIT will fall if property values decline.
3. Aggregate Bond Index
A bond is an investment security â basically an agreement that an investor will lend money for a specified time period. You earn a return when the entity to whom you loaned money pays you back, with interest. A bond index fund invests in a portfolio of bonds that hope to perform similarly to an identified index. Bonds are typically considered to be safe investments, but the bond market can be complicated.
If youâre just getting started with investing, or if you donât have time to research the bond market, an aggregate bond index can be helpful because it has diversification built into its premise.
Of course, with an aggregate bond index you run the risk that the value of your investment will decrease as interest rates increase. This is a common risk if youâre investing in bonds â as the interest rate rises, older issued bonds canât compete with new bonds that earn a higher return for their investors.
Be sure to weigh the credit risk to see how likely it is that the bond index will be downgraded. You can determine this by reviewing its credit rating.
- Diversification: You can invest in several bond types with varying durations, all within the same fund.
- Good for passive investment: Bond index funds require less active management to maintain, simplifying the process of investing in bonds.
- Consistency: Bond indexes pay a return thatâs consistent with the market. Youâre not going to win big, but you probably wonât lose big either.
- Sensitive to interest rate fluctuations: Bond index funds invested in government securities (a common investment) are particularly sensitive to changes to the federal interest rate.
- Low reward: Bond index funds are typically stable investments, but will likely generate smaller returns over time than a riskier investment.
4. 60/40 Portfolio
Financial advisors used to highly recommend a 60/40 stock-bond mix to create a diversified investment portfolio that hedged against inflation. However, in recent years that advice has come under scrutiny and many leading financial experts no longer recommend this approach.
Instead, investors recommend even more diversification and whatâs called an âenvironmentally balancedâ portfolio which offers more consistency and does better in down markets. If youâre considering a 60/40 mix, do your research to compare how this performs against an environmentally balanced approach over time before making your final decision.
- Simple rule of thumb: Learning how to diversify your portfolio can be hard, the 60/40 method simplifies the process.
- Low risk: The bond portion of the diversified portfolio serves to mitigate the risk and hedge against inflation.
- Low cost: You likely donât have to pay an advisor to help you build a 60/40 portfolio, which can eliminate some of the cost associated with investing.
- Not enough diversification: Financial managers are now suggesting even greater diversification with additional asset classes, beyond stocks and bonds.
- Not a high enough return: New monetary policies and the growth of digital technology are just a few of the reasons why the 60/40 mix doesnât perform in current times the same way it did during the peak of its popularity in the 1980s and 1990s.
5. Treasury inflation-protected securities (TIPS)
Since TIPS are indexed for inflation theyâre one of the most reliable ways to guard yourself against high inflation. Also, every six months they pay interest, which could provide you with a small return.
You can buy TIPS from the Treasury Direct system in maturities of five, 10 or 30 years. Keep in mind that thereâs always the risk of deflation when it comes to TIPS. Youâre always guaranteed a minimum of your original principal at maturity, but inflation could impact your interest earnings.
- Low risk: Treasury bonds are backed by the federal government.
- Indexed for inflation: TIPS will automatically increase its principle to compensate for inflation. Youâll never receive less than your principal at maturity.
- Interest payments keep pace with inflation: The interest rate is determined based on the inflation-adjusted principal.
- Low rate of return: The interest rate is typically very low, other secure investments that donât adjust for inflation could be higher.
- Most desirable in times of high inflation: Since the rate of return for TIPS is so low, the only way to get a lot of value from this investment is to hold it during a time when inflation increases and you need protection. If inflation doesnât increase, there could be a significant opportunity cost.
The Bottom Line
Inflation represents a real risk for investors as it could erode the principal value of your investment. Make sure your investments are keeping pace with inflation, at a minimum.
Inflation hedges can protect some of your assets from inflation. Although you donât always have to put your money in inflation hedges, they can be helpful if you notice the market is heading into an inflationary period.
The post 5 Best Hedges in the Face of Inflation appeared first on Good Financial CentsÂ®.
Rob discusses two basic approaches to rebalance your portfolio. The easiest approach is time-based and the second approach is market-based.
The post Time-Based vs Opportunistic Rebalancing appeared first on The Dough Roller.