Investing in REITs & Everything You Need to Know

It’s been a wild year for investors, with more uncertainty ahead. Now is a great time to learn the ins-and-outs of investing in REITS.

With the global economy destabilized and the vaccine deployed across the country for widespread distribution, investors worldwide are looking for opportunities that not only offer them a good store of value, but ideally, a steady and solid return.

Real estate is a historically high-performing investment

They need not look any further than REITs, which have consistently ranked among the highest return investments.

In fact, over the last 30 years across ten different investment classes, REITs have taken the #1 spot for highest returns eight times – more than any other asset class. For those years that they didn’t snag the #1 spot, they ranked second or third an additional six times.

This year proved to be a rough one for REITs, closing out at a net loss. But smart money knows that a down year can also be a prime entry point. After all, the goal is to buy low, sell high.

For the capitalist who sees the opportunity where others see obstacles, here’s the 360 on all things REIT.

What is a REIT?

REIT is an acronym for Real Estate Investment Trust.

In a nutshell, they are companies that pool investor capital to invest in real estate or real estate products. The gains on these investments are in turn distributed among shareholders.

REITs were defined and passed by Congress in 1960 under the Cigar Excise Tax Extension.

The idea was to give average Americans – who might not have the means to buy more than one property – the opportunity to take part in and enjoy the fairly consistent gains from real estate investments.

The act outlined requirements to qualify as a REIT under law. REITs are incentivized to meet these conditions through tax advantages. The big fish reward is that the company does not have to pay corporate taxes if they meet REIT qualifications.

REIT Qualifications

No corporation wants to pass up tax breaks. They’d rather hit these key numbers than rendezvous with the IRS come springtime:

75%

Percent of total assets invested in real estate, cash or U.S. treasuries. Also the percent requirement of revenue generated from real estate-related income such as mortgage interest rates, rent on property, or profit on real estate sales

90%

Amount of taxable income that is paid out to shareholders – a nice perk for investors, courtesy of Uncle Sam. HappyNest intends to pay out 100% of its net income to shareholders.

50%

The maximum amount of shares that can be held by 5 people or less. Coupled with this requirement is that within the first year of an REITs formation, it must have at least 100 investors in the pool.

3 Trillion

Estimated total value of assets currently held by REITs.

The Benefits Of Investing In REITs

Regular returns

Unlike many investments, investing in REITs typically produces regular income in the form of dividends generated from rent or mortgage interest payments.

Investing in REITs is accessible to the average person

While it would be great to be in a financial position to buy numerous properties and collect rent monthly, for most people, that’s simply not financially feasible.

REITs offer the ability to participate in real estate investing without having hundreds of thousands of dollars at the ready. With real estate investment apps like HappyNest, for example, investors can buy in with as little as $10.

Liquidity

Compared to traditional real estate investment property, buying into and selling out of most REITs is easier and more streamlined and requires a lot less paperwork.

Hands-free management

Ask any landlord and they’ll tell you – managing properties is a lot of work. Between filling vacancies, managing tenant requests and complaints, and building maintenance, a lot of time and money can go into the administrative side of real estate.

REITs handle the operational side of real estate investments, so investors can skip the 3 a.m. calls about plumbing issue emergencies.

REIT Taxonomy

Although it may seem difficult to understand all there is to know about investing in REITs, let’s start with the basic building blocks.

Remember in biology class when your teacher covered taxonomy trees? You know, kingdom, phylum, class, order, family, genus, species, etc.?

No? Okay, well, pay attention this time – there’s money on the line.

There are several categories…of categories…of REITs. Very meta, we know.

To make things a bit more digestible, it might help to start with a visualization, then get into the nitty-gritty.

If REITs were a taxonomy hierarchy, they’d look something like this:

REIT Taxonomy

Every REIT has a ‘class,’ ‘order,’ and ‘family’ component.

For example: American Tower Corp is a publicly-traded (class), equity-based (order) REIT that primarily manages telecommunication infrastructure sites (family) around the world.

 

Breaking Down The Taxonomy Hierarchy

Class: Investment acquisition strategy

REITs can be categorized by how they accrue capital for different forms of real estate investing.

They fall into three main categories: Publicly traded, public non-traded, and private.

Publicly traded

Publicly traded REITs trade on stock exchanges like the NYSE. Anyone can buy a slice of a real estate portfolio whenever they want.

Pros Cons
  • High degree of transparency
  • Registered with the SEC
  • Ability to generate a high amount of investment capital quickly
  • Easy to buy and sell (highly liquid)
  • Able to be grouped into ETFs. This means the value of the REIT’s share can be affected by the performance of other REITs and sectors as opposed to solely on the performance of the underlying portfolio.E.g.: If a REIT has a strong year but is grouped with low-performing REITs in ETFs, the REIT’s performance will be adversely impacted.
Public, non-traded

An REIT can be public without being traded on a stock exchange like the NYSE.

HappyNest falls into this category. Though anyone can buy shares of our portfolio of properties, the shares are not listed on the NYSE or anywhere else. We see this as an advantage – and 2020’s bottom lines back us up.

This year, the value of the properties in our portfolio appreciated. But not every sector of the real estate market was quite so lucky.

Had our REIT been publicly traded on exchanges, it’s likely it would have been grouped into other REIT ETFs. Because of this grouping, our returns would have been smaller. It’s the stock market equivalent of “guilty by association.”

Instead, our performance is tied directly to and only influenced by the appreciation of the properties in our portfolio, all of which gained this year.

Pros Cons
  • Registered with the SEC
  • Performance of investment tied to underlying asset value alone – insulated from swings in the market at large
  • Ability to quickly raise capital from investors since anyone can buy in
  • Not bought and sold as quickly (less liquid)
  • Less transparent, harder to tell share value
  • Fees
    *(HappyNest does not charge for broker commission of platform fees)
  • Information provided to the SEC may not be independently verified
Private REITs

Private REITs are not listed on exchanges and not offered to the public. As the name implies – they aren’t open to everyone.

Private REITs are not required to register with nor report to the SEC. More often than not, they are only offered to “accredited” investors, otherwise known as very wealthy people that can take the kinds of financial gambles and hits that would put the rest of us on the streets.

Though private REITs have produced higher returns than publicly traded ones, they come with significant risk. Without an SEC registration, there is little to no oversight on their performance and operations. That makes these kinds of REITs particularly susceptible to fraud.

Management fees can be high and unsubstantiated. Investors must put their full trust into the board of trustees.

Pros Cons
  • Potentially higher returns compared to traded REITs
  • Partially insulated from stock market fluctuations
  • Lack of transparency
  • Must be “accredited” investor
    *net worth of $1 million, not including primary residence or income of $200K+
  • Not registered with the SEC
  • High management fees
  • Can require long holding periods (low liquidity)

Class: Type Of Asset Managed

The ‘class,’ (in our REIT taxonomy hierarchy) is the type of real estate assets managed by that REIT. These primarily fall into two categories:

  • Equity

    An equity ‘class’ REIT owns real estate investment properties. The REIT manages, buys and sells, or collects rent from those properties.

    They generate income and profits via market appreciation of their assets. That could include things like rent payments from properties they own outright or a rent payment that exceeds their own mortgage payment on that property.

    For example: An REIT buys a property for $100,000. Their mortgage payment is $1,500 a month. They are able to rent it out for $2,000 a month. That $500, minus overhead expenses, is profit for the REIT – 90% of which must be paid back to shareholders by law.

  • Mortgage-based

    Mortgage-based REITs provide capital to borrowers much like a bank does. They generated returns via interest paid by the borrower during repayment.

Unlike the ‘order’ (investment acquisition strategy) which is either/or, asset types can be diversified within an REIT.

Two Harbors Investment Corp, for example, engages in both mortgage-backed securities as well as owns a portfolio of properties. Its income is generated by a combination of rent, asset appreciation, and interest paid on mortgages it holds.

Family: Real Estate Sectors

Lastly, within the real estate market, there are sectors.

Examples of real estate sectors include:

  • Residential
  • Commercial
  • Retail
  • Industrial
  • Healthcare facilities
  • Data centers
  • Telecommunications infrastructure

The sector in which a REIT operates can have a huge impact on the bottom line, and the performance of each sector can vary year over year.

A retrospect of 2020 demonstrates just that. As millions of workers across the world were sent to work from home, office buildings and retail storefront worldwide stood empty as leases lapsed and were not renewed.

As a result, office REIT’s year ended with a net loss of almost 20%. Around this time last year, office REIT investors were celebrating 30%+ returns.

Meanwhile, e-commerce demand skyrocketed. In May of this year, even fast shipping MVP Amazon had to remove non-essential items from its 2-day prime delivery schedules.

All that demand meant the need for shipping fulfillment centers, part of the industrial sector, increased significantly. HappyNest has an industrial property in its portfolio, currently leased by shipping logistics company FedEx, that is enjoying this appreciation.

Choosing The Right REIT For Your Investment

At the end of the day, every investor wants to protect the value of their investment and gain a little alpha along the way.

Though 2020 wasn’t the best year for REITs as a whole, some sectors thrived. Even for those that didn’t, as the old saying goes: Buy low, sell high. The dip in performance could prove to be a great entry point. REITs have historically outperformed stocks and other asset classes consistently.

Successful REIT investments are often the product of accurate predictions of what comes next.

HappyNest remains confident in its portfolio of properties’ ability to weather – and even thrive – in the upcoming year. Are you ready to start investing in REITs?

 

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5 Real Estate Market Predictions For 2021

Well, we think everyone can agree that 2020 was full of surprises.

This year spared no industry from a barrage of audibles, the full impact of which remains to be seen. As the year draws to a close, it’s about that time of year to look back at trends that emerged and make predictions about what comes next.

Longstanding real estate market trends that had held steady for over a decade saw sharp reversals. But are these circumstantial blips on the radar, or harbingers of a societal restructuring?

We look for clues to forecast real estate market trends of 2021.

Rent in big cities will drop

Up until this year, rents across the nation had been climbing steadily higher quarter over quarter for almost ten years. 2020 interrupted that: Rental prices in some of the hottest housing markets cooled in the second half of the year..

There were two key catalysts for the drop. Firstly, a huge portion of the workforce went home. For the first time, employees were longer restricted to a radius close enough to the office for a daily commute. Secondly, interest rates dropping to zero made loans cheaper for prospective home buyers.

For the first time in their lives, Millennials will experience a renter’s market.

A renter’s market goes hand in hand with an investment property buyer’s market.

“In places like Manhattan, many buyers have been priced out over recent decades,” says Jesse Prince, Founder and CEO of HappyNest, a real-estate investing app.

“The impacts of COVID may present unique buying opportunities for those risk-tolerant operators willing to bet that effective vaccines are right around the corner, large corporations will begin to repopulate the urban core office markets in the near-term, and business will rapidly return to normal.”

Buyers who picked up rental investment properties during the housing market dip of 2008 enjoyed decade long gains. History might be repeating itself.

Office space will be converted to residential units

Big city landlords aren’t the only ones poised for a tough year. Urban flight could have consequences on commercial real estate owners too. Thousands of businesses went bankrupt this year; needless to say, they won’t be renewing their leases. Many companies that were better fortified to withstand the turbulence of 2020 announced that their employees can remote work permanently, including headcount heavyweights like Google, Shopify, and Nationwide.

Others welcomed the elimination of a recurring lease expense on their P&L – especially those who found their teams were just as productive at home.

Presumably, the combination of these three factors will leave a dent in the demand for office leases. The question is – how big of a dent?

“Whether or not the current trend of urban flight will reverse in the post-pandemic New World remains up in the air – a risk factor that shouldn’t be ignored by developers underwriting any new projects,” Prince says.

Even prior to the Work-From-Home Revolution, the transition from suit to sweats was well underway. According to a research report by GetApp, between 2010–2019, the number of remote employees surged 400%.

Landlords in the right municipal zoning might consider converting their buildings into mixed-use, work-loft properties to fill vacancies faster.

“Converting underutilized office space into mixed-use properties is by no means a new strategy, one that proved effective in several urban markets during the recovery from the Great Recession.” Prince says.

The months following widespread vaccination will be critical gauges on COVID’s impact on office space demand in the coming years. For opportunistic investors, it could also be a rare ‘buy the dip’ opportunity in the commercial office real estate market.

Increase in demand for flexible lease office spaces

Business owners in new or long-term leases found themselves stuck paying for offices they weren’t using for the lion’s share of the year.

As leases draw to an end, business owners across the country will be asking themselves: What value does a shared working environment bring my company and my employees?

In a survey done by Publicis Sapient, only 15% of respondents said they wanted to return to the office full time, 21% said they preferred to work remotely full time, while 64% said they’d prefer a hybrid model with some days in office and some days remote.

Some of those employees just might get their wish.

Workshare spaces are intuitive solutions for what many experts are calling the rise of the Hybrid Work Model. As such, they could stand to benefit as the economy emerges from lockdown – especially in the early phases of reopening.

Businesses, smaller ones in particular, will appreciate the savings on overhead expenses without passing up the benefits of strong team relationships and in-person collaboration.

Other companies endured major economic blows in 2020, and were forced to downsize as a result. A return to a half-full office might prove demoralizing and warrant a location change either way.

With uncertainty still ahead, they may opt for short-term, low-risk leases and smaller spaces until things stabilize.

All of these circumstances could translate into new demand for workshare spaces as a byproduct of the pandemic.

Industrial real estate are poised for double digit growth

2020 brought record growth in the e-commerce sector as stay-at-home orders and pandemic fears made doorstep deliveries the primary means of acquiring goods for large sects of the public.

Though the reopening of retail locations may trigger a pullback in e-commerce activity worldwide, it’s unlikely to fully recede to pre-pandemic levels. Its convenience and wide product availability is sure to have won over former holdouts.

Even prior to 2020, e-commerce was experiencing healthy growth year over year – the pandemic only gave it a boost on its trajectory.

All those orders need to be processed, filled, and shipped from somewhere. That’s why industrial real estate, fulfillment centers in particular, are slated to be big winners for years to come.

“It often pays to follow the money. Goldman Sachs, and other institutions, have started taking large positions in industrial assets,” Prince notes.

Unlike other types of real estate markets, the upside is all but guaranteed. Major retailers including Amazon, Home Depot, Chewy, and Lowe’s have already announced plans to open fulfillment centers.

That makes the industrial sector a highly attractive investment property option with low-risk tenants.

“Industrial services have proven themselves essential during the pandemic. From a cash flow perspective, the risk that your tenant won’t pay their rent is reduced significantly,” Prince adds.

Purchasing industrial real estate as an investment property is out of reach for many investors. But you can enjoy the upcoming gains with whatever capital commitment fits your budget through crowdinvesting apps like HappyNest, which has a fulfillment center currently leased by FedEx in its portfolio of properties.

Housing market will continue to gain value

Months-long lockdowns raised some big questions for city renters, who had mostly seen their apartments as places to sleep, change, and store things.

Prior to 2020, they willfully made concessions in square footage to be in the middle of the big city action.

But after just one month of sharing a 300-square-foot apartment in lockdown, ‘home’ began to feel like a prison cell. Suburbia and small town America never looked so good…and spacious.

Renters leaving the city for some peace and quiet is good news for the housing market. As demand for single-family homes increased in suburban areas, so too did housing prices. Some areas hit record highs.

“People are fleeing urban markets in search of more space for them and their families. It no longer makes sense to pay $5,000+ for a two-bedroom apartment during a lockdown,” Prince notes.

Interest rates are expected to remain low through Q1 of 2021, further stimulating the hot housing market. That will help prospective buyers offset the rising list prices of homes.

“Markets are super tight because building has slowed down while demand has increased. High demand coupled with low interest rates are a recipe for higher home values and top dollar for sellers.”

The 2020s

With the pandemic yet to be fully behind us, these real estate market predictions are based on trends we already saw emerging in 2020.

The vaccine has the finish line in sight, and the post-pandemic world may finally arrive in 2021.

But if 2020 taught us anything, it’s to always keep our heads on a swivel.
 

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Think outside the stock market: 5 alternative investments for 2021

At the risk of sounding basic, we’re going to go ahead and restate an investing 101 bedrock principle: Diversify your portfolio. Those early in their investment journey might take that to mean buying stocks from a few different companies whose operations are uncorrelated.

But that would amount to a basket with some different colored eggs in it – all still bound to the fate of the basket.

Though the stock market is indisputably the greatest wealth generation machine of all time, the rise of algorithmic trading has tangled the performance of individual companies to the market at large.

That’s why investors are looking to diversify their portfolio not only within the stock markets, but in alternative investments.

What are alternative investments?

It’s easier to characterize alternative investments by what they are not. They are not cash, public stocks, and bonds. Consequently, they are generally characterized as less liquid and long term strategies.

On the upside, they open numerous avenues and opportunities ranging from safe investments with steady yield to high risk-investments with potentially quit-your-job returns. But where to start?

“I’d really break [alternate investments] down to four main sub equity classes, so: private equity, private real estate, private credit, and hedge funds,” says Kristin Olson, the global head of Alternative Capital Markets Group for Goldman Sachs.

“Last year, 2019, was frankly a record year for us in terms of capital commitment to alternatives for our clients.”

The great migration

There are several warning signs flashing that the stock market is in risky territory – from the concentration of investment in FAANG stocks making the market wobbly and top heavy, to runaway valuations that even healthy growth and scale would fail to justify.

While the stock market doesn’t always align with the books, the situation has made smart money just a tad uneasy.

Smart money (i.e., the big dogs with deep pockets) have already been making moves into alternative investments to hedge against risk.

In fact, in October 2020, BlackRock – the world’s largest asset manager – advised investors to reorganize their portfolios from a 60-40 stock-to-bond ratio to incorporate alternative investments at 50/30/20 (stocks/bonds/alternatives).

Perhaps it’d be prudent to follow suit.

Types of Alternative Investments

Private equity investments
Barrier of entry: High
Risk factor: High
Potential returns: Max

Embrace your inner hipster: Find the next big thing before it goes mainstream.

The sharks (you know, Mr. Wonderful, Mark Cuban, and so on) on Shark Tank are all making private equity offers and deals with the budding entrepreneurs presenting to them.

That’s private equity investing 101.

The key differentiation between private equity and publicly traded stocks is that stake in the company is not available to just anyone.

And just like the sharks, private equity firms generally invest in startups, privately held companies, and companies in distress.

They provide the capital the company needs, either to scale or overcome an obstacle, as well as ‘business management services’ (for better or for worse).

At the end of the day, the goal of private equity investment is to generate value and return for investors – and a lot of it.

The good news is, according to global capital management firm Bain & Company, private equity investments have generated a 60% higher return on investment compared to the S&P 500 over the last 30 years.

The bad news is that unless you spend your Wednesday afternoons on the golf course, private equity might be prohibitively expensive to get into.

A $250,000 would be on the lower end of the entry price to go through an institution – and to be properly ‘accredited.’ But keep in mind: that buy in is still the coach class, boarding group C of private equity.

Hedge funds
Barrier of entry: High
Risk factor: Medium
Potential returns: High

Hedge funds are similar to private equity. They pool investors’ money and make strategic deals they’re betting will produce return. They’re also similar in that they require investors to be ‘accredited’ (read: a certified rich person).

Like private equity, a $250,000 minimum investment is par for the course and can run many times higher depending on the firm.

The key differentiator between hedge funds and private equity is the types of asset investments they make.

Like private equity, hedge funds also buy stakes in private companies. But hedge funds investment strategies are more diversified.

They also invest in public companies, real estate, and tangible commodities that appreciate like gold, fine art, wine, and collectibles (rumor has it the hedge fund manager who bet big on beanie babies in the ‘90s is no longer in the business).

Big hedge fund managers are the celebrities of Wall St. – Ray Dalio, George Soros, and Bill Ackman. Those with the means to buy into their exclusive club can ride their coattails into the sunset.

Warren Buffett, is not a hedge fund manager. What makes him different? Unlike hedge funds, the average investor can ride his coattails…by buying public shares in his company Berkshire Hathaway – no ‘accreditation’ required. No wonder he’s America’s favorite billionaire.

But if you can swing it and meet the accredited investor criteria, hedge funds tend to be pretty hands-off and safe investments.

Private real estate investment group
Barrier of entry: High
Risk factor: Low
Potential returns: Above average

Like private equity, the real estate market has also outperformed the stock market on returns for investors over the last few decades.

However, unlike private equity, investing in real estate doesn’t have the same barriers of entry thanks to technology services and crowdfunding.

HappyNest, for example, allows investors to buy in for as low as $10. HappyNest and other private real estate investment groups buy, manage, and sell properties. By investing in HappyNest, the investor becomes a partial owner of these properties and their shares appreciate in tandem with the real estate’s value.

Real estate is widely considered to be a safe and reliable investment over time. Private real estate investment group investments are also insulated from stock market volatility since the aren’t caught up in EFT and other stock collectives.

Private credit: Peer-to-peer lending and crowdfunding
Barrier of entry: Low
Risk factor: Above average
Potential returns: Above average

Peer-to-peer lending cuts the middle man (i.e., the bank) out of lending.

Through platforms like Lending Tree or Peerform, you can lend money (investment) to a person or a business. Then, you play banker and charge interest on repayment.

The returns on private debt can be high – in the double digits.

But for every yang, there’s a yin. High potential returns come with high potential risks.

Applicants’ risk profiles oftentimes do not meet the loan criteria for standard banks. That’s something the private lender (you) have to be willing to take on. If the borrower defaults, well, c’est la vie.

That being said, peer-to-peer lending as an alternative investment strategy tends to perform better in economic downturns. That’s because banks become more risk averse and tighten their lending criteria.

In a study released in August of this year by MarketWatch, the peer-to-peer industry was projected to grow by 30% – a sign that investors aren’t quite bearish on this alternative investment strategy just yet.

It’s also worth noting that the industry as a whole saw a high growth period after the Great Recession of 2008 as the credit markets recoiled.

That could mean that 2021 might shape up nicely for those with a bullish risk tolerance.

Alternative and foreign currencies
Barrier of entry: Low
Risk factor: Above average
Potential returns: Above average

The dollars’ value is only defined relative to foreign currencies. Since its March 2020 highs, the value of the dollar has lost 9% of its buying power  –  just eight months later.

That’s bad news for savers – and the catalyst for investors scrambling to find stable, alternative currencies, especially trillions of freshly printed dollars begin circulating.

Little problem though: The entire global economy is in a state of flux. It’s hard to tell which country’s economy (and by extension, currency) will stabilize first.

Some countries’ look poised for a quicker economic recovery than others. Their currencies could gain value against the dollar and into your portfolio.

There’s also the phenomenon of cryptocurrencies.

Once considered somewhat of a joke by big-name investors, the attitudes around Bitcoin and other digital currencies has taken a drastic turn in 2020.

With global markets volatile and the future opaque, a currency independent politics, governments, and stock markets look pretty appealing nowadays.

There is no doubt Bitcoin and cryptocurrencies are gaining traction. Major companies like Microsoft, Shopify, Amazon (through a third-party app) now accept Bitcoin, with more on the way.

PayPal plans to roll out Bitcoin and other cryptocurrencies on it’s apps (including ultra-popular Venmo) in 2021.

The upside to foreign and cryptocurrencies compared to other alternative investments is that it is highly liquid. You can also invest just a few dollars if you want to, so the commitment level is low.

Will 2021 be the year that Bitcoin and cryptocurrencies become the global currency standard?

That could be a multi-million dollar question.

Looking ahead to 2021

While no one really knows what the future holds, everyone’s bracing for some choppy waters ahead. That warrants branching into investments outside of the stock market and other traditional investments.

The world is eager to get back to normal. But as events continue to unfold, it’s becoming increasingly probable that ‘normal’ might look a little different in 2021. Some of the changes brought on this year are fundamental, long-lasting shifts.

And where there are shifts, there are usually some millionaires in the making.
 

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Parents, It’s Your Responsibility to Teach Your Kids Financial Literacy

Parents, it’s your responsibility to teach your kids financial literacy or they’ll have to learn the hard – and expensive – way

Parents want what’s best for their kids, especially in regards to their future.

What a shame then, that one of the most highly correlated predictors of success in adulthood is one of the least talked about topics in the world of parenting – financial literacy for kids.

Financial literacy is on the decline

Financial literacy in the U.S. has been on the decline for the better part of two decades. The consequences of that have been the stuff of headlines.

The problem is likely to get worse: A study released earlier this year by the TIAA found that only 16% of Millennials qualify as financially literate.

And it costs them dearly….literally. On average, millions over the course of their lifetime.

But where there is a problem, there is an opportunity. In this case, that opportunity is that a comprehensive financial education becomes a strategic advantage in life.

After all, who wouldn’t want to give their sons and daughters a leg up over 84% of the population?

We all know things aren’t getting any easier – let alone what the future holds.

Don’t rely on school to teach kids about financial literacy

Only 21 states in the U.S. require personal finance coursework in public schools. Believe it or not, that’s actually a significant improvement from just two years ago.

Still, most requirements are minimal. A majority of states have no curriculum in financial literacy at all.

Like it or not, the reality is that the responsibility of financial literacy for kids falls squarely on their parents.

Financial education in the school of hard knocks

Most people earn their financial education the hard way: A slow, painful process in the strict and unforgiving classroom of the real world.

Lessons here come at a hefty price: deflated credit scores that haunt for seven years, debt that seems to never go down despite monthly payments (that aren’t always easy to make, especially in early adulthood), and tricky ‘offers’ that are essentially financial booby traps.

But in the depths of the convoluted fine print, most of these ‘offers’ capitalize on money management blindspots.

In recent years, the world of finance has grown even more labyrinthian – predatory even. Many products are specifically designed to exploit (and profit) from widespread gaps in financial literacy.

It’s a cruel and costly learning curve.

But parents who understand the importance of financial literacy for kids can flatten that curve. They can introduce basics on how to manage money at an early age. Then they can build on that foundation with more sophisticated concepts over time.

Financial literacy during the Wonder Years

Explaining how indexed annuities work to a 2nd grader will unsurprisingly be met with blank stares. But there’s no reason we shouldn’t expect the same from a young adult who hasn’t learned foundational concepts like investing, compound interest, and the importance of taxation timing.

Of course, not all at once. But the earlier a financial education framework is introduced, the more time the investment will have to mature.

Elementary years

As with all things in life, the basics come first and early.

That aforementioned 2nd grader probably can grasp the Bank of Mom and Dad depositing an allowance into an account.

Over time, an allowance account offers many learning opportunities on managing money – from delayed gratification (‘you can get the NERF ball now, or wait another 2 weeks to get that bike we saw’) to basic principles of fixed income.

Early adolescence

Parents can share visibility into an investment account as children enter early adolescence, such as a college savings account. That way, their preteen can see first-hand how small investments can lead to big payoffs.

Calibrate your expectations: Though they might not seem especially interested at first, once that investment grows into real money, they’ll likely change their tune.

This is also a great time to start familiarizing them with things such as personal credit scores.

High school

By the time they’re in high school, they will have witnessed what Einstein called the ‘sixth wonder of the world’: The power of compound interest.

From there, it is only a small logical step to understanding how compound interest can work against them in the context of debt.

But nothing quite beats the real thing. High school is also a time where kids start wanting big-ticket items, such as a car or a trip with friends. These wish list items can serve as the basis for the mechanics and implications of debt.

Their financial education can mature in tandem with them.

Parents bridge the classroom and the real world

What makes early exposure to financial literacy for kids so vital is the bridge it creates between the math they learn in school and how it applies in the real world.

Consider compound interest – arguably one of the most important engines in finance – is taught in 7th grade. It is not easy to recall when they’re applying for a credit card or deciding how much to contribute to their 401k.

But with first-hand experience watching an investment account grow over time, they’re more inclined to make financially savvy choices while time is on their side.

The idea is to find teachable moments along the way – life is chock full of opportunities to deepen your child’s financial literacy skills.

Financial literacy isn’t just math, it’s mindset

Understanding the numbers and math that go into financial products on the market today is an integral part of financial education. The more elusive piece of the puzzle is often the psychology around money management and growing wealth.

Financial philosophies, such as “pay yourself first” and “being poor is expensive,” aren’t taught in schools, even those that offer personal finance coursework.

But mindset, attitude, and strategy all impact wealth accumulation outcomes. Parents can help their children to see money as a tool, not a master.

Early bird gets the worm

Parents who want to see their children succeed shouldn’t rely on the school to teach them financial literacy. Instead, they have to take a proactive approach in their child’s financial education.

Perhaps the most important role a parent can play in their child’s financial literacy is helping their children bridge the conceptual to real-world application.

As with most investments, time is a variable. But kids have the benefit of time on their sides.

Early investment in financial literacy for kids ensures that when the time comes for them to fly the nest, they’ll have a little more lift under their wings.
 

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Reach Your Financial Goals With a Diversified Portfolio

 

It’s fair to say that deciding where to start or what to do can feel overwhelming with all the investment options out there. Just listen to CNBC, Fox Business, or Bloomberg any day of the week, and you’ll hear dozens of opinions about where to invest your money. “Buy stocks,” “buy bonds,” “buy gold!” “sell Bitcoin!” “buy real estate,” the options feel endless. On the surface, the advice can be confusing and, at times, contradictory. Still, if you take a step back, you realize they are all hinting at one fundamental piece of advice: diversify your portfolio.

What exactly is diversification?

Simply put, it’s the process of spreading your investments across multiple industries and asset classes. You’ve probably heard the saying, “don’t put all of your eggs in one basket,” as it turns out, this applies, quite literally, to your investment portfolio.

To better understand diversification’s benefits, you must first understand modern portfolio theory (MPT) and correlation. MPT argues that an investment should be evaluated on how it affects an overall portfolio’s risk and return. This is important because the risk and return profile of one investment can influence an entire portfolio. When you have a diversified portfolio, you will have assets with varying levels of risks, returns, variances, and correlations.

As for correlation, it’s the degree of a relationship between two assets. For example, if two assets are perfectly correlated (correlation equals 1), when one asset price goes up, the other asset increases at the same value, and vice-versa. A well-diversified portfolio includes assets with low correlation preventing the entire portfolio value from collapsing in bad times.

So, what does a diversified portfolio look like? It includes a mix of real estate, stocks, bonds, and even some Treasuries. All these assets have varying risks, returns, and correlations with one another. For example, Treasuries and bonds generally have lower returns than stocks and real estate but can be a good source of steady income. These are your portfolio’s lower-risk portfolio stabilizers. Real estate and stocks can provide more significant long-term returns but increase the overall portfolio risk. These assets are your portfolio’s growth engine.

Additionally, according to PREA.org research, real estate and stocks have a low correlation of 0.07, and real estate has a -0.15 correlation with bonds. By investing in all three of these types of assets, your portfolio return is resilient from events that may affect real estate or stocks exclusively. A great example of why this is important is the 2008 Great Recession and the stock market drop in early 2020. Private market real estate did not necessarily lose its value even when stocks declined sharply. In fact, as bond values took a hit during this same period, private market real estate (multifamily, single-family, industrial, and logistics) increased in value. The private market real estate, in this case, stabilized the portfolio value for long enough to allow an investor to maintain their ownership in stocks, which of course, returned to near all-time highs as of the publishing of this article.

In short, a diversified portfolio helps mitigate the effects of unfavorable market fluctuations while still allowing you to take advantage of the bull market runs. At the end of the day, it’s important to find the right balance of assets for your risk tolerance. Creating a well-diversified portfolio can help you hit your financial goals faster!
 

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My Financial Journey: Drew Appelbaum

 

Are you someone that has pushed off investing until recently? Was watching your savings account “grow” month after month just enough for you to feel like you were saving for that inevitable rainy day? Or is investing just not your thing? If you nodded, screamed, flinched, or said “yes” under your breath to any of the above, I’m with you.

At heart, I’m a simple man. I don’t need fancy things or seven-figure cars. I’ve never strived to work in finance – the thought of wearing a Patagonia vest to work every day was the definition of my nightmare. I simply wanted a decent job where I could have a true work/life balance, with life being the focus of that balance.Yet, what I learned quickly was that simple comes with many perks as well as many struggles. Sure, I don’t care to ride around in a Ferrari (livin’ that Honda dream since 2014!), but I do crave financial freedom. I do not want to be another stereotype where I “live to work” to uphold my life.

So, there I was, all motivated to invest my hard-earned, slow-growing savings account into something great … but what? I think we can all agree if you listen to too many people, you will find yourself terrified to invest but also terrified not to invest. That’s when I learned about HappyNest.

The process was quick, easy, and incredibly user friendly. I had a rough idea of how much I wanted to save within a certain time frame. HappyNest took the guesswork out of it for me and broke down how much I needed to put in monthly to achieve my goal. The best part – I’m not doing any more or less than I used to with my sluggish savings account, yet my growth is far greater.

Will I become a millionaire overnight? No. The one thing I really appreciate about real estate investing is that it’s a slow and stable burn, regardless of what the rollercoaster we call the Dow Jones is doing. For me, I finally have a piece of mine that there is an investment option out there that is working for me and my goals, even if they are simple.
 

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