Fundrise Review 2018: Best Passive Real Estate Investment?

Investing Simple is affiliated with Fundrise. This relationship does not influence our opinion of this platform.

It seems like the American dream today is to make money by investing in real estate. I am sure we all have that rich uncle or family member that made a fortune by investing in real estate. One of the biggest obstacles to achieving this dream is the amount of money required to buy a single piece of real estate. The upfront cost for an individual to purchase a piece of residential or commercial real estate can be astronomical. This creates high barriers to entry to many real estate markets.

The typical down payment on a home is 20%. If this is a commercial loan for the purpose of renting it out or flipping it, this down payment could be as high as 25%. If you are looking at a $200,000 property, you could be looking at a $50,000 down payment without factoring in closing costs!

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S&P/Case-Shiller U.S. National Home Price Index

On top of that, home prices are on the rise. It is getting increasingly more difficult to invest in physical real estate.

There are plenty of people that are in their 20’s that want to invest in real estate, but they are unable to save the thousands or even tens of thousands of dollars required to get the ball rolling. The good news is, there are other ways to invest in real estate outside of direct ownership.

The Publicly Traded REIT

Traditionally, investors have been able to overcome these barriers by investing in REITs (real estate investment trusts) or other investment vehicles offered on public exchanges.

These investment vehicles are large pools of real estate split up into millions of shares and sold to hundreds or thousands of investors. These products allow common everyday investors to gain access to real estate markets.

This video provides a great explanation of what a REIT is.

The downside of this publicly traded real estate investment is that these products traditionally have high upfront fees and you may need a minimum net worth or income to participate in the investment. Another downside to this is a bit more complicated, but it is worth explaining. These REITs trade on a public exchange like the NYSE and NASDAQ. They are bought and sold just like a stock.

One way that investors look to achieve diversification is by investing in different asset classes. Typically, these are assets like stocks, bonds, real estate and even precious metals. While publicly traded REITs offer the ability to easily diversify asset classes and own real estate, these investments are heavily correlated with the overall market.

Generally speaking, if the markets are doing well the publicly traded REIT investments are as well. If the markets are performing poorly, the publicly traded REIT investments are as well. The point of investing in different asset classes is to have assets performing in different ways at different times. Maybe the stocks in your portfolio are performing poorly, but the value of the gold in your safe is soaring.

REIT ETFSP500.PNG

Consider the example above. On the left is a publicly traded Vanguard REIT and on the right is the S&P 500. In January and February of 2018, there was turmoil in the market and a broad market correction took place. As you can see, a correction also took place with the Vanguard REIT. While it is not identical, the performance of these two investments is very similar. This defeats the purpose of asset diversification, meaning the publicly traded REIT is not the perfect solution to our real estate problem mentioned above.

Fundrise Real Estate Investing Platform

One of these new real estate investment options is Fundrise. This is a new platform for investing in real estate that was founded in 2010. Fundrise is a new online investing platform that gives everyday investors the power to invest in commercial and residential real estate at a very low cost. The minimum investment to get started with Fundrise is just $500.

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Fundrise Logo

Fundrise offers investment plans to invest in different types of real estate such as income producing rental properties or growth oriented real estate developments. Fundrise offers different investment plans based on your investment objectives. Fundrise has significantly lowered the barriers to entry for real estate investment and offered an interesting alternative to the publicly traded REIT.

We will be explaining how Fundrise is different shortly.

Fundrise pools money from investors and separates the investments into different plans based on your investment objective. You can invest in a growth oriented plan, an income oriented plan or a blended plan. Fundrise takes this money and invests it in a variety of different real estate projects. This could be new construction or renovation of existing real estate.

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Fundrise Project, Briar Creek Townhome Renovation

Take the Charlotte, NC townhome renovation project for example. This is a renovation project taken on by Fundrise where they will be modernizing 46 townhomes in a desirable location in North Carolina. These townhomes have a dated look, and they will all look like the newly renovated home on the right upon completion.

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Fundrise Project, Briar Creek Townhome Renovation

Each project has a website where you can learn about the project as well as the investment opportunity. This investment has a Debt Rating of C, giving it a higher projected return. The Projected Return of this project is 10% at a Total Investment of just over $4.1 million. Collectively, Fundrise investors have funded this renovation.

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Fundrise Project, Briar Creek Townhome Renovation

Fundrise Investment Vehicles

Fundrise allows you to invest through two financial instruments that they invented; the eREIT and the eFund. The short explanation of these investments is that they are non traded, meaning they are not available on a public exchange like a traditional publicly traded REIT. The eREIT and eFund are also investments you purchase directly from Fundrise. This cuts out the middleman and reduces the overall fees.

If you want to dive a bit deeper, here is more information!

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Fundrise eREIT

Fundrise eREIT: An electronic non traded REIT built to provide income to the investor.

eREITs are created by Fundrise and have no broker fees and no front end load fees. Many traditional REITs have 7-15% front end load. Fundrise charges a 1% asset management fee annually (0.85% annual asset management fee and 0.15% annual investment advisory fee).

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Delaware Global Real Estate Fund (DGRPX)

Take the Delaware Global Real Estate Fund for example. This investment has a front load fee of 5.75% and an expense ratio of 1.4%!

eREITs are non traded REITs offered by Fundrise. Non traded REITs are highly illiquid, so understand what you are investing in before you decide to commit.

We will be talking more about investment liquidity later on in this review. 

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Fundrise eFund

Fundrise eFund: A professional portfolio of real estate assets.

An eFund is setup as a partnership instead of a publicly traded corporation. This allows the fund to avoid the double taxation that corporations are subject to. You will pay tax on capital gains and dividends as they are incurred. Where eREITs are designed for income, eFunds are designed for growth.

eFunds also cut out the broker in the transaction and helps maximize the investors return on their capital. eFunds also have quarterly redemption periods, so you will not be able to liquidate your position on an immediate basis.

Fundrise Fees Explained

Fundrise charges a fee of 1% per year. They do not charge any other hidden fees and there is no front load fee with Fundrise.

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Fundrise Fees vs Traditional Investment Fees

For more detailed information on Fundrise fees, keep reading! 

One of the biggest advantages to investing with Fundrise is the extremely low fee structure compared to other real estate investment trusts. As we mentioned above, a front load of 7 to 15% is not uncommon in the REIT industry.

If you were investing $10,000 in a REIT with a front load of 15%, you would be paying $1,500 in fees on Day 1! 

Traditionally, investors have been able to gain access to some of these real estate markets using non traded REITs. These are real estate investment trusts that are not offered on public exchanges. These non traded REITs carry the same benefit discussed above, having less correlation with the overall stock market.

To invest in a non traded REIT, you must purchase it through a broker or investment advisor. Most brokers will charge 5 to 8% commission on the total amount invested. Be careful when investing in non traded REITs through a broker or investment advisor. Often times, they will tell you they are not being paid any commission. Ask a lot of questions and understand the likelihood of hidden fees!

Beyond the front load fee associated with a non traded REIT, you also pay an annual management fee. This is typically around 1%, and this is the same fee charged by Fundrise. When you invest with Fundrise, you pay a 0.85% annual asset management fee and a 0.15% annual investment advisory fee for a total of just 1%. There are no other hidden fees with Fundrise and there is no front load fee.

Is it Safe to Invest in Fundrise?

Fundrise files with the SEC and is audited on an annual basis. These financial statement audits are disclosed on the Form 1-K. Beyond that, Fundrise offers a 90 day satisfaction guarantee. Some limitations do apply, but if you are unhappy with your investment in the first 90 days, Fundrise will buy it back at the original price you paid. Fundrise is for United States investors only, however international investors can invest through some US based entities. The minimum investment to get started with is $500.

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Fundrise SEC Filing, Form 1-K

Fundrise Investment Liquidity Explained

An asset has high liquidity if it can quickly and easily be converted into cash. Assets like stocks are highly liquid, as you can sell them on a stock exchange in a matter of seconds. Real estate is inherently a low liquidity investment. Real estate does not change hands as easily as a stock. It is important to understand that liquidity is never guaranteed when investing in Fundrise.

When Fundrise invests in a real estate project, it is typically a long term investment of five years or more. It is important to understand that as an investor, you should be ready to leave that money invested for the long term. Fundrise has stated this platform is for investors who have a minimum time horizon of five years. If you are a short term investor, Fundrise is not for you!

Fundrise offers a monthly redemption plan where investors have the opportunity to cash out each month following a minimum 60 day waiting period. It is important to understand however that liquidity is never guaranteed.

In order for Fundrise to generate the greatest return for investors, they need to remain as fully invested as possible. If Fundrise held 20% of the fund in cash for redemption, that means 20% of the fund is earning a return of 0% or close to it. This is referred to as the cash drag of an investment fund. Idle cash is not desired when it comes to an investment fund. In order to achieve high returns and keep investors satisfied, Fundrise remains as fully invested as possible.

Fundrise Investment Options 

Fundrise offers one plan for beginners who invest a minimum of $500 and three plans for advanced investors who invest a minimum of $1,000.

Investment PlanMinimum InvestmentPortfolioAnticipated Return
Starter$50050% Growth, 50% IncomeNot Disclosed
Supplemental Income$1,000Cash flow producing real estate focused on dividends8.5 to 10.3%
Balanced Investing$1,000Blend of both income and growth producing real estate8 to 11.7%
Long Term Growth$1,000Returns are primarily recognized by asset appreciation7.7 to 12.5%

How To Make Money With Fundrise 

Fundrise is a 100% passive investment. You simply invest your cash and it is immediately put to work. With Fundrise, you make money in one of two ways; asset appreciation and dividends or distributions.

Your eREITs within Fundrise will pay quarterly dividends or what Fundrise calls distributions. These dividends consist of interest payments from loans and rental payments. The amount of your investment in the entire eREIT determines the amount of your dividend payout.

If you buy into an eREIT, the first quarter your dividend will be prorated based on the amount of days you owned it during that quarter. After that, you will receive your dividend based on the amount of share ownership you have in the eREIT.

Investors can expect to receive dividends from Fundrise on a quarterly basis, but it is important to remember that these dividends are never guaranteed. Just like with the stock market, dividend payments are never guaranteed. The payout frequency and amount can be increased, decreased or the dividend can be canceled at any time.

In terms of asset appreciation, Fundrise will purchase properties with a high potential to grow in value. Often times this is a property in a booming area where population growth is exceeding the national average. The goal is to buy property ahead of a major trend and capitalize on the growth of the neighborhood. Once a property is acquired, Fundrise will often renovate the real estate and make improvements to increase the sale price and the value of the property. The returns are primarily realized upon the sale of the property.

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North Los Angeles Renovation Loan

Consider the North Los Angeles Renovation project. The city of Los Angels has the nation’s second largest economy and a massive housing shortage. On top of that, environmental and zoning regulations make it difficult to build more density. There is a massive shortage of housing in this booming area, and Fundrise has identified this as a huge opportunity. This $3.8 million renovation of a Los Angeles apartment building is expected to return 8.7% to investors. This is a perfect example of a growth oriented strategy where a return is generated primarily through asset appreciation.

If you’d like to receive mostly dividends in Fundrise, your best bet is to invest in the Supplemental Income Plan which aims to maximize income through dividends. Fundrise also offers a Balanced Investing Plan which aims to give you a mix of asset appreciation and dividend income.

Reinvesting Fundrise Distributions (IMPORTANT!)

All distributions or dividends from Fundrise will automatically be deposited into your bank account on file unless you opt in to the dividend reinvestment program. If you want to maximize your returns with Fundrise and allow your dividends to compound, you need to opt in to the dividend reinvestment program or DRIP. Fundrise provides this dividend reinvestment program free of charge as a courtesy for investors.

Compound interest is the effect of earning interest on top of your interest. By reinvesting dividends you are able to earn more dividends because you have a larger investment. Over time, the compounding of these dividends will result in exponential growth of your portfolio.

Here is our comprehensive article on compound interest.

Fundrise Portfolio
Fundrise Portfolio Screenshot

Consider the above Fundrise portfolio. This is an investment of $1,000 in the Balanced Investing Plan, so returns will be generated from both income producing properties and asset appreciation. Earnings to date is $6.42 and the next distribution is expected in mid October of 2018. On the right, you can see that dividend reinvestment is enabled.

Fundrise Historical Performance 

Past performance does not guarantee future returns. All investing involves risk, including potential loss of principle.

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Fundrise Supplemental Income Plan

The Fundrise Supplemental Income Plan aims to generate returns through quarterly dividends and it is less geared toward asset appreciation. The money invested in this plan is invested in income producing real estate and rental income is distributed to investors in the form of dividend payments or distributions.

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Fundrise Balanced Investing Plan

The Fundrise Balanced Investing Plan generates returns through both dividends and asset appreciation. The money invested in this plan is invested in both income producing real estate and renovation projects.

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Fundrise Long Term Growth Plan

The Fundrise Long Term Growth Plan generates returns through asset appreciation and it is less geared toward income producing real estate. The money invested in this plan is invested in real estate renovation projects where the majority of the returns are recognized when the property is sold.

Pros of Investing in Fundrise

  1. The minimum to get started with the Starter Portfolio is $500
  2. Since this is a non traded REIT, it is less correlated with the overall market
  3. Small retail investors are able to access private real estate investments
  4. Fundrise has a transparent fee of 1% per year 
  5. Fundrise does not have a minimum net worth or income requirement like most private investment funds do
  6. Fundrise gives you diversified exposure to real estate
  7. This investment allows you to earn compound interest, with the option of automatically reinvesting quarterly dividends
  8. Fundrise supports some retirement accounts
  9. This is a 100% passive real estate investment
  10. Monthly redemption periods eliminate the temptation for panic selling

Cons of Investing in Fundrise

  1. Liquidity is never guaranteed
  2. Distributions (dividends) are never guaranteed
  3. Distributions (dividends) are taxed as ordinary income
  4. Fundrise has a limited track record of four years

The Verdict

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Fundrise Logo

Fundrise is a perfect platform for passive investors who are looking to gain access to private real estate markets. Fundrise is also great for investors who are looking to diversify asset classes and have less correlation to the overall stock market.

Since you can only liquidate your positions quarterly, you may be less tempted to actively trade in and out of positions. You can also automate your dividend reinvestment plan, allowing compound interest to build up in your account.

Fundrise is best for investors with a 5 year time horizon. Real estate is not a highly liquid investment and inexperienced investors need to take this into consideration. While Fundrise does offer a 90 day satisfaction guarantee, you should not invest if you have a short term investing mentality.

Click here to get started with Fundrise!

What Is Compound Interest? (And How To Earn It!)

Investing Simple is affiliated with Fundrise. This relationship does not influence our opinion of this platform.

Warren Buffett, arguably the most successful investor of our time, attributes his success to being born in America, some lucky genes and compound interest. Albert Einstein called compound interest the eighth wonder of the world.

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www.suredividend.com

For some, compound interest is the reason why they never have to worry about having enough money. For others, compound interest is the reason why they will never get out of debt. Those who understand it can apply this powerful force and accelerate their wealth.

One of the most amazing things about compound interest is that it does not discriminate. If you are rich, compound interest can make you richer. If you are poor, compound interest can make you poorer. It does not matter what race, gender, ethnicity or religion you are. Anyone in the world can earn compound interest, and it can change your life.

What Is Compound Interest

The easiest way to understand compound interest is to think of a snowy day. You go outside with the hopes of making a snowman and you begin packing a large ball of snow. Once you have a basketball sized ball of snow in your arms, you begin to roll it along the ground. At first, it appears that nothing is happening at all. It seems like you are rolling this ball of snow around for no reason!

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Snowman on a frozen lake, Wikimedia

This is the reason why most people give up, whether it be growing a business or growing your wealth. Most people are familiar with linear growth, assuming that the snowball will grow in size at the same rate every few feet that you roll it. The thing is, you are not experiencing linear growth, you are experiencing exponential growth. With this type of growth, the growth rate speeds up the larger something becomes.

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Linear vs Exponential Growth, www.valleyadvocate.com

Once that snowball is larger, it has a greater surface area to pick up more snow. It may have taken 2 minutes for the snowball the size of the basketball to double in size, but the next doubling cycle will take less time. This is known as the snowball effect.

The same effect can happen with your wealth as well. When you begin to earn compound interest, the returns seem insignificant at first. As you continue to allow your money to grow, the compounding effect becomes greater and greater and the growth rate accelerates. This is why many people refer to compound interest as the time value of money. It’s not about how much you have, it’s about how long you allow that money to grow.

When it comes to earning interest, you can either earn simple interest or compound interest. With simple interest, you earn the same rate of interest every single year. With compound interest, you are able to earn interest on your interest.

Consider the table below. This is the investment of $10,000 at 8% simple interest versus $10,000 at 8% compound interest over five years.

Duration$10,000 @ 8% SimpleReturn$10,000 @ 8% CompoundReturn
Year 1$10,800$800$10,800$800
Year 2$11,600$800$11,664$864
Year 3$12,400$800$12,597.12$933.12
Year 4$13,200$800$13,604.89$1,007.77
Year 5$14,000$800$14,693.28$1,088.39

Compound interest allows you to earn a greater return every single year. While this change seems insignificant, the growth takes place over time. Using the snowball analogy, those initial years are the packing of the snowball. The growth is invisible to the naked eye.

Consider this. If you invested that same amount for 25 years instead of 5, the compounded return would amount to $68,484.75 compared to the simple return of just $30,000. In that 25th year of compounding, you earned $5,072.94 in interest! 

Here is a link to my favorite compound interest calculator. 

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$10,000 Invested, 8% Compound Interest www.investor.gov

“That’s great! But I don’t have $10,000 to invest.” – You

Here is one of the other great parts about compound interest. You can earn compound interest and experience this growth acceleration by investing a little bit each month over time. In this video, Ryan Scribner will show you how you can become a millionaire by simply investing $5 a day.

Rich people understand the power of compound interest, and they have likely been applying it for years. You might be wondering why so many rich people seem to have an endless supply of money. It is simply because they started investing their money and allowing that money to grow into more money over time. They understood the power of compound interest early on and they had the patience to see it through.

The number one skill you need to have in order to get rich is patience. Compound interest will not make you a millionaire over night. Earning compound interest is about as exciting as watching paint dry on a wall or grass grow in your lawn. Nobody became a millionaire overnight by investing in a low fee index fund. It takes time, patience and regular contribution!

On the other side of the coin, compound interest can be your enemy. Consider the credit card in your wallet. The debt on that credit card can compound in the same way that you can earn compound interest.

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“State of Credit: 2017” www.experian.com

Let’s say you have a $5,000 limit on that credit card and you made the unfortunate mistake of maxing it out. Your interest rate on this card is a staggering 22% and you are making a payment of $100 a month.

Pop quiz!

First, how long will it take you to pay off this card?

And second, how much did you pay in total in interest and principal?

Don’t worry, if you are like most people you can’t answer this. It seems like something that would have been useful to learn in school, but I guess Hamlet was more important.

If you were paying off $5,000 in debt with no interest at $100 a month, it would take you just 50 months to pay off that debt. If you were paying off $5,000 in debt at $100 a month with 22% interest, it would take you 137 months to pay off that debt.

Here is how I found this out.

To answer the second question, you would pay $5,000 in principal and $8,678 in interest at a total of $13,678!

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Credit Card Payoff Calculator www.bankrate.com

Would you rather roll a boulder uphill or downhill? Earning compound interest is like rolling a boulder downhill. Paying off compound debt is like rolling a boulder uphill. As we said before, compound interest does not discriminate. It can be your best friend or your worst enemy.

How To Earn Compound Interest

There are many ways that you can earn compound interest. Some of these methods are better than others, as you will see going through the examples. Interpreting compound interest rates can be confusing, so we are going to use the rule of 72 instead.

The rule of 72 is a great way to understand the power of the return you are getting. You simply take the number 72 and divide it by your average annual return. If you had a return of 5%, you would take 72 and divide it by 5 which comes out to be 14.4. What does that 14.4 mean exactly? It tells you that at a 5% compounded return, you would double your money every 14.4 years. The table below demonstrates the rule of 72 in action.

Interest RateYears To Double
2%36 Years
4%18 Years
6%12 Years
8%9 Years
10%7.2 Years
12%6 Years
14%5.1 Years

Moving on now, let’s discuss a few ways that you can earn compound interest.

1. Bank Account

While this is the worst way to earn compound interest, the interest earned from a bank account is compound interest. With a Savings Account, Checking Account, Money Market or Certificate of Deposit, you can earn compound interest.

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People walking by TD Bank, www.bankrate.com

The table below demonstrates why this is actually the worst way to earn compound interest. On top of that, you would not be able to outpace inflation earning interest rates this low and you would be losing the buying power of your money!

Account TypeInterest RateYears To Double
Checking 0.05%1,440 Years
Savings0.05%1,440 Years
Money Market0.1%720 Years
Certificate of Deposit1%72 Years

I don’t know about you, but I need to double my money more frequently than every 72 years or more. Let’s go ahead and discuss some other methods of earning compound interest.

2. Stock Market

Investing in the stock market is one of the best ways to earn compound interest. If you are interested in learning more, check out our beginner’s guide to investing in the stock market!

With the stock market, higher risk yields a higher reward potential. Long term stock market investors can expect an average return of 10%. It is important to remember that you will not see this type of return every single year! This is the average return experienced over a long period of time.

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NASDAQ Display, Wikimedia

At a 10% return, you would double your money every 7.2 years. This is why compound interest is referred to as the time value of money. A young person would be able to experience more of these doubling cycles than an older person. This is why it is imperative that you get started early. If you are a young person reading this, you have a huge advantage because time is on your side!

Another way you can earn compound interest is through dividends. Dividends are regular cash payments paid out to shareholders. A company can decide to retain earnings or share the earnings with shareholders in the form of dividend payments.

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Coca Cola (KO) Revenue, EPS and Dividends www.nasdaq.com

When you are investing in a dividend stock, you have two options. The first option is to receive these dividends in cash. The second option is to reinvest these dividends. Reinvesting your dividends allows you to earn more dividends from your dividends (the same thing as earning interest on interest).

Not all investing platforms are created equally!

Most of these investing accounts charge a fee to reinvest your dividends back into the issuing stock. If you are looking to earn compound interest through dividends, you should consider investing with M1 Finance. This platform allows you to reinvest your dividends for free!

Read our full review of M1 Finance here.

Failing to reinvest your dividends can be detrimental to your wealth. If you are currently getting dividend checks in the mail, you should contact your broker and inquire about a dividend reinvestment plan. If your broker does not offer this, it might be time to shop around.

3. Real Estate

Another common way that people earn compound interest is by investing in real estate. Consider a flipper for example. This is a type of real estate investor who buys a piece of real estate, fixes it up and sells it for a profit.

In Year 1, they invest $100,000 in a piece of real estate. They fix it up and after expenses they make a profit of $15,000 on the flip. This investor made a return of 15%.

In Year 2, they invest $115,000 in another piece of real estate. They fix it up and they earn another 15% return, but this time it is a profit of $17,250!

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Man repairing a house, www.howstuffworks.com

At a 15% return per year, you would double your money every 4.8 years. Riskier investments have a higher potential return, and higher return investments will have a shorter doubling cycle.

One of the problems with investing in real estate is that it typically requires a high upfront capital investment. If you are looking to own a two family home, get ready to put down $10,000 or more!

Fundrise has come up with an interesting solution to this problem. Thanks to modern day technology, people from all over the world can pool their money together to invest in real estate projects. There are a number of advantages to this. First of all, the minimum to get started is just $500 making the barriers to entry significantly lower. Second of all, you are investing in a diversified pool of real estate and not just one property.

If you own a two family house and one of the units goes vacant, you just lost 50% of your rental income from the property. If you and 1,000 other people collectively own 10,000 units of real estate all over the world, one vacancy will not make a difference. That is the beauty of diversification.

Fundrise is a great investment option for earning compound interest!

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Fundrise Returns, 2014 To 2017

Click here to learn more about Fundrise. 

Another way that people earn compound interest is through running a business. This is very similar to the real estate example above. For example, let’s say you had an Amazon FBA business and you were investing in inventory. Your initial investment could yield a 20% return or more, and the profits could be reinvested in more inventory yielding a greater return.

For most people, the best way to earn compound interest is through investing in the stock market. This is going to be the most passive method, as flipping real estate and running a business will be time consuming. It is important to remember that the most important factor when it comes to earning compound interest is time. While having a large amount of capital does help, it is not necessary. You can build a serious amount of wealth for yourself through small contributions on a consistent basis over time.

 

 

 

 

A Beginner’s Guide To Investing In The Stock Market

Most people believe they have a choice when it comes to whether or not they decide to invest. The truth is, you don’t. At some point, you need to start investing your money and saving for the future. You could be reading this as a 20 year old (lucky you) or someone who put this off until their 40s or 50s. Regardless of your age and financial situation, you need to be participating in some kind of investment to allow your money to grow into even more money.

“The best time to plant a tree was 20 years ago. The second best time is now.” – Chinese Proverb

Now, does this have to be a stock market investment? Absolutely not. Here at Investing Simple, we discuss all kinds of investments such as passive real estate investments, peer to peer lending and more. However, for the purpose of this article we are going to assume that you are interested in investing in the stock market.

At a time when consumer debt is at all time highs and stock market participation is at all time lows, I applaud you for reading this and considering entering the realm of investing. You might think the first step is to figure out what brokerage account to use and to start picking stocks. This is actually not the best way to do it. Some of you that are reading this might be ready to invest, but I am guessing most of you have a little personal finance clean-up work to do.

consumer debt
“The State of the American Debt Slaves” www.wolfstreet.com

Phase 1: Pay Off Debt

Let me ask you a question. Let’s say you have $100 in the bank, but you also owe your friend $100. Your friend Bill is charging you $1.50 each month until that $100 is paid back. Now, your friend Jack calls you up and asks you if he can borrow $100. He agrees to pay you $0.50 a month until he is able to pay you back that $100.

Should you…

A. Keep that $100 in the bank

B. Pay back your debts with Bill

C. Loan your money to Jack

If you picked Choice A, this is actually the worst move you could make. Your money is sitting in the bank earning a very small rate of return. For most people, this is a rate that does not outpace inflation. Your first goal when it comes to investing is to protect the buying power of your money by outpacing inflation. If you didn’t take economics class in high school, inflation is an increase in prices over a period of time. As prices increase, the buying power of each dollar decreases. To explain this simply, bread is more expensive now than it was back in 1930.

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Price data from www.thepeoplehistory.com and www.nationmaster.com

In recent years, inflation has been at a rate of around 2 to 3% per year. The average interest rate on a US savings or checking account is around 0.05% per year. Assuming these figures remain the same, let’s take a look at how this plays out. Let’s assume you have $100,000 sitting in a US checking account. A dollar today is worth more than a dollar tomorrow.

$100,000 Now = $98,000 1 Year From Now (2% Inflation)

Thanks to our friend inflation, your $100,000 will only buy you $98,000 worth of goods next year.

$100,000 Saved = $100,050 1 Year From Now (Is it really?)

Thanks to the “generous” interest rate paid by your bank, your $100,000 grew in value by $50! But since inflation was 2% and your return in your bank account was only 0.05% you really lost 1.95%

So what exactly happened here? You earned a return of $50, but you lost $2,000 worth of buying power. Your net loss was $1,950!

This is what people are talking about when they mention “outpacing inflation”. All investors look for investments that will either keep pace with or outpace inflation in order to maintain their purchasing power!

One of the best comparisons I have heard is that inflation is like having termites in your house. Day by day, it goes unnoticed. The real damage is done over a long period of time.

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Termites, Insight Pest www.flickr.com

So what exactly happened here? You earned a return of $50, but you lost $2,000 worth of buying power. Your net loss was $1,950!

Keep this in mind when your friends or family members tell you they keep their money in the bank because it is safe. Termites!

If you picked Choice B, you chose the best option! It does not make any sense to loan your money to Jack when you owe Bill money. Now, you might argue that this could make sense if you could get a higher rate of return than you are paying in interest. This is something people try to do with the stock market. They borrow money against the shares they already own and they invest that borrowed money. This is known as buying on margin, a key contributor to the stock market crash in 1929.

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Man selling his car, unknown source

On average, the stock market has averaged a return of 8 to 10% per year. This is the average, meaning you will not experience this every single year! In a bull market (a time when the price of stocks is rising), you could see returns of 15% per year or more. In a bear market (a time when the price of stocks is falling), you could see a 20% loss or more.

Buying on margin and investing borrowed money is a result of two things. First of all, it is a result of impatience. You are trying to accelerate your wealth and possibly make up for lost time. While I am not a financial advisor, I have yet to meet a single one that recommends that its clients invest borrowed money. Second of all, it is a result of not understanding compound interest. Einstein called this the 8th wonder of the world for a reason. Warren Buffett attributes a lot of his success to it. It is imperative that you understand the power.

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www.suredividend.com

In this video, Ryan Scribner explains how you could become a millionaire with just $5 a day thanks to compound interest.

I encourage you to play around with a compound interest calculator if you haven’t yet.

Here is a link to one.

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Compound Interest Calculator www.investor.gov

If you picked Choice C, you made a very common mistake. Most people are so excited about investing in the stock market that they do not consider their personal finances and whether or not it actually makes sense to invest at this point in time. As we mentioned above, the average return from the stock market is around 8 to 10% per year. Just to restate this, you will not experience this kind of return every year!

The most common debt people have is credit card debt. Since this is unsecured debt, it typically has the highest interest rate. It is not uncommon for people to have a 20% or higher interest rate on a credit card. If you have credit card debt, you need to pay it off before investing in the stock market. It is no different than loaning $100 to Jack when you owe Bill $100. The best return you can get at this point in time will be from paying off your high interest debt.

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“State of Credit: 2017” www.experian.com

As a general rule of thumb, you want to pay off all debt that exceeds your anticipated rate of return from your investment. If that is 8%, you want to pay off all debt near, at or above 8% interest.

Now, what about a car loan or a mortgage? These are secured loans, so the interest rates are typically much lower. For example, if you are paying 4% interest, it would make sense to invest.

Let me give you an example. Let’s say you have a car loan of $20,000 but you also have $20,000 in the bank. You have good borrowing history, so your interest rate on this car loan is 4% per year. Rather than pay off your car loan, you decide to invest that money. Your anticipated rate of return is 8% over the next year.

Interest Paid = $800

Investment Return = $1,600

Net Gain = $800 or 4%

You were able to earn a return that exceeded what you paid in interest. On top of that, you were able to build your credit in the process.

In this video, Ryan Scribner talks about whether or not you should invest while being in debt. The same concepts are explained!

Summary: The point is, you do not need to be debt free to start investing. You just need to use common sense and pay off any high interest debt first. It does not make sense for most people to borrow money to invest. Buying on margin was a key contributor to the stock market crash of 1929, and I have yet to meet a financial advisor that recommends their clients invest borrowed money. Some debt is okay, as this will help you build your credit score. While the stock market historically returns 8 to 10% per year, this should not be expected every single year.

Phase 2: Eliminate The Need For Debt

Why do people go into debt? Sure, it could be compulsive spending or keeping up with the Joneses. However for a lot of people, debt is a result of an expense that was not anticipated or planned for. This could be something like a car repair or a medical bill. Once you have committed to being a participant in the stock market, you have hopefully followed the steps outlined in Phase 1. Unfortunately, the next step is not to go on a stock shopping spree. The next step is to eliminate the future need for debt.

Most people don’t plan on going into debt. You don’t wake up on a Saturday morning and say “I want a $3,000 credit card balance.” However, most people do not plan for unexpected expenses. Here is a tip: Don’t be like most people.

I am a big fan of Dave Ramsey. If you are still in the phase of paying off debt, I would highly recommend watching some of his videos.

The next step is to build up an emergency fund. This is going to eliminate the need for debt in the future. A general rule of thumb for this is that this should be enough to cover all of your expenses for the next 6 months. Pretend you lost your job or main source of income tomorrow. How long would you be able to sustain yourself before you needed to grab your credit card? If the answer is anything less than 6 months, you need to build up your cash cushion.

Let me give you an example. John has the following monthly expenses.

Car Payment = $300

Mortgage = $1,200

Utility Bill = $150

Food = $500

Entertainment = $200

Other = $200

Total = $2,550

John should have an emergency fund that covers all of his expenses for the next 6 months, or around $15,000. This money should be sitting in a liquid account like a checking account or a money market account. This money should not be invested. You might be saying that $15,000 is a lot of money. You are right! It would take most people at least one year to save up that amount of money. What you could do instead is invest half of your money and save the other half for your emergency fund. This would allow you to participate in the stock market while improving your financial situation.

“Wait a second, you just told us above that inflation is like termites and it is eating our money! Shouldn’t we invest our emergency fund?”

Here is another Dave Ramsey classic on the emergency fund.

Let me show you exactly why you should not do this. Let’s assume you buy shares of a red hot technology stock. You picked up 10 shares at a cost of $250 per share. In doing this, you drained your checking account and left yourself with $500 until payday. You picked up your shares the day before this company is reporting earnings because you anticipate that this stock will beat expectations. When this happens, the share price can go soaring!

The next day, they report earnings that fall short of expectations. The stock drops 15% on the news. Your initial investment of $2,500 (10 shares at $250) is now worth $2,125 (10 shares at $212.50). You “lost” $375. To tell you the truth, you didn’t lose a penny. You do not recognize a loss until you sell those shares to someone else at a price that is lower than what you paid for them. Often times, people will say that the stock market is a scam or that the stock market took money from them. As if the stock market reached into your brokerage account and plucked the money out! The stock market never took a penny from anyone. If you lost money, you handed it over.

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After earnings, AMD stock fell 24.4% in one day! www.marketwatch.com

Back on topic here, you are now down 15% on your shares of this red hot technology stock and you have $500 in checking. After listening in on the earnings call, you decide to go grab breakfast. You walk out to your car, turn the key and hear clicks. After punching the steering wheel a few times, you call a tow truck. Your car repair and tow bill ends up costing you $2,000! This was clearly an unexpected expense and like most people, you did not plan for it. Here is a tip: Don’t be like most people.

At this point, you have two lousy options.

Your first option is to sell your shares of the red hot technology stock and recognize the loss. You will use this money to pay for your car repair bill. On top of that, it will take 3 business days for the funds to settle before you can transfer the funds back to your bank account.

Your second option is to pull out that shiny credit card and slap on a $2,000 repair bill and tow at a 20% interest rate.

Both of these options are bad. If you end up in this situation, flip a coin.

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Credit Card Interest Rates www.creditcards.com

Summary: Most people do not plan on going into debt. Usually, debt is a result of a lack of planning. An emergency fund will eliminate the future need for debt. A general rule of thumb is that you should have enough money in a liquid account like a checking account to cover all of your expenses for the next 6 months. You can contribute to your investing account as well as your emergency fund at the same time. Your emergency fund should not be invested.

Phase 3: Your First Investment

Have you ever seen a horse race before? Don’t worry, this will make sense shortly. People spend hours upon hours analyzing the horses and the different variables involved. Then, the horses go off and the fastest horse is the winner. No matter how much research is conducted by the handicapper, they are frequently wrong about what horse will come in first. Is this due to a lack of intelligence or research? In most cases, no. It is because horses are horses and sometimes they just don’t feel like running. But what if instead of picking the winner of this race, you were able to make a different bet on all of the horses? That’s right, you are betting on the outcome of the entire race and not just one horse.

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Horse Racing www.wikimedia.com

This is exactly how stock picking works. Everyone has their own strategy when it comes down to the analysis of the investments, but at the end of the day nobody knows how the market will perform and what stocks will come in the lead. While you can’t bet on the entire horse race, you can bet on the entire stock market with an investment known as an index fund.

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Who is right? www.christinecantrell.com

An index fund is a pool or collection of different stocks designed to replicate an underlying benchmark. This benchmark could be the S&P 500, foreign telecommunication companies or even the entire global stock market. This fund is designed to replicate the performance of the underlying benchmark as closely as possible.

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Vanguard S&P 500 Index Fund “VOO”

It is important that you understand the difference between the index fund and the distant relative known as the mutual fund. A mutual fund is actively managed, and the expenses associated with this type of investment are often significantly higher. The truth is, most actively managed mutual funds do not beat the market. Mutual funds are often benchmarked against the S&P 500, an index that tracks the performance of the 500 largest publicly traded companies in the US. What most people do not realize is that you can simply invest in the S&P 500 through a low fee index fund instead of trying to pick stocks or pick a mutual fund that will hopefully outperform.

In fact, Warren Buffett recommends that people simply invest in a low fee S&P 500 index fund! One example of this is the Vanguard 500 Index Fund. You can invest directly into this fund through Vanguard, or you can purchase shares on the market through a financial instrument known as an ETF. This is simply an exchange traded fund. Shares of this fund trade openly on the market under the symbol VOO.

Most people should just buy low fee index funds. Now, am I telling you this to deter you from going out and picking stocks on your own? Absolutely not. It is possible to beat the market and you can learn a lot by investing in individual stocks. However, if you are brand new to investing you should start with an index fund. It is in your best interest to build your tolerance for risk and your understanding of the stock market before you begin to hold individual stocks. By holding ETFs, you get to experience what it is like to be a stock market investor without holding individual stocks that can be volatile.

In this video, Ryan Scribner talks more about index funds and ETFs.

Volatility is the degree of variation seen in the price of a stock. Individual stocks are far more volatile than the overall market, meaning you will see more drastic price fluctuations. One of the easiest ways to determine the volatility of a stock that you are looking at is to look at the beta. If a stock has a beta above 1, that means this stock is more volatile than the overall market. If the beta is below 1, that means this stock is less volatile than the overall market. If you are investing in individual stocks as a complete beginner, you should consider investing in stocks with a beta below 1.

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UnitedHealth, Low Beta/Volatility
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Chesapeake Energy, High Beta/Volatility

Some stocks are inherently more volatile than others. For example, a technology stock like Advanced Micro Devices is going to see more variation in the share price than a blue chip stock like Coca Cola. These durable, time tested investments are named blue chip stocks after the blue chip in poker. The blue chip is the poker chip with the highest value. If you are looking to invest in an individual stock as a beginner, you should familiarize yourself with these blue chip stocks. A great place to start is the Dow Jones or DJIA. This is a list of 30 well established, financially responsible industry leaders. This includes companies like Apple, 3M and UnitedHealth.

Summary: For most investors, especially beginners, your best option is to invest in low fee index funds. This will give you diversified exposure to the stock market. Warren Buffett recommends this too! If you do decide to invest in individual stocks, you should consider the beta or volatility of these investments. As a beginner, you should avoid stocks that have high volatility. 

Phase 4: How To Make Money

When it comes to investing in the stock market, there are two different ways you can make money. The first way you can make money is through asset appreciation. You purchase a stock and hopefully sell it at a higher price in the future. It is important to remember that share prices can be completely erratic, and you should always invest in a company you fully understand. Consider the investing style of Warren Buffett. He invests in simple businesses like Kraft Heinz, American Express and Coca Cola. There is a lot of temptation out there to invest in complicated industries like biotechnology. At the end of the day, you need to ask yourself one question. Do I understand what I am buying?

DIVERSIFIED INVESTMENTS
Warren Buffett’s Investments (Berkshire Hathaway)

The second way that you can make money in the stock market is through dividends. Companies can decide to share a portion of their earnings with shareholders through dividends. These dividends are typically paid on quarterly basis, but in some instances companies pay annual, semiannual or quarterly dividends. It is important to understand that these dividend payments are never guaranteed. A company that pays a dividend can cut or cancel this dividend payment at any time. Generally speaking, companies like to increase dividend payments over time and avoid a dividend cut at all costs. A dividend cut almost always results in a decline of the share price, which hurts the reputation of the company.

In this video, Ryan Scribner explains how money is made in the stock market.

Stocks that pay dividends are referred to as income stocks. Stocks that are growing at a faster rate than the overall market are referred to as growth stocks. You will also find that there are some stocks that are both growth and income investments. The company pays a dividend and it is also experiencing a faster rate of growth than the overall market.

You also have conservative growth stocks and aggressive growth stocks. As the name suggests, aggressive growth stocks are likely to experience a higher growth rate than conservative growth stocks.

When you begin investing in the stock market, it is important to consider what type of investor you want to be. Do you want to invest in aggressive growth stocks? Do you want to invest in durable blue chip stocks that pay dividends? Do you want to invest in stocks that pay dividends while also having growth potential? Like anything else out there, it is important to have a game plan and a strategy. A dividend investor would be focused on companies with a consistent operating history and a durable competitive advantage. A growth investor would be focused on what the most innovative companies are. Determining what type of investor you are is above and beyond the scope of this article, but you should begin to think about what type of investing seems most appealing to you.

horse race new
Horse Racing www.wikimedia.com

Remember, if this seems too overwhelming you can always bet on the outcome of the entire race! This is why many investors simply invest in index funds rather than bother with picking individual stocks. If you are bullish on a particular sector or industry, like semiconductor technology, you can invest in a sector or industry specific ETF. You have no idea what the top performing semiconductor stocks will be, you just believe in that industry as a whole.

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Semiconductor Sector ETF “SOXX”

Summary: People make money in the stock market through asset appreciation or income from dividends. It is possible to invest in stocks that will offer both. Income investors buy shares of companies that pay dividends on a consistent basis. Growth investors buy shares of companies that are highly innovative and adaptive. It is important to understand what type of investor you want to be. 

Phase 5: Core Investing Principles

There are a number of core investing principles that you should know before you begin investing in the stock market. You should also refresh your memory once in a while to ensure that you are following them. Here are the cardinal rules to sensible investing that will help you stay out of trouble.

Buy Low, Sell High

This is the most important investing principle, yet so few actually practice this. Let me give you an example. In 2017, Bitcoin went mainstream. Cryptocurrency was the topic of bar room conversations all over the world. By the time the average person learned about Bitcoin, it was trading at a price of over $10,000 per coin. Looking at the chart, you could see that Bitcoin had gone nowhere but up.

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Bitcoin Bubble www.coindesk.com

At this point, FOMO was triggered. Also known as the fear of missing out, masses of people entered the cryptocurrency market because they were afraid of missing out on the hottest investment. Do you know what all of these people did? They purchased Bitcoin at all time highs. To the untrained eye, Bitcoin had nowhere to go but up. Seasoned investors knew that the opposite was true. Whatever it is that you are buying, do not buy it at all time highs. People who are new to investing are often cautious about buying low. They see that the share price has fallen and they are afraid to buy. If you went to the grocery store and found out that Tide laundry detergent was on sale, you would stock up and buy extra. But when Procter & Gamble stock goes on sale, the maker of Tide laundry detergent, people are afraid to buy it. Stocks are the only thing that people do not buy on sale.

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Notable “PG” Stock Sales, Last 5 Years

Ignore The Noise

When it comes to investing, noise is everywhere. There is always a line of people waiting to give you their opinion regardless of whether or not you wanted to hear it. To some extent, you can control the noise. Most of it is coming from the news outlets. Keep in mind that Wall Street makes money when you are active. Activity leads to trading and trading makes your broker money. Wall Street wants you to be active. They want you to invest in a stock on Monday and change your mind Thursday, sell it and buy something else only to sell that Friday. There is a difference between staying informed about your investments and being obsessed.

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The Grinch www.toontalkweekly.com

Check on your stocks once a day, maybe twice. Keep track of the major company announcements, quarterly earnings reports and annual reports. Beyond that, the rest is just noise. While investing in stocks can be a social activity, you should be careful about where you get your advice from. Hot stock tips are a dime a dozen. Beyond that, even if they are right about their hunch, what is your next move? Is your plan to wait for someone else to give you a stock tip at the bar? That is not an investment strategy. An investment strategy needs to be scale able and repeatable.

The Stock Market Is A Pendulum

A man by the name of Benjamin Graham once said that the market is a pendulum, forever swinging between optimism and pessimism. Warren Buffett learned a lot from Benjamin Graham. For example, Buffett has said that you should be greedy when others are fearful and fearful when others are greedy. Optimism leads to greed and pessimism leads to fear. Buying from the pessimist means that you are buying stocks when there is fear in the market, or buying low. Selling to optimists means that you are selling stocks when there is optimism or euphoria in the market, or selling high.

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If you hear everyone talking about a hot stock, it is probably time to sell it. The underlying value of a stock does not change in the short term, only the price does. At some points, the price is high due to greed and feelings of euphoria. At other points, the price is low due to feelings of fear.

This article is a work in progress, bookmark and come back often!

Last updated August 20th, 2018. 

M1 Finance: What Is An Expert Pie?

Investing Simple is affiliated with M1 Finance. This relationship does not influence our opinion of this platform.

Times have changed, and investing in the stock market is not the same as it was 10 years ago. The rise of the roboadvisor and algorithm based trading have taken the brokerage industry by storm. One of the most established examples being M1 Finance.

M1 Finance is a pie based investing platform. No, this is not the kind of pie your grandmother would make, but instead this is a pie based investment portfolio.

Within M1 Finance, your portfolio is referred to as a pie. Your pie breaks down what positions or securities you would like to hold in your account as well as how much weight they carry in your portfolio. You can create your own custom pie in M1 Finance and choose your own investments or you can invest in an M1 Finance expert pie.

In this article, we talk more about fractional shares on M1 Finance.

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M1 Finance Pie Based Investing

M1 Finance also offers expert pies on the platform. These expert pies are created by M1 Finance and are offered to provide increased diversification as well as low cost alternatives to some of the other investment options on the market. These expert pies can also be a suitable choice for beginners who do not want to build an investment portfolio from scratch. These expert pies can make up your entire investment portfolio or just a portion of it.

M1 Finance creates these professionally built pies based on generally accepted investing principles as well as past performance data. They offer a variety of expert pies, each composing of 2 to 20 securities depending on the type you choose. Expert pies are designed by M1 Finance investment professionals as well as third party partners such as Cambria Investments. M1 Finance offers 9 different categories of expert pies.

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M1 Finance Expert Pies

Here are the categories of the M1 Finance expert pies…

  1. General Investing: Choose from risk levels ranging from ultra conservative to ultra aggressive.
  2. Plan For Retirement: Invest for your target retirement date. Your portfolio allocation will adjust over time to become more conservative as you approach retirement.
  3. Responsible Investing: Socially conscious investing. This investment category invests in companies that are concerned about financial obligations as well as social and environmental obligations.
  4. Income Earners: Contains dividend and interest paying securities.
  5. Hedge Fund Followers: Pies that track public funds such as Berkshire Hathaway and Icahn Enterprises.
  6. Industries & Sectors: Invest in one segment of the overall economy.
  7. Stocks & Bonds: Multiple options of diversified stock and bond exposure.
  8. Other Strategies: Other investment options like blue chip stocks, domestic growth, domestic value and more.
  9. Trinity Portfolios: Portfolios created by Cambria Investments. Learn more about Cambria Investments here.
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M1 Finance Expert Pies

M1 Finance has a quantitative model for choosing the specific ETFs within each expert pie. This model takes into account variables such as fees, assets under management, and tracking error of standard deviation. These variables are considered and result in low cost ETFs that track the underlying benchmark(s) better than others.

There are no fees associated with using M1 Finance or the expert pies. However, all ETFs have management fees associated with the fund. M1 Finance chooses ETFs with some of the lowest fees. They are also very transparent about the management fees charged by ETFs on their platform.

Click Here To Get Started With M1 Finance

How Does M1 Finance Make Any Money?

Investing Simple is affiliated with M1 Finance. This relationship does not influence our opinion of this platform.

Times have changed, and investing in the stock market is not the same as it was 10 years ago. The rise of the roboadvisor and algorithm based trading have taken the brokerage industry by storm. One of the most established examples being M1 Finance.

M1 Finance has an offer that on the surface might seem too good to be true. First of all, they offer commission free trading. Second of all, the minimum account balance is just $100. Is M1 Finance operating as a charity? Not quite.

First, M1 Borrow

M1 Finance makes money in a couple of different ways. The first way that M1 Finance makes money is by offering a feature known as M1 Borrow.

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M1 Borrow

M1 Borrow allows investors to take out a portfolio line of credit. Your investments in your M1 Finance account serve as the collateral. M1 Borrow allows you to borrow up to 35% of your M1 Finance account balance at an interest rate of 3.75% per year. Essentially, M1 Finance extends a loan to you and in return if you do not pay it back they can sell your investments to cover the loan. The risk on M1 Finance is relatively low, so this is easy money.

Second, lending shares to short sellers 

Short sellers are borrowing shares to bet against them. Short selling is a relatively complicated subject, and that is a topic for another article. However, M1 Finance is able to loan shares held by investors to short sellers and profit from doing this.

Third, uninvested cash in your account

You know that cash sitting in your investment account? Depending on what brokerage you are using, you may or may not be earning interest on it. Free investing platforms like M1 Finance do not offer interest on the cash in your account. Instead, they keep the interest earned on the cash balances.

On a cash balance of $10,000 this could be as little as $50 per year. However, when you consider that M1 Finance has millions of dollars in cash sitting in investment accounts these small bits of money add up.

Fourth, directing order flow 

Brokerage accounts like M1 Finance can receive commission or compensation for directing orders to different parties for execution. The brokerage receives a small payment for directing the order to different parties.

Between these methods, M1 Finance is able to make money and offer a brilliant investing platform completely free.

Click Here To Get Started With M1 Finance

 

 

How Does M1 Finance Work?

Investing Simple is affiliated with M1 Finance. This relationship does not influence our opinion of this platform.

Times have changed, and investing in the stock market is not the same as it was 10 years ago. The rise of the roboadvisor and algorithm based trading have taken the brokerage industry by storm. One of the most established examples being M1 Finance.

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M1 Finance Website Homepage

What is M1 Finance?

M1 Finance was launched in 2016 and is an online roboadvisor for everyday people who want to invest in stocks or exchange traded funds (ETFs). M1 Finance focuses on low cost passive investing with additional features such as automatic rebalancing of your portfolio and tax minimization strategies. M1 Finance operates by creating portfolios of stocks and ETFs called “Pies”. Each pie can be customized meaning you can choose specific stocks and ETFs that you want to add. For example, you could build a pie with 50% Tesla stock and 50% Google stock. There are also prebuilt pies that M1 Finance has created based upon the amount of risk you would like to take, investment time horizon, and personal preferences. All of these features are included free of charge.

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M1 Finance Custom Pies

M1 Finance also allows you to buy fractional shares of a corporation within your pie. For example, if your M1 Finance account had a total of $1,000 in it, but you would like to buy a share of Amazon for $1,885.60 then you would be offered a fractional share of Amazon to hold in your portfolio valued at $1,000 or less depending on its weight in your pie. With fractional shares, you can buy as little as 1/10,000th of a share!

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Amazon Stock, August 8th 2018

What are the fees?

M1 Finance puts an emphasis on its low fee structure. There are no trading commissions or mark up fees for using M1 Finance as long as you open a brokerage account and fund it with $100 ($500 for retirement accounts).

You may be asking yourself, so how do they make money? M1 Finance makes money  in a way similar to Robinhood, by directing order flow and offering margin to investors. Here is our article on this.

What are the features of M1 Finance?

M1 Finance offers a variety of additional features, the two most prominent being tax minimization and smart rebalancing. Using a simplified method of tax loss harvesting, M1 Finance offers options to sell positions in the most tax favored way.

For some investors, the tax loss harvesting offered by other roboadvisors is worth paying for the annual management fee. However, if you are looking to take advantage of this tax minimization M1 Finance offers this for free.

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M1 Finance Tax Minimization

However, there are alternative roboadvisors that offer more effective tax loss harvesting strategies. Another feature of M1 Finance is smart rebalancing. Using smart rebalancing, all deposits will be automatically invested into your “pie” without your manual input. When withdrawals are taken out of your account it will automatically rebalance your pie so it has the correct weight of your holdings at all times.

Is M1 Finance safe?

M1 Finance is a member of Financial Industry Regulatory Authority (FINRA) and the Securities and Investor Protection Corporation (SIPC). Being a member of SIPC, you will be insured in the event that M1 Finance goes out of business or goes financially insolvent. Each account at M1 Finance is insured up to $500,000 in coverage ($250,000 for cash).

Who is M1 Finance for?

The ideal user for M1 Finance is someone who is a passive investor, relatively fee sensitive, and does not want to spend a significant time managing their investments. This would not be an ideal platform for active traders.

Who is M1 Finance not for?

M1 Finance would not be an ideal platform for active traders. Anyone who would like to make frequent trades in and out of the market should try alternative platforms to M1 Finance such as Robinhood.

Click Here To Get Started With M1 Finance

M1 Finance VS Vanguard: Best Investing Platform 2018

Investing Simple is affiliated with M1 Finance. This relationship does not influence our opinion of this platform.

Most people have heard of Vanguard, one of the largest fund companies in the world. If you have a 401k plan, there is a good chance that this is through Vanguard! This is one of the most prominent fund companies around. M1 Finance has recently taken a strong foothold in the brokerage industry, disrupting the traditional investing model. So, are you better off investing through Vanguard or though M1 Finance?

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Vanguard Logo, www.vanguard.com

M1 Finance is a relatively new investing platform that launched in 2016. M1 Finance has goals that are in line with Vanguard. Both platforms have offerings that appeal to passive long term investors. Comparing M1 Finance to Vanguard is like comparing red grapes to green grapes. They are very similar, with only a few minor differences. Both companies have high value propositions being offered to their users, but each has unique features and characteristics.

M1 Finance offers a free online investing platform and mobile app for its users. It is easy to open an account and you can begin investing with as little as $100. You start by creating your portfolio which M1 Finance calls a pie. You can customize your pie with a variety of stocks and ETFs offered on M1’s platform, including Vanguard ETFs. One feature unique to M1 Finance is the ability to buy fractional shares. This means you can have broad diversification even if you have a small account balance. You can purchase as little as 1/10,000th of a share of a stock or ETF. M1 Finance offers a variety of other features such as tax minimization, automated deposits/rebalancing and dividend reinvestment all for free. Considered to be the next generation broker, M1 Finance has had a wave of users switching over to the platform since they launched. The emphasis on passive low cost investing has resonated with many other investors across the United States.

Read our full review of M1 Finance here. 

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M1 Finance Website Homepage

Vanguard is one of the largest fund companies in the world, with assets under management of approximately $5.1 trillion. They offer a variety of mutual funds and ETFs available on most investment platforms and brokerages. To directly invest in most of Vanguard’s mutual funds you must have a minimum account balance of $3,000.

Vanguard Retirement funds and STAR funds have a minimum of $1,000. Vanguard also offers a variety of exchange traded funds which have no minimum investment, and you can buy shares through brokerage accounts like M1 Finance. Vanguard is a mutual fund company, and it is owned by the funds that it offers. In essence, all of the Vanguard investors own shares of the funds and they own Vanguard itself.

Now, don’t let the word mutual fund scare you! What Vanguard offers is low fee index mutual funds. They offer some of the lowest fee investment products on the market.

Vanguard was started by a famous investor named John Bogle, known as the man who created the first index fund. Bogle created Vanguard to be a company devoted to its people and its underlying shareholders. Vanguard is based on the premise of Bogle’s own thesis of low fee index fund investing over the long term. That is why Vanguard has some of the lowest fees in the fund industry.

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John Bogle Vanguard Founder, sensibleinvesting.tv

M1 Finance and Vanguard differ in many ways, though they both have the same goal of attracting long term passive investors. M1 Finance is an online trading platform geared towards a do it yourself investor who is relatively fee sensitive. Vanguard offers funds at record low fees within the industry, along with investing discipline from one of the greatest minds in the investing community. Vanguard is more of a traditional fund company with a focus on low cost passive investing. Barriers to invest into Vanguard mutual funds can be moderately high from $1,000 to $3,000. That being said, investors can find many Vanguard ETFs offered on a variety of platforms, including M1 Finance.

Vanguard and M1 Finance are very similar platforms. If you are on the fence trying to decide whether or not to invest in Vanguard ETFs through M1 Finance or investing in funds directly through Vanguard, consider the following…

  • With M1 Finance, you will be able to automate your deposits, allocation and rebalancing
  • You will be limited to Vanguard products through the Vanguard platform
  • M1 Finance allows you to invest in thousands of stocks and ETFs for free
  • The minimum balance to get started with M1 Finance is $100 while the minimum investment for most Vanguard funds is $3,000
  • ETFs have greater liquidity than funds

Click Here To Get Started With M1 Finance

 

M1 Finance VS Stash: Best Investing Platform 2018

Investing Simple is affiliated with M1 Finance. This relationship does not influence our opinion of this platform.

Investors will be happy to know that fees and commissions throughout the brokerage industry have been on the decline over the past 5 years. This has resulted in some great low fee or no fee investing platforms. With the introduction of roboadvisors and algorithm based investing platforms, downward pressure on fees has greatly benefited the everyday investor. Two of these new platforms are Stash and M1 Finance, and in this review we will be discussing the differences and similarities between them.

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M1 Finance Home Page

M1 Finance is an investing platform focused on long term investing in a relatively passive way. M1 Finance offers a free online investing platform and mobile app for its users. It is easy to open an account and you can begin investing with as little as $100.

Read our full review of M1 Finance here.

You start by creating your portfolio which M1 Finance calls a pie. You can customize your pie with a variety of stocks and ETFs offered on M1’s platform. You can also choose from a variety of expert created pies offered by M1 Finance and its partner Cambria Investments. One of the biggest pros of investing with M1 is that M1 Finance offers this feature 100% free, no commissions or management fees.

M1 Finance Expert Pie
M1 Finance Expert Pies

One feature unique to M1 Finance is the ability to buy fractional shares. This means you can have broad diversification even if you have a small account balance. You can purchase as little as 1/10,000th of a share of a stock or ETF.

Here is our full article on M1 Finance fractional shares. 

M1 Finance offers a variety of other features such as tax minimization, automated deposits, automated rebalancing and dividend reinvestment all for free. Considered to be the next generation broker, M1 Finance has had a wave of users switching over to the platform since they launched. The emphasis on passive low cost investing has resonated with many other investors across the United States. The best part being that M1 Finance is completely FREE to use.

Click Here To Get Started With M1 Finance

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Stash Home Page

You can begin investing in Stash with as little has $5. However, be cautious because there is a minimum fee of $1 per month to use Stash. You may want to wait until you have more cash to begin investing.

After opening an account, you will be guided through a questionnaire where Stash will ask a variety of questions to analyze your risk tolerance, investment horizon, and personal preferences. Once Stash has an idea of what type of investor you are, they will offer you a variety of portfolios customized to your investment objective.

Most portfolios are composed of a group of ETFs as well as a limited number of individual stocks. Stash uses clever names and easy to understand themes for their portfolios such as “American Innovators”Blue Chips” and “Clean & Green.”

Similar to M1 Finance, Stash offers the ability to buy fractional shares of stocks or ETFs. This will allow for increased diversification for smaller accounts. Stash also offers a variety of educational material to teach investing principles to new investors. Stash aims to make investing simple and offers their platform in an approachable way for novice to moderate level investors.

To use stash there is a minimum fee of $1 per month for accounts below $5,000, and 0.25% annual fee on accounts greater than $5,000. There is also a $2 per month fee for retirement accounts (however, this fee is waived if you are 25 years old or younger).

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Stash Pricing

Which investing platform is better?

M1 Finance and Stash are very similar platforms with some significant differences in their approach. Both platforms have a similar ideal user in a moderate level investor who follows a DIY approach and is relatively fee sensitive. M1 Finance offers their service completely free of charge, while Stash charges a relatively small monthly fee for servicing your account. M1 Finance also offers a variety of additional features such as dividend reinvestment, margin trading, and tax minimization. M1 Finance has more features than Stash and is also free to use. For these reasons we believe M1 Finance is the superior investing platform.

Click Here To Get Started With M1 Finance

FeatureM1 FinanceStash
Minimum Account Balance$100 ($500 Retirement Accounts)$5
FeesNo Fees$1/Mo ($2/Mo Retirement Accounts) under $5,000 or 0.25%/Yr over $5,000
AccountsTaxable Account, Roth IRA, Traditional IRA, SEP IRA, Joint TrustsTaxable Account, Roth IRA, Traditional IRA, Custodial
Investments Stocks and ETFs on NYSE, NASDAQ and BATSETFs, Limited Individual Stocks
Fractional SharesYesYes
SIPC InsuredYesYes
Automated DepositsYesYes
Dividend ReinvestmentYesNo
Tax MinimizationYesNo
Average ETF Expense RatioAs low as 0.04% with Vanguard ETFsOn average, 0.34% higher than industry average

M1 Finance VS Robinhood: Best Investing Platform 2018

Investing Simple is affiliated with M1 Finance. This relationship does not influence our opinion of this platform.

In recent years, dozens of new online trading platforms and robo advisors have emerged. These services have quietly started to disrupt the traditional brokerage industry. The majority these platforms are geared towards individual investors and offer different types of features that aid the do it yourself investor. Robinhood and M1 Finance are some of the most well known of these platforms. As someone looking to enter the stock market, it can be difficult to decide on what platform is the best for you.

In this review, we will be highlighting some of the key differences between M1 Finance and Robinhood!

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Robinhood VS M1 Finance

First up, Robinhood

Robinhood is an online brokerage that focuses on commission free investing. All buys and sells on Robinhood are completely free. Robinhood is an easy to use platform that simplifies investing and caters towards the millennial investor. Since its release in 2015, Robinhood has gained respectable user growth in the brokerage community, now with over 5 million users. On the Robinhood platform you are free to invest in stocks, ETFs, options and even some crypto assets such as Bitcoin and Ethereum. Robinhood also offers a tiered premium gold service for margin trading. Robinhood has watch lists and corporate action trackers, but performing any company research on the platform is very limited. This is because Robinhood was designed to be as simple and user friendly as possible.

For more information on Robinhood, check out this review by Ryan Scribner.

Robinhood is good for beginners who want to get started with investing without using a complicated trading platform. However, experienced investors will find that this platform is too basic. Many Robinhood users will conduct investment research on other sites or platforms and use Robinhood strictly for transactions.

Robinhood certainly met the goal of being the most accessible investment platform out there with a $0 minimum account balance and $0 in trading commissions. For this reason, Robinhood is the easiest brokerage account to get started with.

There are, however, a number of areas where this platform falls short. Here is our list…

  1. Robinhood does not offer a DRIP or dividend reinvestment plan. You will need to reinvest your dividends on your own.
  2. Robinhood only offers purchase of whole shares. This is more bad news for dividend investors, as you cannot reinvest those dividends into partial shares. You will need to save up until you can afford another whole share of that stock.
  3. Robinhood does not offer automation of the portfolio. While you can automate deposits to your Robinhood account, you cannot automate investments. Sorry passive investors!
  4. Robinhood does not offer retirement accounts. They have stated that they hope to offer this down the road, but no timeline has been mentioned.
  5. Robinhood does not offer any portfolio guidance or prebuilt investment portfolios. You are on your own!

Robinhood offers a great free service and has gotten millions of people to invest in the stock market by significantly lowering the barriers to entry. However, as we mentioned there are some areas where this platform falls short.

Next, M1 Finance

M1 Finance aims to take Robinhood’s idea of commission free investing a step further. M1 Finance has features the DIY investor and the passive investor will love. The M1 Finance platform allows you to build a custom portfolio with whatever stocks and ETFs you choose. M1 Finance also allows you to buy fractional shares of companies (up to 1/10,000th of a share) which allows investors to have complete diversification even within smaller accounts.

Once your portfolio is built, M1 Finance will allocate any deposits into your account to the group of holdings you chose. With M1’s automated reinvestment feature, you won’t have to worry about idle cash in your portfolio as you can remain fully invested. Dividends within the account will be reinvested once the cash balance hits $10. M1 Finance also offers tax minimization strategies, recurring investments, as well as professionally created portfolios. The best part? M1 Finance offers their service 100% free with no commissions on trades and no price mark ups.

For more information on M1 Finance, check out this review by Ryan Scribner.

Which one is the winner?

Robinhood and M1 Finance both offer a similar product, but with one big difference being their target user.

The ideal user of Robinhood is a relatively active trader, someone who is making a considerable amount of buys and sells in their account. With Robinhood offering options and crypto trading you can see how their platform gears towards a more active individual.

M1 Finance on the other hand offers a service designed for a long term relatively passive investor. M1 Finance puts a strong emphasis on the difference between trading and investing on their website. If you are an active trader making a lot of buys and sells, Robinhood is going to be a better platform for you. For those investors who are long term oriented and have a more passive strategy, M1 Finance will be the better platform for you. You could always try both platforms to see which is a better fit for your investment style.

For dividend investors, M1 Finance is the clear winner. The automated reinvestment of cash in the account above $10 and the offering of fractional shares make this the ideal platform for long term income investors.

Click Here To Get Started With M1 Finance

FeatureM1 FinanceRobinhood
Minimum Account Balance$100 ($500 Retirement Accounts)$0
Trading Commission$0$0
InvestmentsStocks and ETFs on NYSE, NASDAQ and BATSStocks and ETFs on NYSE, NASDAQ, Options, Cryptocurrencies
Account TypesTaxable Account, Roth IRA, Traditional IRA, SEP IRA, Joint TrustsTaxable Account
MarginAll accounts over $2,000 have automatic access to margin Robinhood Gold tiered subscription starting at $6 per month, $2,000 minimum account balance
Short SellingNoThrough Options
AutomationAutomated Deposits, Automated Rebalancing, Automated InvestmentsAutomated Deposits
DividendsAutomated Reinvestment No DRIP
Fractional SharesYesNo
Tax HarvestingTax MinimizationNo
Best ForLong Term Investors, Passive Investors, Dividend InvestorsShort Term Investors or Traders

M1 Finance: Tax Minimization vs Tax Loss Harvesting

Investing Simple is affiliated with M1 Finance. This relationship does not influence our opinion of this platform.

One of the cons of the M1 Finance platform is that they do not offer tax loss harvesting. While this is one of the only cons I see for this platform, it is still worth mentioning. Roboadvisors like Wealthfront and Betterment offer a feature called tax loss harvesting. This is simply the process of selling a security that has experienced a loss and buying back a similar security. As a result, a capital loss is recognized and this can be used to offset capital gains from your investments.

These realized capital losses can offset capital gains and reduce your ordinary taxable income by up to $3,000 per year. If you have more than $3,000 in capital losses, they can be recognized across multiple years.

It is common for roboadvisors to offer automated tax loss harvesting, however these platforms like Wealthfront and Betterment charge a fee for using the platform. Both Betterment and Wealthfront charge a 0.25% annual management fee, while M1 Finance does not have any fees associated with the platform.

You may be asking yourself, so how do they make money? M1 Finance makes money in a way similar to Robinhood, by directing order flow and offering margin to investors.

Now, before you write off M1 Finance we need to talk about what they offer instead. M1 Finance offers a feature known as Tax Minimization. This is essentially a simplified version of the tax loss harvesting offered by other roboadvisors.

When you request a withdrawal from your M1 Finance account, the investments will be sold in the most tax efficient way possible.

Capital-Gains-Tax-Rates
www.diffen.com

If an asset is held for one year or less, the capital gain recognized on that investment is considered to be a short term capital gain. This type of capital gain is taxed at the highest rate possible, typically the same rate as your ordinary income tax rate.

If an asset is held for over one year, the capital gain recognized on that investment is considered to be a long term capital gain. This type of capital gain is taxed at a lower tax rate.

When you withdraw money from your M1 Finance account, your investments are sold in this order:

  1. Losses that offset capital gains
  2. Securities or groups of securities that result in long term capital gains (lower tax rate)
  3. Securities or groups of securities that result in short term capital gains (higher tax rate)

For some investors, the tax loss harvesting offered by other roboadvisors is worth paying for the annual management fee. However, if you are looking to take advantage of this tax minimization M1 Finance offers this for free.

Click Here To Get Started With M1 Finance