2021 Outlook: Stocks and Housing
Today we dust off our crystal ball and tell you what’s ahead for stocks, housing, interest rates and more in 2021.
Today we dust off our crystal ball and tell you what’s ahead for stocks, housing, interest rates and more in 2021.
To new investors, the stock market can seem mysterious and intimidating. Many people hear that buying stocks is risky, but they like the potentially high investment returns. Fortunately, there are some ways to make money investing in stocks that significantly limit your risk.
Just about every investor should own some amount of stocks, even during times of market volatility.
Just about every investor should own some amount of stocks, even during times of market volatility. I'll explain how to invest in stocks when you have little experience or money. You’ll learn the pros and cons of stocks and the best ways to own them to build wealth safely.
Stocks are intangible assets that give you ownership in a company. That’s why they’re also known as equities or equity investments. Owning stock entitles you to part of a company’s earnings and assets.
Let's say a company needs to fund groundbreaking research, open a division in a foreign country, or hire a crew of talented engineers. Companies issue stock to raise money from investors for these types of ventures—it’s that simple.
Publicly traded stocks are bought and sold on exchanges such as the NASDAQ or the New York Stock Exchange (NYSE). However, you can trade them only through a broker or investment firm.
When a stock increases in value, it’s called "capital appreciation." That’s a fancy way of saying that the price goes up. As I'm writing this episode, Facebook and Apple stock are selling on the NASDAQ exchange for $266.12 and $469.51 per share. Visa and Walt Disney stock are selling on the New York Stock Exchange for $202.41 and $127.92.
If you buy Visa at $202.41 per share and the price goes up to $210, you can sell it for a gain of $7.59 ($210 – $202.41). You can easily find current stock price quotes on sites like Google Finance and Yahoo Finance.
In addition to capital appreciation, some stocks also pay a portion of company profits. If so, it’s called a dividend stock and distributes dividend payments to stockholders. For instance, right now, Discover pays a dividend of $0.44 a share. If you own 1,000 shares of Discover, you'd be paid $440 in dividends over a year.
Dividend stocks pay you even when the share price goes down, so owning them is smart to hedge against potential market losses. You can find a list of dividend stocks on a site like Morningstar.
There are many advantages to investing in stocks. One is that you don't need much money to buy them compared to other assets such as real estate. Buying just one stock share makes you an instant business owner without investing your life savings or taking on significant risk.
Buying just one stock share makes you an instant business owner without investing your life savings or taking on significant risk.
Another advantage of making stock investments is that they offer the most significant potential for growth. Although there's no guarantee that every stock will increase in value, since 1926, the average large stock has returned close to 10% a year.
If you're investing for a long-term goal, such as retirement or a child's education, stocks turbocharge your portfolio with enough growth to achieve it. Over the long term, no other type of common investment performs better than stocks.
The main disadvantage of investing in stocks is that prices can be volatile and spike up or plummet quickly as trading volume fluctuates from minute to minute. News, earnings forecasts, and quarterly financial statements are just a few triggers that cause investors to buy or sell shares, and that activity influences a stock's price throughout the day.
Price volatility is why stocks are one of the riskiest investments to own in the short term.
Price volatility is why stocks are one of the riskiest investments to own in the short term. Investing at the wrong time could wipe out your portfolio or cause you to lose money if you need to sell shares on a day when the price is below what you originally paid.
But as I mentioned, you can minimize this risk (but never eliminate it) by adopting a long-term investing strategy.
In addition to taking a long-term approach, another key strategy for making money investing in stocks is diversification. Having a diversified stock portfolio means you own many stocks.
People are often surprised to learn that it's better to own more investments than less. Diversification allows you to earn higher average returns while reducing risk because it's not likely that all your investments could drop in value at the same time.
Diversification allows you to earn higher average returns while reducing risk because it's not likely that all your investments could drop in value at the same time.
For instance, if you put your life’s savings into one technology stock that tanks, you’re in trouble. But if that stock only makes up a fraction of your portfolio, the loss is negligible. Having a mix of investments that responds to market conditions in different ways is the key to smoothing out risk.
Diversification isn’t a guarantee that you’ll make a killing with your investments, but the idea is that as some investments go up in value, others may decline and vice versa. It prevents you from “putting all your eggs in one basket,” financially speaking.
RELATED: How to Invest in the Perfect Portfolio
If you think creating a diversified stock portfolio sounds difficult or time-consuming, I want to put you at ease. Buying one or more stock funds is a simple and inexpensive way to achieve instant diversification.
Funds bundle investments of stocks, bonds, assets, and other securities into packages convenient for investors to buy. They’re made up of many underlying investments. Some funds may focus on one asset class only, such as international stocks, others may have a mix of asset types, such as stock and bonds.
Depending on the investment firm you use, you may see the following types of funds:
Stocks or stock funds should be an essential part of every investor's long-term portfolio. If you're young and have a long way to go before retirement, consider owning a large percentage of stocks. Though prices will go up and down in the short term, you're likely to see prices trend up and give you an impressive return over time.
But if you're nearing or already in retirement, take a more conservative approach to preserve your wealth. That doesn't mean eliminating stocks from your portfolio entirely but instead, owning a lower percentage.
There's a rough rule of thumb that says you should subtract your age from 100 or 110 to find the percentage of stocks to own.
There's a rough rule of thumb that says you should subtract your age from 100 or 110 to find the percentage of stocks to own. For instance, a 40-year-old should consider holding 60% to 70% of their investment portfolio in stocks. The remainder would be in other asset types such as bonds, real estate, and cash.
These investment allocation targets are not hard rules because everyone is different. To design your ideal allocation strategy, you can use an online resource, such as Bankrate's Asset Allocation Calculator.
What's important to remember about making money with stocks is that the amount you own should change over time. When you have decades to go before retirement, take advantage of as much growth as possible by investing mostly in stocks. As you get closer to retirement, devote more of your portfolio to bonds and cash, which preserve the wealth you worked hard to accumulate.
Earning an advanced degree as a working professional can be a challengeâunless you have a good financial plan.
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If you're dreaming about leaving a corporate job to work for yourself, getting affordable health insurance is probably one of your top concerns. Fortunately, there are more protections now than ever for those who leave the safety of a group health plan.
This post will cover six tips to find affordable health insurance when you become self-employed or leave a job for any reason, so you and your family get the coverage you need.
The Affordable Care Act (ACA), known as Obamacare, became law in 2010, with significant provisions taking effect in 2014. One critical ACA benefit is that you can't be denied coverage or charged sky-high premiums when you have a preexisting medical condition. However, insurers can charge different rates based on where you live, your age, tobacco use, and family size.
One critical ACA benefit is that you can't be denied coverage or charged sky-high premiums when you have a preexisting medical condition.
The ACA also removes annual and lifetime caps on your health coverage. And no matter how much care you receive, the law caps how much you have to pay for it.
Out-of-pocket annual maximums vary depending on your health plan, but if you get in-network care, you'll never have to pay more than $8,150 as an individual, or $16,300 as a family, for the 2020 plan year. For 2021, these amounts increase to $8,550 and $17,100. Note that these limits don't include your monthly premiums.
The ACA also offers many low- and middle-income Americans a health subsidy, which cuts the cost of premiums depending on your income and family size. It's a tax credit paid to your health insurance provider every month, which allows you to pay a lower premium.
For 2020, an individual earning approximately less than $51,000 or a family of four making under $104,000 per year may qualify for an insurance subsidy.
The ACA subsidy applies when your household income is between 100% and 400% of your state's federal poverty level. For 2020, an individual earning approximately less than $51,000 or a family of four making under $104,000 per year may qualify for an insurance subsidy.
One challenge to using a subsidy is that it's based on your estimated earnings in the year when you'll get coverage, not on your last year's income. Since self-employment incomes can vary dramatically from month to month, the chances of knowing exactly how much you'll earn in the current or future year may be difficult.
If you underestimate your income for a health subsidy, you may have to return a portion of the tax credit already spent on your insurance during the previous year. In other words, you may owe additional taxes that you weren't expecting.
When you enroll in an ACA plan, you'll have access to a marketplace account. That's where you can update changes to your expected income or family size that affect your tax credit so you can correct it as quickly as possible.
The ACA mandated that individuals be covered by a qualified health plan or pay a tax penalty if you're uninsured for more than two consecutive months. The mandate applies no matter if you're employed, self-employed, unemployed, a child, an adult, or where you live.
Technically, it's still illegal to be uninsured, but the federal government won't penalize you for it.
However, starting in 2019, due to the Tax Cuts and Jobs Act, the mandate penalty for not having health insurance no longer applies. Technically, it's still illegal to be uninsured, but the federal government won't penalize you for it.
But several states have their own insurance mandates, requiring you to have a qualifying health plan. You may have to pay the penalty for being uninsured if you live in:
For example, California residents without ACA coverage in 2020 face a penalty up to 2.5% of household income, or $696 per adult, and $375.50 per child, whichever is greater. So, even if the federal government won't penalize you for being uninsured, you could have to pay a hefty state penalty, depending on where you live. More states will likely adopt penalties to keep the cost of coverage for residents as low as possible.
The ACA established health insurance exchanges, primarily as online marketplaces, administered by either federal or state governments. That's where individuals, the self-employed, and small businesses can shop and purchase qualified insurance plans and find other options, depending on your income.
When you go out on your own, the cost of a health plan can be shocking—especially if you just left a company that paid a big chunk of the insurance bill on your behalf.
Remember that the high cost of health insurance pales when compared to the alternative. Having a medical emergency or being diagnosed with a severe illness that you can't afford to treat could be devastating.
Remember that the high cost of health insurance pales when compared to the alternative.
Here are six tips for finding affordable health insurance when you become self-employed or no longer have job-based coverage for any reason:
If your spouse or partner has employer-sponsored health insurance, joining their plan could be your most affordable option. Group insurance generally costs much less than individual coverage. Plus, some employers subsidize a portion of your premium as a benefit.
However, some employer plans may not offer domestic partner benefits to unmarried couples. So, find out from the benefits administrator what's allowed.
If you're under age 26, another option is to join or remain on a parent's health plan if they're willing to have you. Even if you're married, not living with your parents, and not financially dependent on them, the ACA allows you to get health insurance using a parent's plan. However, once you're over age 26, you'll have to use another option covered here.
As I mentioned, the ACA established federal and state marketplaces for consumers who don't have access to employer-sponsored health insurance. The following states have health insurance exchanges:
No matter where you live, you can begin shopping for an ACA-qualified health plan at healthcare.gov. However, you can only apply for a policy during the annual open enrollment period—November 1 to December 15, for coverage that will begin on January 1 of the following year. Some states with healthcare exchanges have an extended enrollment period.
In general, if you miss the enrollment window, you can't get an ACA health plan until the following year unless you qualify for a special enrollment. That allows you to purchase or change coverage any time of the year if you have a major qualifying life event, such as losing insurance at work, getting married or divorced, having a child, or relocating. However, you typically only have 60 days after the event occurs to enroll.
If your income is too high to qualify for a healthcare subsidy, you can still buy health insurance through the federal or your state's exchange. You can also get an ACA-qualified health plan directly from an insurance company, a health insurance agent or broker, or an online insurance aggregator.
One way to reduce the cost of health insurance premiums is to choose a high-deductible health plan (HDHP). You enjoy lower monthly premiums but have higher out-of-pocket costs. If you're in relatively good health, an HDHP can make sense; however, if you get sick, it can end up costing you more.
Paying for a broad range of HSA-eligible medical, dental, mental, and vision costs on a tax-free basis can add up to massive savings!
Another benefit of having an HDHP is that you qualify for a health savings account (HSA). Contributions to an HSA are tax-deductible and can be withdrawn at any time to pay for qualified medical expenses, such as doctor co-pays, prescription drugs, dental care, chiropractic, prescription eyeglasses, and mental health care.
Paying for a broad range of HSA-eligible medical, dental, mental, and vision costs on a tax-free basis can add up to massive savings!
If you miss the deadline to enroll in an ACA health plan and don't qualify for special enrollment, are you simply out of luck? Fortunately, no. You can purchase a short-term health plan until the next enrollment period comes around.
The problem is, short-term plans don't have to meet ACA standards and only offer temporary coverage, such as for a few months or up to a year. You may be eligible to renew a plan for up to three years in some states, depending on the insurer.
You won't find short-term plans on the federal or state exchange, and therefore can't get a subsidy when you purchase one. However, they can be less expensive than an ACA-qualified plan.
Short-term plans can charge more if you have preexisting conditions, put caps on benefits, or not cover essential services like prescriptions and preventive care. Because they fall short of ACA requirements, you can have one and still be subject to a state-mandated health penalty.
You won't find short-term plans on the federal or state exchange, and therefore can't get a subsidy when you purchase one. However, they can be less expensive than an ACA-qualified plan.
Having short-term coverage is certainly better than being uninsured, but I recommend replacing it with qualified health coverage as soon as possible. That's the best way to have the protection you need against the enormous financial risk of medical costs.
If you can't afford health insurance, you may be eligible for free or low-cost coverage through Medicaid or CHIP at any time of year, depending on your income, family size, and the state where you live. In general, if you earn less than the poverty level, which is currently $12,760 for an individual or $26,200 for a family of four, you may qualify for these programs. They may have different names depending on where you live.
Unlike ACA health plans, state-run health programs don't have set open enrollment periods, so if you qualify, coverage can begin any time of year.
When you complete an application at the federal or state health insurance exchange, you can also determine if you qualify for coverage through Medicaid and CHIP programs. You can learn more about both programs at medicaid.gov.
If you leave a job with group health insurance, you can enroll in COBRA (Consolidated Omnibus Budget Reconciliation Act) coverage. It isn't an insurance company or a health plan, but a regulation that gives you the option to continue your employer-sponsored health insurance after you're no longer employed.
Instead of having your plan canceled the month you leave a job, you can use COBRA to continue getting the same benefits and choices you had before you left the company. In most cases, you can get COBRA benefits for up to 18 months.
The problem with COBRA coverage is that it's temporary and can be expensive. Unlike other federal benefits, such as the Family and Medical Leave Act (FMLA), employers don't have to pay for COBRA. You typically have to pay the full cost of premiums, plus a 2 percent administrative charge, to the insurer.
If you're not eligible for regular, federal COBRA, many states offer similar programs, called Mini COBRA. To learn more, check with your state's department of insurance.
After you become self-employed and purchase health insurance, it's crucial to shop for plans every open enrollment period. Your or your family's medical needs or income may change.
Additionally, new health insurers come in and go out of the health insurance marketplace. Carriers that offered plans in your ZIP code last year may not be the same set of players this year. In other words, a competitor could offer a similar or better plan than yours, for a lower price. So, if you don't shop annually, you could leave money on the table.
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