finance

Reviewed by David Kindness
Fact checked by Amanda Bellucco-Chatham

Revenue is the total amount of money generated from a business’s primary operations. It’s also referred to as gross sales or “the top line” because it’s the first line on an income statement. It’s calculated by multiplying a company’s average sales price by the number of units sold.

Income is a company’s total earnings after all expenses and earnings that aren’t counted as revenue are deducted. It’s calculated by subtracting expenses, interest, cost of sales or goods sold, and taxes from total revenues.

Key Takeaways

• Revenue is the total amount of money generated by the sale of goods or services related to the company’s primary operations.
• Revenue is calculated before any expenses are taken out.
• Income or net income is a company’s total earnings after deducting expenses. 
• Both revenue and net income are useful in determining the financial strength of a company but they aren’t interchangeable.

Revenue

Revenue is the money a company generates before any expenses are subtracted. It only indicates how effective a company is at generating sales. It doesn’t consider operating efficiencies which could have a dramatic impact on the bottom line.

Revenue can come from a variety of sources. These include but aren’t limited to:

• The sale of goods, services, and assets
• Advertising
• Licensing agreements
• Fees and service charges
• Subscriptions
• Rental income

Companies recognize and record revenue differently so it isn’t always the same even for companies within the same industry. You can find out how a specific company defines it in its financial statements if you’re unsure.

Income

Income is earnings left after all expenses and non-revenue, additional income are deducted. It’s more commonly called net income because it’s the net result after the deductions. There may be several line items subtracted from revenue to arrive at net income.

Income can be broken up into different categories just like revenue:

• Gross Income: Gross income is the total income recorded before any taxes and expenses are deducted. Gross income may also be referred to as gross profit or gross margin. It’s found on the income statement.
• Net Income: Net income is calculated by subtracting the costs of doing business such as depreciation, interest, taxes, and other expenses from revenues. The bottom line or net income describes how efficient a company is with its spending and managing its operating costs. This figure appears on a company’s income statement and is an important measure of its profitability.

Income can be used to analyze and determine whether a company is operating efficiently.

Important

Common financial ratios that use data from the income statement include profit margin, operating margin, earnings per share (EPS), price-to-earnings ratio, and return on stockholders’ equity.

Revenue vs. Income

Consider Apple, one of the largest tech companies on the market, to grasp how significant the difference between revenue and income can be. From a net sales (total revenue) of $119.5 billion in Q4 of 2023, Apple deducted its:

• Total cost of sales: $64.7 billion
• Total operating expenses: $14.4 billion
• Other income (expense), net: $50 million
• Income taxes: 7.2 million

This gave the company a net income of $40.3 billion in Q4 2023.

Can Income Be Higher Than Revenue?

Income can generally never be higher than revenue because income is derived from revenue after subtracting all costs. Revenue is the starting point and income is the endpoint. The business will have received income from an outside source that isn’t operating income such as from a specific transaction or investment in cases where income is higher than revenue.

Is Revenue or Income More Important?

Both measures are important and income is derived from revenue but income is generally considered more important. Income is profit that shows that a business can cover its expenses and use that profit to grow the business. It won’t have to rely on outside sources such as debt to continue operating. Strong revenues indicate that a business can sell its product or service but strong profits indicate that a business is in good financial health.

What Are the Advantages of Revenue Management?

Revenue management allows a company to better manage its sales tactics and its costs such as the need for raw materials. It can help it to offer a better price point to customers, run operations more efficiently, and keep inventory slim.

The Bottom Line

Companies report several important financial metrics each quarter including revenue and income. These two figures are often used interchangeably because they refer to the money a company earns. Revenue refers to money earned from a variety of sources, however. Income is any money that’s left over after all expenses are accounted for including taxes and other costs.

Fact checked by Yarilet Perez
Reviewed by Samantha Silberstein

The decade known as the “Roaring Twenties” was a period of exuberant economic and social growth within the United States. The era came to a dramatic and abrupt end in October 1929 when the stock market crashed, paving the way for America’s Great Depression in the 1930s.

Economic upheaval ensued in the years that followed as the U.S. economy shrank by more than 36% from 1929 to 1933 as measured by gross domestic product (GDP). Many U.S. banks failed leading to a loss of savings for their customers. The unemployment rate surged to over 25% as workers lost their jobs.

Key Takeaways

• The stock market crashed in October 1929, wiping out billions of dollars of wealth and heralding the Great Depression.
• The crash is known as Black Thursday.
• It was preceded by a period of phenomenal growth and speculative expansion.
• A glut of supply and dissipating demand helped lead to the economic downturn as producers could no longer readily sell their products.

Black Thursday

The crash began on Oct. 24, 1929, a day known as “Black Thursday.” The market opened 11% lower than the previous day’s close. Institutions and financiers stepped in with bids above the market price to stem the panic and the losses on that first day were modest. Stocks bounced back over the next two days.

The bounce was short-lived, however. The market measured by the Dow Jones Industrial Average (DJIA) closed down 13% the following Monday, known as Black Monday. The Dow, which contains some of the largest companies in the U.S., fell another 12% the next day on Black Tuesday.

The crash wiped out both corporate and individual wealth. The stock market peaked on Sept. 3, 1929 with the Dow at 381.17. The ultimate bottom was reached on July 8, 1932 when the Dow stood at 41.22. The Dow experienced a staggering loss of 89.2% from peak to trough.

The price of many large, blue-chip stocks declined but smaller companies suffered even more, forcing companies to declare bankruptcy. Many speculative stocks were delisted from stock exchanges. It wasn’t until Nov. 23, 1954 that the Dow reached its previous peak of 381.17.

Before the Crash: A Period of Phenomenal Growth

Companies experienced a great deal of success in exporting to Europe in the first half of the 1920s. Europe was rebuilding from World War I. Unemployment was low and automobiles spread across the country, creating jobs and efficiencies for the economy.

Stock prices shot up until the peak in 1929. Investing in the stock market became somewhat of a national pastime in the 1920s for those who could afford it and even for those who couldn’t. They borrowed from stockbrokers to finance their investments.

The economic growth created an environment in which speculating in stocks became almost a hobby. The general population wanted a piece of the market. Many were buying stocks on margin, the practice of purchasing an asset where the buyer pays only a percentage of the asset’s value and borrows the rest from the bank or a broker. Margin credit rose from 12% of NYSE market value in 1917 to 20% in 1929.

Overproduction and Oversupply in Markets

People weren’t buying stocks on fundamentals. They were buying in anticipation of rising share prices. These prices brought more people into the markets as they became convinced that it was easy money.

The economy stumbled in mid-1929 due to excess production in many industries which created an oversupply. Companies could essentially acquire money cheaply due to high share prices and could invest in their production with the requisite optimism. This overproduction eventually led to oversupply in many areas of the market such as farm crops, steel, and iron. Companies were forced to dump their products at a loss and share prices began to falter.

Important

The prices of agricultural products dropped so low in the 1930s that farmers lost their farms and went bankrupt. Many families burned corn instead of coal because corn was cheaper.

Global Trade and Tariffs

The oversupply of agricultural goods as Europe recovered from the Great War and production increased meant that American farmers lost a key market to sell their goods. The result was a series of legislative measures by the U.S. Congress to increase tariffs on imports from Europe

The tariffs expanded beyond agricultural goods, however, and many nations also added tariffs to their imports from the United States and other countries. The overproduction, oversupply, and higher prices due to these tariffs had devastating consequences for international trade. Global trade plummeted by 66% from 1929 to 1934.

Excess Debt

Margin trading can lead to significant gains in bull or rising markets because the borrowed funds allow investors to buy more stock than they could otherwise afford. The gains are magnified by the leverage or borrowed funds as a result when stock prices rise.

The losses in the stock positions are also magnified when markets are falling, however. The broker will issue a margin call if a portfolio loses value too rapidly. This is a notice to deposit more money to cover the decline in the portfolio’s value. The broker is forced to liquidate the portfolio if the funds aren’t deposited.

Banks issued margin calls when the market crashed in 1929. Entire portfolios were liquidated due to the massive number of shares bought on margin by the general public and the lack of cash on the sidelines. The stock market spiraled downward as a result.

Many investors were wiped out and the Federal Deposit Insurance Corporation (FDIC) didn’t exist back then to guarantee depositors’ funds. Many Americans began withdrawing their cash from banks. The banks were left with significant losses because they’d made too many bad loans.

The Aftermath of the Crash

The stock market crash and the ensuing Great Depression from 1929 to 1939 directly impacted nearly every segment of society. They altered an entire generation’s perspective and relationship to the financial markets.

The time frame after the market crash was a total reversal of the attitude of the Roaring Twenties which had been a time of great optimism, high consumer spending, and economic growth.

What Were the Causes of the 1929 Stock Market Crash?

There were many causes of the 1929 stock market crash, some of which included overinflated shares, growing bank loans, agricultural overproduction, panic selling, stocks purchased on margin, higher interest rates, and a negative media industry. This deflationary period in the U.S. economy marked the beginning of the Great Depression.

Why Did the Stock Market Crash of 1929 Cause the Great Depression?

The stock market crash of 1929 caused the Great Depression because everyone lost money. Investors and businesses both put significant amounts of money into the market and tremendous amounts of money were lost when it crashed. Businesses closed and people lost their savings.

What Ended the Great Depression?

World War II ended the Great Depression. The economy shifted to a war economy when the U.S. went to war after being attacked by Japan. People went to jobs in the defense industry and others went overseas to fight in the war.

The Bottom Line

A complex network of factors works together to bring about a crash and recession. The 1929 crash was caused by many factors including a boom after World War I, overproduction in key industries, increased use of margin for purchasing stocks, and lack of global buyers around the world due to the war. Some lessons have been learned since then. Some mistakes have contributed to future crashes.

Being laid off from your job is traumatic on multiple levels. In stressful situations such as this, it can be hard to confidently navigate a path forward and know where best to focus your efforts. Here’s what I’m telling my clients.

Key Takeaways

• Give yourself a minute to be upset. Being laid off can trigger various reactions and emotions, such as anger, sadness, or fear.
• Take stock of what you have. Having a clear sense of available resources can assure you that you can cover your basic expenses for a period of time.
• Review your severance package and all available benefits carefully.

What I’m Telling My Clients

1. Take Inventory

Start by inventorying all your liquid (available) cash in checking/savings, money market funds or CDs, and incoming severance or bonus payouts. Add up your essential monthly expenses like rent/mortgage payment, utilities, and groceries. Then, you can factor in more discretionary spending categories like travel or entertainment. The goal at the outset isn’t necessarily to cut back but to know how much you typically spend.

2. Assess Your Runway

Once you know your monthly burn rate and how much cash you have, you can assess your “runway”—in other words, how many months of current spending you have before you cannot cover daily living expenses.

Note

According to data from Crunchbase, at least 95,667 workers at U.S.-based tech companies have lost their jobs in 2024, a decline compared to the 191,000 layoffs in 2023.

3. File for Unemployment

File for unemployment immediately so you can get the maximum benefit available to you.

If you receive a severance package, review the details carefully to ensure you understand your options regarding equity compensation, portability of benefits, and vacation payout.

Important

If you work in a non-compete or non-solicit clause role, it might be wise to consult with an attorney.

4. Start Your Job Search Early

It’s OK to give yourself a week or two before jumping right in, but don’t wait too long. You don’t want to wait until you need the income and are forced to take the first job offered. 

5. Understand Your Benefits

Some of your employer-sponsored benefits may be portable (which means you can keep them after you no longer work there). In particular, you likely can access your medical/dental/vision benefits through COBRA and possibly disability and life insurance. While paying these premiums out of pocket can be intimidating, it’s important not to let critical coverage lapse. You typically have 60 days to decide whether or not you want to keep your medical insurance, and this benefit is retroactive to your termination date.

The Bottom Line

Receiving the proverbial “pink slip” might feel like a worst-case scenario. Thankfully, you can take numerous practical steps to ensure your financial life remains healthy. Tackling one thing at a time and ensuring the most critical components are taken care of first will afford you some breathing room while you consider your next move.

Reviewed by Charles Potters

Most traders and investors are familiar with the saying “the trend is your friend.” However, deciding what constitutes a trend often proves challenging because it depends on the trader’s preferred time in the trade. Furthermore, once a trend has been identified, the trader must determine its strength.

In his book “The Logical Trader,” Mark Fisher describes a number of techniques to help his readers spot trend breakouts and identify their strengths. Fisher’s ACD trading system uses intraday data to identify the daily opening range for finding trades.

Fisher, an independent trader, is the founder of MBF Clearing Corp., one of the largest clearing firms on the NYMEX. While this intraday ACD technique may not appeal to the long-term trader or investor, the following is a look at how the technique can be applied to a longer time horizon.

Key Takeaways

• In this article, we look at Mark Fisher’s “ACD system” and how it works from a technical analysis standpoint.
• Basically, this system provides A and C points for the entry of a trade, and B and D points as exits—hence the name.
•  ACD is a breakout strategy that works best in volatile or trending markets with a special group of stocks and commodities such as crude oil.

Opening Range

First, we look at how short-term trades are to be entered on a five-minute chart. Using the first five to 30 minutes of the day, depending on the equity or commodity, we determine the opening range (OR) high and low.

“A ups” and “A downs” are then calculated based on a set number of points above or below the daily OR. In Figure 1 below, we examine the stock Broadcom. An A up (A down) (green lines) occurs if the price of the stock moves $0.27 above (or below) the OR.

Monthly and Half-Yearly Opening Range

Opening range can also be applied to longer periods. Just as the daily OR has a greater chance than other times throughout the day of being the high or low, the monthly OR has a greater chance than another day in the month of being the high or low for the next 20 or so trading days. Once the trader knows this fact, it can be exploited to better the odds of making money.

This is also true of the first two weeks (10 trading days) of each six-month period. The high and low set during the first two weeks of January and July often represent an important area of support or resistance for the next five and a half months.

The good news is that both monthly and half-yearly ORs are very easy to calculate. Simply take the high and the low of the first trading day of the month for the monthly OR, or take the first 10 trading days in January or July for the half-yearly OR and draw two lines across your chart. If the price breaks above the high, a bullish bias is adopted. If it breaks below the low line, a bearish stance is taken.

The monthly opening range is plotted in Figure 1 (orange lines). We see that after breaking down through the monthly OR, the stock continued to trade lower, confirming a medium-term negative market bias. An advance warning of the breakdown was provided by the bearish divergence on the relative strength index, or RSI, in the upper window of the chart in Figure 1.

Note

Technical analysis is primarily used for short-term trading while fundamental analysis is used more for long-term investing.

Pivot vs. Pivot Range 

Most experienced traders are familiar with pivots. A pivot point is simply the point at which a security changes direction and is therefore a turning point. A pivot low price bar has higher bars before and after it so that the formation looks like either a “V” or “U.” A pivot high looks like the mirror image of a pivot low.

Pivots signify the end of a short-term move and minor reversal or the end of the dominant trend and a major change in direction. Pivot points are used to calculate Fibonacci levels of support and resistance, swing trade entry and exits, and a host of other trading techniques.

A pivot range is also based on the high, low, and close, but is calculated somewhat differently than a pivot point. As the name implies, pivot ranges have a high and low limit.

Here is the calculation from “The Logical Trader.” The same formula is used to calculate daily, monthly, and six-month pivot ranges, but note that for the monthly, the high, low, and close of the first day of the month should be used. For the six-month pivot ranges, the high, low, and close of the first 10 trading days of January and July should be used:

• Pivot price (also equals formula for a pivot point) = (high + low + close) / 3
• Second number = (high + low) / 2
• Pivot differential = daily pivot price – second number
• Pivot range high = daily pivot price + pivot differential
• Pivot range low = daily pivot price – pivot differential

Below, the monthly (blue lines) and six-month (orange lines) pivot ranges are plotted for Broadcom. In both cases, the pivot ranges acted as either resistance (when in a bear trend) or support (bull trend).

Like opening range, pivot ranges can be used to execute trades. Similar to an ACD trade, A ups and downs as well as C ups and downs are used, but because the trader is using longer time frames, larger values are employed than when the daily values are calculated (not shown in Figure 2).

When trading Broadcom, instead of using an A up of $0.27 to trade short-term using the daily OR, the longer-term trader would apply a half-year A up of $2.50 to $3 above the half-yearly pivot range, depending on volatility and the stock price at the time.

The time frame is different but the concept is the same. The goal is to identify breakouts, assess their potential, and then trade accordingly.

Three-Day Rolling Pivot

Another technique for helping traders spot breakouts is the three-day rolling pivot. When the three-day rolling pivot range is below the price action, long trades are favored and when above, short trades are preferred.

In the image above, a buy signal is generated on March 1 (point one) when the price breaks through the A up. A long trade is further confirmed by the fact that the three-day rolling pivot is acting as support. The stock then begins to trade in a range in which the three-day rolling pivot turns from support to resistance by March 5. When the stock drops through the A down at point two on March 6, a sell is generated.

Here is the calculation for the three-day rolling pivot:

• Three-day rolling pivot price = (three-day high + three-day low + close) / 3
• Second number = (three-day high + three-day low) / 2
• Pivot differential = daily pivot price – second number
• Three-day rolling pivot range high = daily pivot price + pivot differential
• Three-day rolling pivot range low = daily pivot price – pivot differential

Putting It All Together

Fisher’s point in “The Logical Trader” is that OR and pivot ranges are methods used by his professional traders to gauge overall market bias and are more powerful than simply relying on standard support and resistance. How are opening and pivot ranges used together?

• If OR < pivot range < close = plus day and the trader is bullish.
• If opening OR

For example, if OR is less than the pivot range and assuming there is some room between the A up and the pivot range, a long trade could still be taken.

However, fewer shares would be purchased since the trader knows that the price has a strong probability of stopping or reversing when it reaches the pivot range. But when the price trades above the OR and pivot range, the trader has a higher degree of confidence that the trade has some room to move, so they buy more shares as it is now a plus day.

What Is the ACD Method of Trading?

Mark Fisher developed the ACD system of trading to help traders identify entry and exit points in the market. The system uses time-based price levels, ABCD, which are calculated by using the market’s opening range and daily volatility. Traders monitor the price to see if it moves above or below A and C to gauge market strength or weakness and make trading decisions based on that information.

What Does a Technical Trader Do?

Technical traders use historical patterns to determine future stock movements. They use price charts, patterns, and technical indicators to make trading decisions. These methods help traders create entry and exit points on trades. Technical trading focuses on timing and risk management, using various tools to create buy/sell signals. It does not solely rely on fundamental data, such as the information in a company’s financial statements, to make trading decisions.

What Are the Best Technical Trading Indicators?

Some of the most popular technical trading indicators include the Aroon indicator, the moving average convergence divergence (MACD), the relative strength index (RSI), the stochastic oscillator, and Bollinger Bands.

The Bottom Line

The opening range provides a wider area with a probability that it will either be the high or the low of the period under examination. The pivot range, whether it is daily or half-yearly, gives another point of reference for support or resistance. By plotting these values on the chart, a trader can immediately see when the stock or market is gaining or losing strength and momentum.

Designating where OR and pivot range are in relation to each other and to the current price helps the trader decide how much confidence can be used when placing a trade. This information is highly useful in making trading decisions. And, like any reliable technical trading technique, it is one that works in all time frames.

Compare which top digital wealth management platforms is best for your financial needs

Fact checked by Vikki Velasquez
Reviewed by Samantha Silberstein

M1 Finance and E*TRADE Core Portfolios are both well-known competitors and are considered two of the best digital wealth management platforms. While M1 Finance is a relatively new company, founded in 2015, it has quickly gained recognition as a robo-advisor, offering investors customization and control of their portfolios and winning our top pick for sophisticated investors. E*TRADE is more of a household name in the industry, as it has been around since the 1990s. E*TRADE has long stood out for its technological expertise, and is our top pick for best for mobile category in 2024. 

While both companies offer digital wealth management services to investors, the strategies and features of these platforms are vastly different. M1 Finance offers a low minimum investment to get started, 0% advisory fees, and a plethora of stocks and ETFs to choose from for your portfolio, which is fully customizable. E*TRADE is more of a traditional robo-advisor, walking investors through a questionnaire relating to goals, time horizon, and risk tolerance, and then suggesting a portfolio to meet the goals matching your investor profile. We will take an in-depth look at each platform to help you decide which is the best fit for your portfolio needs.

Key Takeaways of M1 Finance

• Can invest in over 6,000 stocks and ETFs
• No fee for the basic account
• Ability to borrow against your portfolio with a flexible line of credit
• Investor has total control over picking stocks and ETFs

Key Takeaways of E*TRADE Core Portfolios

• User-friendly desktop and mobile platforms
• Simple to enroll and get started, especially for existing E*TRADE customers
• Can apply smart beta and socially responsible investing principles to recommended portfolios
• Vast array of investment options, including stocks, bonds, ETFs, futures, and commodities

Account Setup

M1 Finance

M1 Finance is unique within the industry in that you are in complete control of your portfolio. M1 uses “Pies” for investors to build a portfolio, thinking of each stock or ETF as a slice of that pie. While you are able to choose a pre-made Model Portfolio, you also have the ability to build your own, with exactly the investments that you choose, in the percentages that you choose, and you can edit your “slices” at any time.   

When opening an account, you will not be walked through a questionnaire for the platform to automatically suggest a portfolio. Instead, you will be prompted to choose stock and ETF slices to comprise your investment Pie. 

Keep in mind: 

• There is a maximum of 100 stock or ETF slices per portfolio.
• Each slice must be at least 1%, with the total portfolio adding up to 100%.
• Any buy order must equal a minimum of $1 per security before a trade will be executed.

E*TRADE Core Portfolios

E*TRADE Core Portfolios has a typical robo-advisor account setup, where investors complete an investor profile questionnaire, answering questions regarding investment objectives, time horizon, and risk tolerance. Core Portfolios then suggests a recommended portfolio based on this questionnaire. You can see this portfolio prior to funding it, which is a nice feature. Further customization is limited to additional investment strategies, such as ESG or smart beta ETFs.

Account Setup Verdict: E*TRADE Core Portfolios

We give E*TRADE Core Portfolios the edge in account setup as it is a more comprehensive process whereas M1 Finance requires you to know what you are doing right out of the box. 

Account Types

M1 Finance

• Individual taxable
• Joint taxable
• Traditional individual retirement account (IRA)
• Roth IRA
• 401(k) rollover IRA
• Simplified employee pension (SEP) IRA
• Trust 
• Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA)
• Crypto
• High-interest cash

E*TRADE Core Portfolios

• Individual taxable 
• Joint taxable 
• Traditional IRA 
• Roth IRA 
• SEP IRA 
• Rollover IRA
• Custodial (UGMA and UTMA)

Account Types Verdict: M1 Finance

Both of these digital investment platforms offer the most commonly used accounts. M1 Finance gets a slight nod as its cryptocurrency and high-interest cash accounts are integrated into the platform. E*TRADE Core Portfolios provide access to other financial accounts, but they are inside the larger Morgan Stanley/E*TRADE financial universe of products. 

Account Services

Cash Management and Borrowing

M1 Finance has created an all-in-one, easy-to-use platform where clients can access banking services, set up their investments, and acquire a margin loan, if needed.

• M1 brokerage accounts: These accounts offer flexibility, customization, and automation on a commission-free platform.
• M1 margin loans: Clients have the ability to easily borrow against their investments at a low interest rate, currently 5.50% to 6.25%, via a margin loan. In order to borrow on margin, the account must have a balance of at least $2,000, and must not be a retirement or custodial account.  

E*TRADE Core Portfolios has a 1% cash allocation target in all portfolios, which is invested in money market funds or cash alternatives. When a client needs to withdraw funds, Core Portfolios pulls from any cash in the account first, then strategically sells investments across the portfolio to maintain the target allocations.

Core Portfolios is designed with the primary goal of investing for the long term. With this objective in mind, features such as check writing, debit cards, or bill pay are not offered to clients with this type of account. While these features are not offered in a Core Portfolios account specifically, clients can open an additional E*TRADE Premium savings account, which offers a 4.10% APY on cash savings (as of Dec. 19, 2024).

Cash Management Verdict: M1 Finance

Here again M1 Finance benefits by having a feature in-platform rather than elsewhere in affiliated accounts. E*TRADE Core Portfolios is a robo-advisor within a larger financial institution whereas M1-Finance offers its cash management options right in the automated investment platform. 

Goal Planning

M1 Finance

The focus at M1 Finance is a no-frills, streamlined platform to allow experienced investors the ability to select and automate their portfolio management. M1 is unique within the digital wealth management industry in that the company isn’t using your basic goal and risk tolerance information in order to generate a suggested portfolio for you. Rather, M1 is seeking investors who want to reduce the portfolio management burden without giving up portfolio flexibility, investment options, or automation capabilities. If you are looking for goal-planning tools, financial calculators, or the ability to talk to a financial advisor, M1 Finance is not the choice for you.

E*TRADE Core Portfolios

Goal planning with E*TRADE Core Portfolios is minimal compared to some robo-advisors, but it is still ahead of M1 Finance in this respect. Besides selecting a goal when going through the initial questionnaire, clients will not find many tools or calculators to help them run the numbers for financial strategies or other goals. E*TRADE also has more support outside the Core Portfolios area in terms of financial content providing guidance and best practices that also apply to its other offerings.

Goal Planning Verdict: E*TRADE Core Portfolios

E*TRADE Core Portfolios has a more streamlined approach to goal planning and analysis than some of its robo-advisor competitors, but it is still more robust than M1 Finance’s general lack of any goal planning support.

Portfolio Construction

M1 Finance

When it comes to choosing investment options, M1 Finance stands out in the industry with over 6,000 stocks and ETFs for clients to choose from, as well as a range of ETFs and OTC securities for asset allocation. Additionally, investors wanting to get into the crypto market can open a Crypto account and invest in coins or build crypto Pies using Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), or cryptocurrency-related assets. 

For investors who are interested in socially responsible investing (SRI), M1 Finance offers four types of investment options to meet this goal: SRI, ESG, impact investing, and faith investing. Investors have the ability to choose the particular socially responsible stocks and ETFs that they’d like in their portfolio. Socially responsible investing at M1 is categorized in four different ways:

• SRI: “Socially responsible investing” is the all-encompassing term that M1 Finance uses for the overall strategy of investing for both financial return and the impact of the companies in which they are invested on the world around them. 
• ESG: Environmental, social, and governance investing is socially responsible investing that focuses on environmental impact, social impact, and corporate governance. 
• Impact investing: This option focuses on investing in companies with the main goal being positive social impact. With this strategy, financial returns are a secondary factor.
• Faith investing: This is a segment of socially responsible investing that focuses on the values of a particular religion and its impact on sustainable strategies.

E*TRADE Core Portfolios

Constructing your portfolio with E*TRADE Core Portfolios is relatively limited, as investors are only allowed to select their risk tolerance and investing goals with this type of account. However, clients do have the option to further customize their portfolios with smart beta and socially responsible portfolio choices.

Smart beta is an active portfolio strategy where a section of assets are devoted to a smart beta ETF. This type of ETF favors equities with attributes that have performed well historically, and incorporates elements of active and index investing.

Socially responsible portfolios focus on investing in companies that align with your values, specifically in the areas of environmental, social, and governance (ESG). E*TRADE Core Portfolios has also expanded its allocation options in the off-the-shelf offerings based on your survey inputs. Previously the high risk profile produced a mix of 80% stock exposure and 20% bonds. Now there is an aggressive portfolio option that will put 90% of your money into stocks with no bond exposure. 

Available Assets

Portfolio Customization

M1 Finance

M1 Finance is a standout within the digital wealth management platforms industry when it comes to portfolio customization. While most competitors suggest a portfolio for clients based on their goals, time horizon, and risk tolerance, M1 allows investors to select which individual stocks or ETFs, and in what percentage, they want in their portfolio. Once the client has these investments and percentages set, new money invested will be allocated automatically to maintain those levels.

E*TRADE Core Portfolios

E*TRADE Core Portfolios is limited when it comes to customizing your portfolio. This is similar to many robo-advisors within the industry where customization is limited to adjusting the risk tolerance and time horizon for your goals. Changing any of these factors will change the recommendations and allocations of your portfolio, which will then realign based on your current preferences. Beyond this, there is the option to have part of your portfolio in socially responsible or smart beta ETFs.

Portfolio Customization Verdict: M1 Finance

M1 Finance has a large edge in terms of customization over E*TRADE Core Portfolios. A lot of this owes to the fact that M1 Finance is an investment automation platform and E*TRADE Core Portfolios is a robo-advisor that tailors and maintains a portfolio allocation. If you already know what you want to invest in, M1 Finance provides the tools to create that exact portfolio and maintain it according to your specifications. 

Portfolio Management

M1 Finance

While most automated platforms will automatically rebalance your portfolio, M1 Finance will not commence with a portfolio rebalance unless you initiate the rebalance manually. However, M1 Finance does have dynamic rebalancing, which nudges your portfolio closer to the target percentages that you have set with every trade made with new money in your account. 

M1 Finance offers two ways to rebalance your portfolio: 

• Manual rebalancing: You set the original asset allocations when you set up your portfolio. As the market changes, those initial portfolio allocations may drift from your target preferences. Manual rebalancing allows you to select the option to rebalance the portfolio to buy and sell securities to return your Pie to the preset targets.
• Dynamic rebalancing: Automatic, or dynamic, rebalancing, whenever new money is added, M1 will examine your portfolio and determine if there are underweight stock allocations and will purchase these stocks to get them back in line with your target allocations; likewise, M1 will also sell overweight stocks to keep portfolio targets in line.

Whenever cash is added to your account to make new trades, the algorithm finds slices that are most underweight as compared to the target percentage you have set and puts money in those first.  

E*TRADE Core Portfolios

E*TRADE Core Portfolios is set up to manage your portfolio as a typical robo-advisor. While daily monitoring does occur, your portfolio will only be rebalanced if the allocations have drifted 5% or more from the targets, or if material deposits or withdrawals are made in the account. E*TRADE Core Portfolios also takes taxes into consideration, but that is covered in the next section.

Portfolio Management Verdict: E*TRADE Core Portfolios  

E*TRADE Core Portfolios provides a deeper level of portfolio management than M1 Finance. With M1 Finance, if you want to derisk a portfolio, for example, you will have to go in and change your allocations until you are satisfied. With E*TRADE Core Portfolios, this can be done simply by updating your risk profile via the questionnaire. 

Tax-Advantaged Investing

M1 Finance

M1 Finance does not offer tax-loss harvesting. However, the company does implement a tax minimization feature, which is designed to help clients reduce the amount of taxes owed when selling securities. When an investor requests a sale, M1’s algorithm decides which securities to sell based on portfolio targets.

M1 sells securities based on:

• Losses that offset future gains
• Lots that result in long-term gains
• Lots that result in short-term gains

E*TRADE Core Portfolios

E*TRADE Core Portfolios made a big addition to its account amenities in 2024, by introducing tax-loss harvesting to go along with its existing tax-advantaged investing options with municipal bond ETFs. Individual retirement accounts (IRAs) and other tax-advantaged accounts are eligible for Core Portfolios as well.

Tax-Advantaged Investing Verdict: E*TRADE Core Portfolios

Just as with portfolio management, E*TRADE Core Portfolios takes the tax-advantaged investing category over M1 Finance. E*TRADE Core Portfolios has tax-loss harvesting and also takes taxes into account when rebalancing or adjusting allocation in taxable accounts. M1 Finance is simply automating a portfolio as instructed but does take taxes into account when selling, which is better than nothing. 

Key Portfolio Management Features

Security

M1 Finance

All accounts at M1 Finance are protected by:

• Military-grade 4096-bit encryption
• Password
• Two-factor authentication

Additionally, M1 Finance is a registered broker/dealer with FINRA and a member of SIPC, which safeguards customer accounts up to $500,000, including $250,000 for claims for cash. 

E*TRADE Core Portfolios

E*TRADE Core Portfolios has several security standards in place to ensure that your account is protected:

• Encryption
• Firewalls
• Dedicated fraud protection teams
• Multi-factor authentication
• Security alerts

In addition to account security, E*TRADE from Morgan Stanley also has measures in place to safeguard your assets:

• Bank protection: Member of FDIC
• Brokerage protection: Member of SIPC, which protects customer accounts up to $500,000 (including $250,000 for cash only)
• Customer protection rule: All securities are fully owned by the investors and separate from E*TRADE securities
• E*TRADE complete protection guarantee, which means you’re not responsible for unauthorized use of your account. Additionally, E*TRADE does not sell your personal information.

Security Verdict: Tie

Both E*TRADE Core Portfolios and M1 Finance are up to industry standards when it comes to security. Your investments are safe at either firm from a security standpoint, but no insurance—including SIPC or FDIC—protects you from losses from market downturns.

User Experience

Desktop

The M1 Finance website is straightforward and user-friendly. The sleek design gives investors a quick glance at their current financial situation by displaying their assets and liabilities on the main dashboard. 

E*TRADE Core Portfolios clients are able to view their portfolio and track performance via the online dashboard from their desktop. The platform is easy to use and intuitive, focusing on providing investors with basic account information at a glance.

Mobile

M1 Finance has apps for both Apple and Google devices. Similar to the desktop version, the M1 Finance app was designed for its ease of use. The workflow of the website and the app are practically indistinguishable experiences, so you can conveniently monitor your account, even on the go.  

E*TRADE Core Portfolios accounts can be accessed on your smartphone via the apps for Apple or Google devices. The functionality of the app offers all the same features as the desktop, but in a format that you can access conveniently from anywhere. E*TRADE’s mobile app allows you to access the Core Portfolios account as well as any other brokerage or banking accounts you hold with E*TRADE.

Customer Service

M1 Finance

• Online chat 
• Email
• Call 312-600-2883, Monday through Friday from 9 a.m. to 4 p.m. ET
• Submit a request through the Help Center 
• Schedule a call with a member of the Client Success Team 
• Send a message through social media via the company’s Facebook, X Formerly Twitter), Instagram, or LinkedIn accounts

E*TRADE Core Portfolios

• Call 800-387-2331 to speak with a customer service representative 24/7
• Email
• Connect via social media: Facebook, X (Formerly Twitter), Instagram, LinkedIn, and Youtube

Customer Service Verdict: E*TRADE Core Portfolios

E*TRADE Core Portfolios has the edge in customer service in that it is available 24/7. This is one advantage that comes with being a small part of a larger financial firm.

Fees

M1 Finance

M1 Finance does not charge advisory fees or commissions on basic accounts. There are a few miscellaneous fees, such as a minimum balance fee for accounts with up to $50 and no trading or deposit activity for 90+ days.

E*TRADE Core Portfolios

E*TRADE Core Portfolios has a 0.30% annual flat fee. The fee is charged at the beginning of each month, based on the balance at the end of the previous month, and is automatically deducted from the cash balance in the account. Core Portfolios also has underlying ETF expense ratios, which is true of most ETFs you will access from M1 Finance as well. With M1 Finance, the expense ratios depend on the investments selected. With E*TRADE Core Portfolios we have a clearer range of 0.05% to 0.14% with the lower end being the standard offering and the higher end for smart beta or socially responsible portfolios.

Fees Verdict: M1 Finance

M1 Finance has a clear advantage in fees in that it has none, beyond some of the underlying expense ratios on ETFs that E*TRADE also has. Of course, this fee advantage is offset by the lower levels of portfolio management and construction support M1 Finance offers. 

The Bottom Line

When comparing M1 Finance and E*TRADE and their digital wealth management platforms, it is not really a matter of which is better, because they are so extremely different. Rather, it is a matter of which best fits your personal investing needs. The ideal customer for M1 Finance is an experienced investor who is comfortable picking a portfolio and automating the allocation of future contributions. The ideal customer for E*TRADE Core Portfolios is an investor just starting out who wants to be guided into a diversified portfolio that will largely be managed for them.

Advanced investors will likely find the M1 Finance platform more appealing for its hands-on, fully customizable portfolio options, low minimum investment, and no fees. E*TRADE Core Portfolios, while it has a $500 minimum investment to get started and a flat fee of 0.30%, is still a competitive and attractive option for beginner investors looking for a recommended portfolio tailored to their investing goals, as well as automatic rebalancing to make sure the portfolio stays aligned to their needs.

Is E*TRADE Core Portfolios Worth It?

Core Portfolios is good for novice investors who want a hands-off approach. However, the $500 minimum investment amount and 0.30% annual fee make this type of account somewhat less easy to get started and more expensive to have when compared to industry competitors, many of which have a $100 minimum investment to open an account and lower advisory fees.

How Much Is a Core Portfolio on E*TRADE?

E*TRADE Core Portfolios customers must have $500 to open an account and pay a 0.30% annual flat fee. The fee is based on your account balance, so a portfolio with a minimum amount of $500 would pay $1.50 annually.

Is M1 Finance Good for Beginners?

M1 Finance is much better suited to more experienced investors. Because there is so much flexibility with what investments you can choose and no initial questionnaire to guide investing choices, it is important that a client know what their goals, risk tolerance, and time horizon are and be able to choose their own investments to reach those goals.

How We Review Robo-Advisors

Providing readers with unbiased, comprehensive reviews of digital wealth management companies, more commonly known as robo-advisors, is a top priority of Investopedia. We used our 2023 consumer survey to guide the research and weightings for our 2024 robo-advisor awards. To collect the data, we sent a digital survey with 64 questions to each of the 21 companies we included in our rubric. Additionally, our team of researchers verified the survey responses and collected any missing data points through online research and conversations with each company directly. The data collection process spanned from Jan. 8 to Feb. 9, 2024.

We then developed a quantitative model that scored each company to rate its performance across nine major categories and 59 criteria to find the best robo-advisors. The score for each company’s overall star rating is a weighted average of the criteria:

• Goal Planning – 21.00%
• Portfolio Contents – 17.00%
• Portfolio Management – 17.00%
• Fees – 15.00%
• Account Services – 10.00%
• Security & Education – 5.00%
• User Experience – 5.00%
• Account Setup – 5.00%
• Customer Service – 5.00%

Additionally, during our 2023 research, many of the companies we reviewed granted our team of expert writers and editors access to live accounts so they could perform hands-on testing. Through this all-encompassing data collection and review process, Investopedia has provided you with an unbiased and thorough review of the top robo-advisors.

Read more about how we research and review robo-advisors.

Separately, our research team conducted a survey of 205 U.S. adults aged 18 to 72 who are current clients of one of 18 robo-advisors. While the information collected did not influence the development of our ratings model, it was instrumental in gathering the valuable insights published in Investopedia’s 2023 Robo-Advisor Consumer Survey.

Participants in our 2023 Robo-Advisor Survey opted in to an online, self-administered questionnaire from a market research vendor. Data collection took place between Aug. 30 and Sept. 15, 2023, with 11 video interviews conducted with volunteer respondents from Sept. 7 to Sept. 17, 2023. Multiple quality checks, including screeners, attention gauges, comprehension evaluations, and logic metrics, among others, were used to ensure only the highest quality responses were included.

We independently evaluate all recommended products and services. If you click on links we provide, we may receive compensation.

Reviewed by Michael J Boyle
Fact checked by Suzanne Kvilhaug

If you meet with your boss and the head of human resources (HR), you’re probably on the way out. They may present you with your separation agreement, which outlines the terms of your departure, spelling out your severance pay. You’ll probably have a deadline to sign the agreement with a suggestion to consult a lawyer to review the terms. That’s good advice since your package can be made up of many parts.

But, there may also be a lot of gray areas. What your severance pay will be could fall within a wide range. And there is a lot of ground to cover in negotiations beyond your last paycheck. Below, we lay out seven key things you should know if you are ever terminated from a position, including the factors that determine your severance pay.

Key Takeaways

• Most states classify you as an at-will employee, meaning your boss can fire you without reason and not be on the hook for any severance pay.
• The rule of thumb that applies to severance packages—two weeks’ pay for every year of employment—turns out to be a rough average.
• It helps to determine what you can ask for during negotiations and what is off-limits.

1. Know the Key Requirements for Both Sides

Your employer makes it clear they don’t need you for whatever reason. Unless a contract covers you, most states classify you as an at-will employee, which means your boss can fire you without a set reason and not be on the hook for any severance pay. You may have even signed a document confirming that point when you were hired.

Remember that the company wants closure—and for good reason. Your separation agreement signature is worth money because it potentially limits the number of legal issues you (the fired or downsized employee) might pursue. Less hassle now and in the future means fewer billable hours for the company’s legal counsel. You get the picture.

2. There’s a Range of Financial Outcomes

If you’re a top executive, the terms of what you’ll pocket when you pack up are typically spelled out in your employment contract. For everyone else, from upper-level management down the corporate ranks, things are likely not so clear.

That’s where informal guidelines come into play. The rule of thumb that applies to severance packages—two weeks’ pay for every year of employment—turns out to be a rough average. In practice, it ranges between one to four weeks depending on circumstances, according to Jeffrey M. Landes, a lawyer in the labor and employment practice of the New York firm Epstein Becker & Green.

3. Your Severance Depends on Several Factors

Your tenure on the job is just one of several considerations as far as severance is concerned. If you’re fired because your boss feels you didn’t measure up, it’s likely to be on the lower end of the scale. If your company was bought out and forced to shed jobs, you might find your boss wants to be more generous. Ask yourself the following questions:

• How well did you perform and how well is it documented? The better your evaluations and the more popular you are, the more likely that an employer will carve out more severance pay.
• What triggered your dismissal? If the circumstances behind your termination are out of your company’s hands (downsizing as the result of a merger or the axing of an obsolete division), the terms are likely to be more generous.
• Has your company been lax about tracking your performance? Your company is likely to weigh its legal vulnerability. If you were fired because you underperformed, you might gain leverage if your evaluations are unclear or seem to point to good work.

4. Review Your Work History—Closely

Miriam F. Clark, a partner at the New York employment-law firm Ritz Clark & Ben-Asher, says one of the first things to examine with a lawyer are documents that chart your history at the company and how well you performed your job.

The overall picture will help determine whether you have a discrimination case to pursue. If you have grounds for action, there’s potentially a court award or settlement in your future. At the very least—if there’s a scent of something awry—you’ve got additional leverage in severance negotiations.

5. Know Where Your Company Has Flexibility

It helps to determine what you can ask for during negotiations and what is off-limits. Some things your company can negotiate and others are outside your boss’ control. First, there’s the law to consider. For instance, Ohio law requires compensation for the accrued vacation. That’s because it is considered a deferred payment for a benefit you’ve earned, says Cleveland attorney Jon Hyman.

Similarly, your company will probably have little or no leeway for employee benefits. Insurance carriers determine coverage costs—not your employer. You can stay on the company health plan for up to 18 months under COBRA law, but you’ll likely pay a steep price. Your disability coverage through the company will likely end with your employment. You can request that your employer help foot the bill for COBRA coverage or the initial disability insurance cost.

Consider a few other possibilities. According to Clark, employees often ask for the sum of money employers might have earmarked for outplacement services, says Clark. Landes suggests timing your severance pay to maximize what you get in-state unemployment benefits. Delaying the receipt of severance for one month may prevent receiving lower unemployment benefits, for example.

Note

Some employees may be able to negotiate to delay the formal date of their separation from the company to accommodate benefits issues, such as reaching a pension deadline.

6. Tap Into Relationships

Relationships can matter during severance negotiations, too. There are times when employees themselves handle some of the face-to-face hagglings over severance terms instead of bringing in an attorney. Those cases are more common when employees have a close relationship with a boss or someone else on the other side of the table.

7. Remember the Future

Hammering out the best terms in your separation agreement goes beyond money—what you agree to can affect your long-term career. Future job references are also something to take up before you sign off.

Your separation agreement negotiations can address what’s put in writing when prospective employers check into your work history. They can also spell out who provides a reference and what information can be shared over the telephone. That’s especially important if you’ve bounced around a few jobs or had an ongoing spat with a supervisor.

There are also likely to be provisions that require you to keep mum about why you’re leaving and the terms you struck on the way out. If you find the limitations too stifling, you may push back and change them during talks. For instance, you may want to carve out exceptions to cover speaking with your spouse and kids about what happened.

What Is Severance Pay?

The term severance pay refers to compensation offered when the employer separates from an employee. Severance packages often include lump-sum payments and compensation for accrued vacation time as well as additional benefits, such as health and insurance coverage. Severance pay is normally provided to certain employees, including contract workers and individuals who are laid off or fired. It usually does not apply to workers who are considered at-will, which refers to employees who can be let go at any time without any legal reason.

Can I Negotiate Severance?

Yes, you can negotiate a severance package. Make sure you review the package offered by your employer. Be realistic when you try to negotiate if you feel you can. If you are unsure about how and where to start, consult a legal representative to review your separation agreement. They may be able to determine whether the agreement is fair and if you have room to negotiate.

Are Companies Obligated to Pay Severance?

Federal labor laws do not obligate employers to pay severance to their employees. Employers may offer their employees severance packages for different reasons. Packages are generally offered to protect the company’s interests, avoid lawsuits, and improve workplace morale among others.

The Bottom Line

In the end, stay objective and focused. While combing through the finer points of a separation agreement can be a painful exercise, they’re an essential step in getting back on track. A clear mind and sharp focus can help you close the past, secure the present, and pave the way to a brighter future. Above all, remember you’ll be in shock at that first meeting, even if it’s not a complete surprise. Don’t sign anything immediately. And try to talk to an attorney who specializes in employment law before you do sign something.

Reviewed by Charles Potters

At its best, investing in penny stocks can be an exciting, lucrative endeavor. In most cases, a good strategy is to maximize the leverage of the invested capital by buying as many shares as possible.

A move of only a few pennies when multiplied by a large position can equal a substantial gain in a relatively short period of time. Additionally, penny stocks can have lower trading volume than many listed options, a lack of liquidity that might present additional trading difficulties.

As investors become more sophisticated, they turn to products such as options as a method for increasing the amount of leverage in a position. Given the lure of penny stocks and options, it’s natural for an investor to try and combine the two. Unfortunately, in the case of penny stocks, trading associated options is not possible.

Key Takeaways

• Penny stocks are low-priced shares of companies that often come with a greater degree of risk and volatility.
• Because they have low share prices, investors and traders can acquire a sizable position, especially if employing leverage or options contracts.
• Leverage, however, can magnify the risk and volatility associated with penny stocks, so beware!

Options on Small-Cap ETFs

While it may not be possible to trade options in specific penny stocks, it’s still possible to use options to leverage the potential of the small-cap or microcap universe. One popular product for trading small-cap stocks is an exchange-traded fund, the iShares Russell 2000 ETF (IWM). For those unfamiliar with this product, IWM seeks to track the investment results of an index composed of small-cap U.S. equities.

Let’s look at a historical example: Over the 12 months ending Nov. 30, 2024, IWM returned 36.22%. While it isn’t possible to trade options in many of the components, it’s possible to trade options on the ETF itself. Small moves in the underlying ETF generally translate to significant movements in the options. One of the biggest benefits of trading options in small-cap ETFs rather than the stocks themselves is that it removes much of the company-specific risk.

Margin Accounts

Another method for increasing leverage to penny stocks is to set up a margin account. This type of investment account gives investors access to additional capital based on leveraging capital and securities existing within the account. Essentially, this is the equivalent of borrowing money from your broker, using existing cash and securities as collateral, then paying interest on the borrowed money for the right to use capital for buying and selling shares.

While trading on margin provides investors with additional leverage, it can be extremely risky. Using money that you don’t have for the purpose of buying any kind of stock is frowned upon by many, and, if not used correctly, can lead to financial ruin. A good rule is to tread lightly whenever using margin or leverage of any kind to buy financial assets.

What Are Penny Stocks?

Penny stocks refer to shares in companies with a low price and low trading volume. A penny stock is typically the stock of a small company that trades for less than $5 per share.

What Are Options?

Options are a financial instrument that is based on the value of underlying securities, such as stocks, indexes, and exchange-traded funds (ETFs). An options contract offers the buyer the opportunity to buy or sell—depending on the type of contract they hold—the underlying asset.

What Is Leverage?

Financial leverage is the concept of using borrowed capital as a funding source. Companies can use leverage to invest in growth strategies. Investors can use leverage to multiply their buying power in the market.

What Is Margin?

Margin is the collateral that an investor has to deposit with their broker or exchange to cover the credit risk that the holder poses for the broker or the exchange.

The Bottom Line

Buying penny stocks with cash can be a risky maneuver. That said, there are some traders out there that would like to increase their leverage to penny stocks even more by using products such as options.

Unfortunately, in the majority of cases, options are not available for trading penny stocks. However, some risk-tolerant traders can turn to options on exchange-traded funds as a workaround. Some traders may even use the benefits of their margin accounts when trading penny stocks, but this should be considered a last resort and used with extreme caution.

Fact checked by David Rubin
Reviewed by Charles Potters

Every exchange-traded fund (ETF) investor wants their fund to have the best performance, but knowing which funds to pick can be challenging. ETFs usually track an index, sector, or commodity and can be purchased or sold on an exchange.

Key Takeaways

• ETFs usually track an index, sector, or commodity and can be purchased or sold on an exchange.
• The benefits of ETF investment include liquidity, portfolio diversification, and low entry costs.
• ETFs can contain stocks, commodities, bonds, or a combination.

Benefits of ETF Investment

Investors choose various vehicles to place their money, such as mutual funds, stocks, or real estate. An ETF’s appeal is wrapped around its core benefits, which include liquidity, portfolio diversification, low entry costs, and transparency. An investor enjoys access to stocks across various sectors and low expense ratios.

ETFs can contain many investments, including stocks, commodities, bonds, or a combination. Before an ETF purchase, investors should review product structure, benchmark index selection, trading volume, and risk exposure.

Important

One of the top-performing ETFs in 2023 was iShares Expanded Tech Software Sector ETF (IGV).

Evaluating ETFs

Several variables affect an investor’s portfolio. Fund expenses are an independent evaluative variable. Regardless of all other factors, it is always better if fund expenses are lower for conservative and risky investors, for domestic and international assets, and tax-free or taxable funds. ETFs with lower expense ratios help investors control what fees affect their investment choice.

Other factors to evaluate include liquidity, index tracking, and tax shelter. When buying ETFs, investors look for discounts. Unless the ETF is actively managed, it is best if the fund has more assets under management. Actively managed funds bring a host of other statistical qualifiers, such as alpha, excess return, or value at risk (VaR).

Fund Composition

The most immediate portfolio-dependent factor is fund composition. It matters whether an ETF tracks the Dow Jones Industrial Average or the Nikkei, holds bonds, or uses leverage. Investors cannot fully evaluate the underlying assets of an ETF without understanding their roles in their portfolio. An investor may not want to buy shares of an ETF tracking the S&P 500 if their 401(k) is made up of a mutual fund tracking the S&P 500. Tracking a different index and gaining exposure to new markets or reducing asset correlation.

Investors also consider the depth of holdings. For an individual who owns several different ETFs and wants specific sector concentration, a fund with fewer, more selective holdings may be chosen. An ETF’s benchmark selection and tracking efficiency are important dependent factors. In some ways, the underlying index matters more than the size of the fund or its management team. An ETF’s underlying index determines its performance but should also fit within an investor’s portfolio optimization strategy.

How Can Individuals Invest in ETFs?

ETF investment is available through online investing platforms, investment apps, or an individual’s retirement account provider. Most offer commission-free trading.

What Is an Expense Ratio?

An expense ratio is the amount of a fund’s assets used for operating expenses. An expense ratio is found by dividing a fund’s operating expenses by the average dollar value of its assets under management (AUM). Operating expenses reduce the fund’s assets, reducing the return to investors.

What Is a Commodity ETF?

A commodity ETF tracks the prices of a commodity or the commodity’s corresponding index, which may include precious metals, such as gold and silver, or energy commodities, such as oil and gas.

The Bottom Line

An ETF can track the Dow Jones Industrial Average or another index and commonly hold stocks, commodities, bonds, or a mixture of investment vehicles. Investors evaluate the underlying assets of an ETF when creating their portfolio. The benefits of an ETF include liquidity, portfolio diversification, low entry costs, and transparency.

Fact checked by Kirsten Rohrs Schmitt
Reviewed by Ebony Howard

A blind trust is a type of living trust where the grantor and beneficiary relinquish control and knowledge of the assets placed within the trust. Instead, a third-party trustee manages the assets without disclosing or consulting the grantor or beneficiary about the specific investments or transactions. 

A blind trust can be revocable, meaning the grantor can change it later, or irrevocable, meaning it can’t be modified or terminated. Blind trusts can be a valuable strategy for eliminating conflicts of interest, particularly in situations involving politics, business, or sudden wealth.

Key Takeaways

• A blind trust is a living trust where the trustee manages the assets without the knowledge or control of the grantor or beneficiary.
• Blind trusts can be either revocable or irrevocable.
• A blind trust can help eliminate conflicts of interest, especially for public officials or individuals with substantial investments.

How a Blind Trust Works

Public officials and corporate executives often use blind trusts to avoid conflicts of interest. For instance, a federal official may set up a blind trust to manage private assets owned by themselves, their spouse, or dependent children. This prevents any perceived or actual conflict of interest if the official’s decisions affect their financial holdings. By placing these assets in a blind trust, especially an irrevocable one, the official can act impartially, focusing on the interests of the public.

The official’s supervisory ethics entity must approve the blind trust and the choice of trustee. Federal law doesn’t require federal officials to use blind trusts, but regulates how they establish and maintain them. 

Similarly, corporate executives can use blind trusts to avoid insider trading accusations. By transferring their company shares into the trust, they no longer control the timing or amount of stock sold, reducing any insider trading risks. The trustee manages the assets, which could improve the executive’s asset diversification and risk profile and help avoid legal complications tied to trading windows and blackout periods. 

While you might read a lot about blind trusts during political campaigns, “not many politicians or wealthy individuals and families use them,” says Eric Schaefer, a financial planner and investment advisor with Evermay Wealth Management, an independent financial advisory firm serving high net worth families in the Washington, D.C., area. “Not only do you give up the control and transparency of assets placed in trust, these vehicles can cost tens of thousands of dollars to set up,” he says. They also have high maintenance expenses. 

Reasons to Establish a Blind Trust

A blind trust is supposed to eliminate any real or perceived conflicts of interest. 

Blind trusts “are most prevalent within the political community, but can be quite valuable in other situations as well,” says Schaefer. “This is a very obvious reason for politicians, but retiring or retired business owners and executives who retain large amounts of company stock may be interested in politics, charitable work, or board membership that requires them to act objectively,” he says. “The trust may also come in handy when influential individuals have access to insider information and want to shield themselves from any question of wrongdoing for investment account transactions.”

Another circumstance that inspires people to set up blind trusts is suddenly coming into a large, unexpected sum of money and wanting to keep the matter private. For example, savvy lottery winners in the United States have used blind trusts to prevent investment hucksters and money-grubbing relatives from trying to snag a piece of their sudden wealth.

Costs of a Trust

Professional trustees may charge either a flat fee or a percentage of the trust’s assets, depending on the trust’s complexity. In addition, there are additional expenses for accounting and tax reporting fees.

How to Establish a Blind Trust

Establishing a blind trust requires drawing up a document that the grantor signs to give full power of attorney over the trust assets to an independent, third-party trustee (In contrast, with a regular, revocable living trust, the trust settlor can designate themself as the trustee and continue to control the assets.) But it’s not a DIY project; it requires a lawyer’s assistance. 

“There are state and federal laws regarding the creation of blind trusts, so it’s important to visit an attorney who has expertise in this area,” says Richard Gotterer, CFP, managing director and senior financial advisor with Calamos Wealth Management, an independent wealth management firm in Miami. “During the drafting phase of the trust, you have the ability to provide input such as what the investment objective of the trust will be. For example, should it be invested for growth, income, or capital preservation? You have the ability to provide a range for the asset allocation and you have the ability to name the beneficiaries of the trust,” he says. 

After that, you cease communication with the trustee and have no further knowledge of how the trust’s assets are being handled.

Choosing the right trustee is imperative. Not only do you need someone who is honest and investment savvy, but if you’re trying to separate yourself from your investments, you also need someone with whom you don’t have a close relationship—not a friend or relative, in other words. In some cases, even a longtime financial adviser or attorney might be considered too close.

For example, in the case of a lottery win, an attorney could help establish the blind trust. Depending on the requirements of the lottery you win, the attorney can redeem the winning ticket anonymously and prevent unwanted media exposure.

What Are the Cons of a Blind Trust?

A major disadvantage of blind trusts is that they require the grantor to relinquish control over their assets for the trust’s duration. Moreover, blind trusts are expensive to set up and need a third-party trustee to manage the assets for the duration of the trust. Professional trustees are typically paid a percentage of the trust’s assets, which can be significant for larger trusts.

Can You Withdraw Money From a Blind Trust?

The terms for withdrawing money from a blind trust are set when the trust is created. These terms, including whether and how funds can be accessed, must be clearly outlined in the trust documents. Once established, these terms can only be altered once the trust is dissolved.

What Is the Difference Between an Irrevocable Trust and a Blind Trust?

An irrevocable trust cannot be altered or revoked without the beneficiary’s consent, typically to protect assets from creditors or reduce the grantor’s taxable estate. A blind trust, on the other hand, allows the beneficiary to disconnect from the management of the assets entirely but can be either revocable or irrevocable, depending on the terms of the trust.

The primary distinction lies in the purpose: a blind trust eliminates the beneficiary’s knowledge of and control over the assets, while an irrevocable trust is more focused on asset protection and tax benefits.

The Bottom Line

Blind trusts can be powerful tools for removing conflicts of interest, maintaining privacy, and safeguarding against accusations of misconduct. However, they are not without their downsides, including high costs and a complete loss of control. If you are considering establishing a blind trust, it’s crucial to weigh the benefits of privacy and independence against the costs and lack of transparency, especially if you are opting for an irrevocable trust. Legal and financial professionals can help guide you through the process to ensure the trust aligns with your financial goals.

Reviewed by Akhilesh Ganti

The most troublesome problems we face as traders are the ones that we don’t even know exist. Certain human tendencies affect our trading, yet we are often completely unaware they are affecting us and our bottom line. While there are many human tendencies, we will look at three that, if not managed, can block the road toward achieving our financial goals.

Key Takeaways

• Human beings are emotional creatures, with psychological and cognitive errors influencing our financial decision making—often for the worse.
• The first step to overcoming our psychological failings is to recognize the types of mistakes that we commonly make and how they can hurt our investment performance.
• Sticking to your trading plan can test your resolve, but you have a better chance of success if your approach is based on a solid and objective framework, free from emotions or bias.

The Enemy We Don’t Know

When dealing with trading in an objective way, we can see where we have erred and attempt to fix it for next time. If we exit a trade too early in a move, we can adjust our exit criteria by looking at a longer time frame or by using a different indicator. However, when we have a solid trading plan and are still losing money, we need to look at ourselves and our own psychology for a solution.

When we deal with our own minds, our objectivity is often skewed and thus cannot properly fix the problem. The true problem is clouded by biases and superficial trivialities. An example of this is the trader who does not stick to a trading plan but fails to realize that “not sticking to it” is the problem, so they continually adjust strategies, believing that is where the fault rests.

Awareness Is Power

While there is no magic bullet for overcoming all of our problems or trading struggles, becoming aware of troublesome thoughts and actions is the first step a trader needs to take. Awareness of potential psychological pitfalls can allow us to change our habits, hopefully creating more profits. Let’s look at three common psychological quirks that can often cause such problems.

1. Sensory-Derived Bias

We pull information from around us to form an opinion or bias, and this allows us to function and learn, in many cases. However, we must realize that, while we may believe we are forming an opinion based on factual evidence, often we are not. If a trader watches the business news each day and forms an opinion that the market is going higher, based on all the available information, they may feel they came to this conclusion by stripping away the media personnel’s opinions and only listening to the facts. However, this trader still may face a problem: When the source of our information is biased, our own bias will be affected by that.

Even facts can be presented to give credence to the bias or opinion, but we must remember that there is always another side to the story. Furthermore, constant exposure to a single opinion or viewpoint will lead individuals to believe that that is the only practical stance on the subject. Since they are deprived of counterevidence, their opinion will be biased by the available information.

2. Avoiding the Vague

Also known as fear of the unknown, avoiding what may occur, or what is not totally clear to us, prevents us from doing many things and can keep us locked in an unprofitable state. While it may sound ridiculous to some, traders may actually fear making money. They may not be aware of it consciously, but traders often worry about expanding their comfort zone or simply fear that their profits will be taken away through taxes. Inevitably, this may lead to self-sabotage.

Another source of bias may come from trading only in the industry with which one is most familiar, even if that industry has been—and is predicted to continue—declining. The trader is avoiding an outcome because of the uncertainty associated with the investment.

Another common tendency relates to holding onto the losers too long while selling the winners too quickly. When prices fluctuate, we must factor in the magnitude of the movement to determine if the change is due to noise or is the result of a fundamental effect. Pulling out of trades too quickly often results from ignoring the trend of the security, as investors adopt a risk-averse mentality.

On the other hand, when investors experience a loss, they often become risk seekers, resulting in an overheld losing position. These deviations from rational behavior lead to irrational actions, causing investors to miss out on potential gains due to psychological biases.

3. Tangibility of Anticipation

Anticipation is a powerful feeling. Anticipation is often associated with an “I want” or “I need” type of mentality. What we anticipate coming is sometime in the future, but the feeling of anticipation is here now and can be an enjoyable emotion. It can be so enjoyable, in fact, that we make feeling anticipation our focus instead of achieving what it is we are anticipating in the first place. Knowing that a million dollars are going to show up on your doorstep tomorrow would create a fantastic feeling of excitement and anticipation. It is possible to become “addicted” to this feeling and thus put off taking payment.

While easy money delivered to the door is more than likely to be grabbed by the eager homeowner, when things are not quite as easy to come by, we can fall into using the feeling of anticipation as a consolation prize. Watching billions of dollars change hands each day but not having the confidence to follow a plan and take a chunk of the money can mean we subconsciously decided that dreaming about the profits is good enough. We want to be profitable, but “wanting” has become our goal, not profitability.

What to Do About It

Once we are aware that we may be affected by our own psychology, we realize it may affect our trading on a subconscious level. Awareness is often enough to inspire change, if we do in fact work to improve our trading.

There are several things we can do to overcome our psychological roadblocks, beginning with removing inputs that are obviously biased. Charts don’t lie, but our perceptions of them may. We stand the best chance of success if we remain objective and focus on simple strategies that extract profits from price movements. Many great traders avoid the opinions of others, when it comes to the market and realize when an opinion may be affecting their trading.

Knowing how the markets operate and move will help us overcome our fear, or greed, while in trades. When we feel we have entered unknown territory where we don’t know the outcome, we make mistakes. However, if we have a firm understanding, at least probabilistically, of how the markets move, we can base our actions on objective decision making.

Finally, we need to lay out what we really want, why we want it, and how we are going to get there. Listen in on the thoughts that run through your head right when you make a mistake—and think about the belief behind it—then work to change that belief in your everyday life.

Why Is It Important to Understand Psychology in Markets?

Many investors are emotional and reactionary, and fear and greed are heavy hitters in that arena. According to some researchers, greed and fear have the power to affect our brains in a way that coerces us to put aside common sense and self-control and thus provoke change. When it comes to humans and money, fear and greed can be powerful motives.

What Are Some Psychological Quirks That We Can Fall Victim to?

Relying on our senses and cognitive ability to process information can be inaccurate, replete with heuristics, and leave us with blind spots. Humans also shy away from vagueness and may fill in the blanks with wrong or biased information. Anticipation is another quirk that keeps people’s emotional levels high, stoking both greed and fear or anxiety.

How Can Traders Overcome Their Psychological Failings?

The key is to be aware and recognize that all people are likely to suffer from these quirks, including you. Knowing your limitations is the first step. Then, craft an objective plan or strategy and stick with it.

The Bottom Line

Our biases can affect our trading, even when we don’t think we are trading on biased information. Also, when an outcome appears vague, we err in our judgment, even though we have a conception of how the market is supposed to move. Our anticipations can deter us from achieving what it is we think we want. To aid us in these potential problems, we can remove biased inputs, gain more understanding of market probabilities, and define what it is we really want from our trading.