investment

Fact checked by Pete Rathburn
Reviewed by JeFreda R. Brown

What Is Underwriting?

Underwriting is the process used by lenders and insurers to evaluate risk. For lenders, it is used to determine how likely a borrower is to be able to pay back the loan. For insurers, they evaluate how likely it is that an insurable event will happen and when it might occur.

In both fields, underwriting is used to set prices for their products. Underwriting helps determine how much of a premium someone will pay for their insurance, how fair borrowing rates are set, and also sets prices for investment risk.

Underwriting is used in various sectors including lending, insurance, and investments. It also has an important place in real estate and mortgage lending.

Key Takeaways

• Underwriting is the process lenders use to determine the creditworthiness of a potential customer and minimize risk to the lender.
• Underwriters research applicants’ credit scores and financial history to determine how risky it will be to offer them a mortgage.
• Real estate underwriters determine whether the property’s sale price meets its appraised value and ensure no one else is on the title.
• Underwriters also evaluate whether natural disasters are likely to pose any dangers to the property.
• Underwriting determines whether a customer is offered a mortgage and, if so, at what interest rate.

History of Underwriting

Lloyd’s of London is credited as the entity that came up with the term underwriting. The English insurance broker, which dates back to the 17th century, gathered individuals to issue coverage for risky ventures such as sea voyages. In the process, each risk-taker literally wrote their name under text describing the venture and the total amount of risk they were willing to accept in exchange for a specified premium. This later came to be known as underwriting the risk.

Although the mechanics have changed over time, underwriting continues today as a key function in the financial world.

How Underwriting Works in Real Estate

In real estate, mortgage lenders use underwriting to evaluate the potential risk of a loan. Underwriters look at the financial history of a potential borrower to determine how likely they are to be able to pay back the mortgage. In its most basic form, underwriting is the fact-checking and due diligence done by a lender before assuming any risk.

Along with looking at the truthfulness of an individual’s application, underwriters research how risky it will be to lend to that person before offering a loan. To determine creditworthiness, an underwriter might look at:

• Credit history, including history of loan repayments, defaults, and bankruptcies
• Credit score
• Current bank balances and other assets
• Any outstanding loan balances
• Employment history and income

How creditworthy the customer is will impact what interest rate they are offered on their mortgage or whether they are offered a mortgage at all.

Important

Real estate underwriters are different from securities underwriters, who are responsible for determining the offer price of financial instruments.

Underwriting and Property Appraisal

In addition to looking at the potential borrower, real estate underwriters also look at the property being purchased to determine whether its sale price meets its appraised value.

Borrowers are required to have an appraisal conducted on the property they want to buy with a mortgage. The underwriter orders the appraisal and uses it to determine if the funds from the sale of the property are enough to cover the amount lent. For example, if a borrower wants to purchase a home for $300,000 that an appraisal deems to be worth $200,000, the underwriter is unlikely to approve the loan or, at least, a loan for the full $300,000.

Underwriters also check other information about the property that could impact the lender’s risk, such as:

• Whether anyone other than the seller is listed on the property title
• Whether natural disasters such as floods or wildfires post a danger to the property

In most real estate loans, the property itself is used as collateral against the borrowed funds. Underwriters generally use the debt-service coverage ratio (DSCR) to determine if the property is able to redeem its own value. If so, the loan is a more secure proposition, and the mortgage request has a greater chance of being accepted.

What Is a Property’s Appraised Value?

In real estate, a property’s appraised value is the value of a property at a certain point in time. This is determined by a professional appraiser before a mortgage is issued. Appraised value is usually based on a number of factors, including the assessed property value and the worth of any physical structures. Appraised value may not be the same as market value, which is what it costs to actually buy the property on the open market.

How Can I Improve My Creditworthiness?

Lenders look at a borrower’s creditworthiness before issuing a loan. Paying bills on time and reducing your debt-to-income ratio are generally the best ways to improve your creditworthiness. You can do this by reducing debt and/or by increasing your income. Removing errors from your credit report can also help.

What Is Collateral?

Collateral is an asset that is promised as security on a loan. If the borrower can’t make their payments and defaults on a loan, then the lender has a right to seize the assets pledged as collateral. In the case of a mortgage, the property itself is the collateral.

The Bottom Line

Underwriting is a process of research and due diligence used in many areas of the financial industry in order to minimize risk. In real estate, underwriters research the credit and financial history of potential borrowers to determine how risky it will be to issue them a mortgage.

A borrower’s creditworthiness, as decided by an underwriter, determines whether they are offered a mortgage and at what interest rate. Underwriters also looked at the property, including its appraised value and the potential for any natural disasters, when assessing risk. Underwriting is used in areas other than real estate as well, including insurance and securities.

Fact checked by Suzanne Kvilhaug
Reviewed by David Kindness

Robyn Rihanna Fenty—better known by fans around the world as Rihanna—may have started off her career as a singer, but in just under two decades, the superstar has added CEO, businesswoman, and billionaire to her list of accolades.

Rihanna released her debut album, “Music of the Sun,” in 2005 at the age of 17. She has since released eight albums and had 14 number-one singles on the Billboard Hot 100 chart. According to her record label, Roc Nation, she is one of the best-selling digital artists of all time, with 60 million albums and 215 million digital tracks sold.

Key Takeaways

• As of February 2025, Rihanna’s estimated net worth is $1.4 billion.
• Rihanna became America’s youngest self-made female billionaire in 2022. 
• Much of Rihanna’s wealth has been attributed to her successful makeup company, Fenty Beauty, which she co-owns with French luxury retailer LVMH.

Rihanna and Fenty Beauty 

Rihanna’s estimated net worth as of February 2025 is $1.4 billion, mainly due to the success of her cosmetics company, Fenty Beauty. In 2024, Rihanna ranked No. 23 on Forbes’ list of America’s Richest Self-Made Women and is one of the youngest self-made female billionaires in the country.

In 2017, Rihanna launched Fenty Beauty, which she co-owns with French luxury conglomerate LVMH. Just three years later, the company brought in more than $550 million in revenue, according to Forbes. Going further, Fenty Beauty doubled its revenue in 2022, thanks to a wider distribution network and successful launches.

Rihanna created Fenty Beauty to be inclusive of all skin tones, and the products are offered in a wide range of shades. Many of Fenty Beauty’s products have developed a cult following and have gone viral on TikTok and other social media platforms—and the superstar’s first Fenty fragrance sold out within hours of launching in August 2021.

Rihanna’s Brand Partnerships and Businesses

Aside from Fenty Beauty, Rihanna’s many brand partnerships and business ventures have also contributed to her wealth. Rihanna owns 30% of Savage x Fenty, a lingerie line, with Bloomberg reporting that the company could be valued at more than $3 billion as of 2022. The billionaire is also a part owner in the Jay-Z-led music-streaming service, Tidal.

In 2014, Rihanna began a four-year partnership with athletic apparel company Puma and served as the brand’s global ambassador and creative director. She also launched her own line of footwear and apparel with them, Fenty x Puma, in 2016.

Rihanna has had other high-profile brand partnerships, including a capsule collection with luxury footwear brand Manolo Blahnik, and was Dior’s first Black ambassador.

The star also has several movie credits to her name, such as “Ocean’s Eight” and “Guava Island,” and she released a song for Marvel Studios’ “Black Panther: Wakanda Forever.” She also performed at the Halftime Show at Super Bowl LVII on Feb. 12, 2023, in Glendale, Ariz.

What Is Rihanna’s Net Worth?

As of February 2025, Rihanna’s net worth is $1.4 billion, largely due to the success of her cosmetics company, Fenty Beauty. Additionally, several business ventures and partnerships, including the lingerie lines Savage x Fenty, Tidal, and Fenty x Puma, have contributed to her wealth.

How Much Does Rihanna Make From Fenty Beauty?

As a 50% owner of the $2.8 billion cosmetics line, Fenty Beauty, Rihanna makes the majority of her wealth from sales generated by the company.

How Much Does Rihanna Make Per Concert Tour?

It is estimated that Rihanna makes $90 million per concert tour; her last world tour was in 2016. It is reported that Rihanna is working on her ninth studio album in 2024, the follow-up to “Anti,” released in 2016.

The Bottom Line

As one of America’s richest self-made women, Rihanna is known not only for her music, but for phenomenal success in beauty, lingerie, and a number of widely successful business ventures. At the age of 36, Rihanna’s net worth exceeds the vast majority of other superstars thanks to her business acumen and global reach.

Reviewed by Doretha Clemon

What Is a Mortgage-Backed Security Guarantee?

A mortgage-backed security guarantee assures the timely payment to an investor of their portion of the payments of principal and interest received on the pool of mortgage loans that underlies a mortgage-backed security.

Should borrowers default on their mortgage loans and fail to make principal and interest payments, investors holding guaranteed mortgage-backed securities will receive the appropriate cash flow amounts to which they’re entitled.

Whether a mortgage-backed security (MBS) is guaranteed depends on the entity that issues the security. The government agency and government-sponsored enterprises Ginnie Mae, Fannie Mae, and Freddie Mac guarantee MBS.

Ginnie Mae does not issue mortgage-backed securities. But Fannie Mae and Freddie Mac do.

By creating and/or guaranteeing MBS payments, Ginnie Mae, Fannie Mae and Freddie Mac serve a vital role. They attract investors who might not choose to invest in mortgages and increase the pool of funds available for housing.

Key Takeaways

• An MBS is a security created by pooling mortgage loans and represents the cash flow associated with those loans.
• An MBS guarantee means investors who hold the securities are guaranteed the timely pass through of that cash flow.
• The MBS guarantors are Fannie Mae, Freddie Mac, and Ginnie Mae.
• Ginnie Mae, a government agency, does not issue mortgage-backed securities but guarantees those issued through certain government programs and by qualified private issuers.
• Fannie Mae and Freddie Mac, though not government agencies, provide guarantees of timely payment for securities that they issue.

How a Mortgage-Backed Security Guarantee Works

If mortgagors begin to default on their mortgages, a lender may have a difficult time passing through mortgage payments to MBS investors.

Depending on how diversified the underlying pool of mortgages is across demographic and geographic regions, default risks may be mitigated.

However, if a significant number of borrowers begin to default on their loans, the lender may default on their cash flow payments for an MBS.

This level of default could cause investors a great deal of financial distress. Thus, there’s a need for some form of MSB guarantee to maintain investor confidence and loan liquidity.

Such guarantees are provided by Fannie Mae, Freddie Mac, and Ginnie Mae. Fannie Mae and Freddie Mac guarantees are not backed by the U.S. government. Ginnie Mae guarantees are.

What Is a Mortgage-Backed Security?

A mortgage-backed security is a financial security backed by mortgage loans. It’s created by securitizing those loans. That is, loans made to individuals and companies to purchase buildings and homes are pooled by the lenders (banks and other mortgage loan originators). Then they’re sold to other financial entities, such as investment banks and other banks, which issue securities that represent those pooled loans. Investors who buy the securities receive a share of the principal and interest cash flow paid on the mortgages by the original borrowers.

Guarantors of Mortgage-Backed Securities

Fannie Mae

Fannie Mae (the Federal National Mortgage Association) is a publicly-traded government sponsored enterprise that was created by Congress in 1938.

It buys mortgage loans from lenders and, as a result, provides the funding that these lenders need to make additional loans to people seeking to buy homes.

In fact, Fannie Mae was established to maintain capital liquidity and to ensure that low- to middle-income individuals can purchase homes with affordable mortgage loans.

Fannie Mae can securitize the loans it buys and issue MBS. It also provides a guarantee for those securities. This guarantee is backed by its own financial health, not by government money.

Fannie Mae’s MBS Guarantee

Fannie Mae guarantees the pass through to MBS investors of the full and timely payment of the principal and interest paid on loans.

This guarantee reduces investor risk and increases an MBS’ marketability.

Fannie Mae is ultimately responsible for the MBS certificates and payments of principal and interest. The organization follows strict underwriting guidelines to assess the credit quality of the loans that it guarantees. 

Freddie Mac

Freddie Mac (the Federal Home Loan Mortgage Corporation) is similar to Fannie Mae in that it is also a GSE and is shareholder-owned. Also like Fannie Mae, it does make loans to borrowers, it buys them from lenders.

It was created by Congress in 1970 to provide competition in the secondary mortgage market, which Fannie Mae originally monopolized.

Freddie Mac’s Guarantee

Freddie Mac uses the loans it buys to issue MBS that it guarantees for investors. Its guarantee is not backed by the government.

The organization can stand behind its guarantees and fund its loan loss reserves due in part to the guarantee fees it charges banks.

Ginnie Mae

Ginnie Mae (the Government National Mortgage Association) differs from Fannie Mae and Freddie Mac in that it operates as a government agency. Its guarantees are backed by the full faith and credit of the U.S. government.

It does not issue MBS but it guarantees those MBS backed by loans insured by these programs:

• The Federal Housing Administration (FHA) single- and multi-family mortgage insurance program
• The Department of Veterans Affairs (VA) guarantee program
• The Office of Public and Indian Housing within the Department of Housing and Urban Development (HUD)
• The U.S. Department of Agriculture Rural Housing Service loan guarantee program

Furthermore, Ginnie Mae guarantees MBS issued by qualified private institutions.

The Guarantee Is Backup Coverage

Importantly, Ginnie Mae’s guarantee provides backup coverage in cases where MBS issuers cannot cover losses due to borrower defaults.

It has a stringent guarantee approval process for MBS issuers. Issuers must be able to prove that they can meet their obligations to service the underlying loans and to step in to handle losses that occur if borrowers fail to make payments on their loans.

Private Issuers

Private issuers also issue MBS. If a private issuer meets the agency’s qualification threshold, its issue is guaranteed by Ginnie Mae. If, on the other hand, it is not qualified by Ginnie Mae, then the MBS issue is not guaranteed.

Does Private Mortgage Insurance Protect Ginnie Mae Investors?

Mortgage loans are secured for a lender by the properties purchased by borrowers. In addition, mortgages often require that the borrower purchase mortgage insurance. However, this type of insurance protects only the lender. It has nothing to do with investors who buy MBS.

Can the U.S. Government Help Fannie Mae and Freddie Mac?

Although they are not government agencies, it’s assumed that Fannie Mae and Freddie Mac have access to some financial assistance from the U.S. government. In fact, during the 2007-2008 financial crisis, the government bailed them out when mortgage loan losses overwhelmed them.

Does Anyone Else Guarantee Mortgage-Backed Securities?

MBS that are issued by private financial entities aren’t necessarily guaranteed by their issuers and do not have a government agency or GSE guarantee. Ginnie Mae could provide a guarantee if the issuer meets its rigorous qualifications. Privately-issued MBS not guaranteed by Ginnie Mae, Fannie Mae, or Freddie Mac typically offer higher potential returns to compensate investors for their greater risk.

The Bottom Line

Mortgage-backed securities can be guaranteed by the government agency Ginnie Mae, and the government sponsored entities, Fannie Mae and Freddie Mac.

Ginnie Mae does not issue mortgage-backed securities, but it guarantees them. Both Fannie Mae and Freddie Mac issue MBS and provide guarantees.

Wide disparities exist between White and non-White future retirees—a “racial retirement wealth gap”

Reviewed by Margaret James

Studies of how much Americans have saved for retirement show disparities among racial and ethnic groups. This article looks at retirement savings by race and explores the reasons for what many call a “racial retirement wealth gap.”

Key Takeaways

• On average, people of color in the U.S. have less money saved for retirement than their White counterparts.
• More than half of Black and Latinx households have no retirement savings, while only a third of White households lack savings.
• Racial wage gaps are a major reason that Black and Latinx workers are unable to save as much for retirement.
• Black and Latinx workers are also less likely to work for employers who offer retirement plans like 401(k)s.
• Racial disparities in homeownership also contribute to differences in wealth building and retirement savings.

What Is the Racial Retirement Wealth Gap?

Racial minorities in the U.S. have less money saved for retirement than White Americans, putting them at an increased risk of financial insecurity in their post-work years.

For example, the Economic Policy Institute reported that, based on 2016 data (latest information), only 41% of black families and 35% of Hispanic families had retirement account savings, compared with 68% of white, non-Hispanic families.

Not only are racial minorities less likely to have retirement accounts, but those who have accounts tend to have much lower balances than their White counterparts.

In a 2023 report, the Government Accountability Office (GAO) estimated that non-Hispanic, non-Latino Whites aged 51 to 64 had median retirement account balances of $164,361 in 2019 (adjusted in terms of 2022 dollars), compared with $80,349 for all other racial groups. In other words, twice as much.

(The GAO defines the “all other” group as “Black or African American, Hispanic or Latino, and Other Race households. Other Race households include Asians, American Indians, Alaska Natives, Native Hawaiians, Pacific Islanders, other races, and all respondents reporting more than one racial identification.”)

Origins and Causes of the Retirement Wealth Gap

Racial disparities in pay, homeownership, and the availability of employer-sponsored retirement plans all contribute to the gap in retirement savings today.

Minority group members were also disproportionately impacted by the Great Recession of 2007/2008 and the COVID-19 Pandemic. A Pew Research study reported that “Some 61% of Hispanic Americans and 44% of Black Americans said in April [2020] that they or someone in their household had experienced a job or wage loss due to the coronavirus outbreak, compared with 38% of white adults.”

Here is a deeper look at how wage disparities, homeownership, and access to workplace retirement plans have created—and still perpetuate—the retirement wealth gap.

The Racial Wage Gap

While Black and Hispanic workers have experienced faster wage growth between 2019 and 2023 than before, low-wage workers still suffer from inadequate wages, and middle-wage workers face inequalities across demographic groups.

A 2020 report from the U.S. Department of Labor, based on 2017-2019 data, breaks down wages by race or ethnicity as described below. This is the latest information available.

Source: Earnings Disparities by Race and Ethnicity

Lower wages leave workers with less cash available to save for retirement and reduce their future Social Security payments since the benefit is calculated based on workers’ wages during their careers.

For the year 2024, for example, the Social Security Administration projected median monthly benefits for beneficiaries age 60 and older as follows:

Source: Projected Profile of Beneficiaries by Race & Ethnicity

The Homeownership Gap

Owning a home has long been an important way of building wealth in the United States. It has also been a major factor in the racial wealth gap. One historical reason for the disparity has been housing and lending discrimination, particularly in the form of redlining.

While redlining is now outlawed, the differences in homeownership rates among different races and ethnic groups remain striking. In 2022 (latest information), according to the U.S. Department of the Treasury, the homeownership rate for White households was 75%.

By contrast, the rate was 45% for Black households, 48% for Hispanic households, and 57% percent for other racial groups. (In this case, the “other” category includes “Asian, Native Hawaiian or Pacific Islander, and American Indian or Alaska Native, and those who report two or more races,” the Treasury Department says.)

Once they reach retirement age, homeowners can sell their homes and downsize to a less expensive one. They can also take out a reverse mortgage, home equity loan, or home equity line of credit, allowing them to tap the equity in their homes without having to sell them or move out.

The Retirement Plan Access Gap

While Social Security makes up a significant portion of retirement income for most Americans, that money only goes so far. Employer-based retirement plans have become increasingly important to ensure a livable post-work income, sometimes referred to as “retirement adequacy.”

Unfortunately, studies have found substantial disparities in access to retirement plans along racial and ethnic lines. A 2022 report from the AARP Public Policy Institute found that nearly half of American workers (47%) don’t have an employer-sponsored retirement plan, with minority group members faring the worst:

Source: AARP

Employer-sponsored retirement plans make saving for retirement much easier than saving on one’s own. Defined-contribution plans, such as 401(k)s, for example, allow employees to fund their accounts through automatic payroll deductions.

Additionally, employers often make matching contributions to these plans, sometimes matching them dollar for dollar. Employees pay no tax on that money until they withdraw it later, typically after retirement.

In other words, people without these plans at work are not only missing out on the opportunity to contribute whatever they can each year but also the bonus of extra (and tax-deferred) income from their employers.

How Could the Racial Retirement Gap Be Narrowed?

Increasing the percentage of workers who have access to workplace retirement plans would be one way to help close the gap. This could be done by offering more incentives to employers to provide retirement accounts to their workers or even by creating a public option for retirement accounts. Closing the wage gap would also make it possible for workers to contribute more to their retirement plans.

Would Social Security Reform Help Close the Gap?

Statistics show that Black and Latinx retirees are more dependent on Social Security benefits than White retirees. According to the National Academy of Social Insurance, “Of those age 65 and older, Social Security is the sole source of income for 40% of Hispanics, 33% of African Americans, 26% of Asian and Pacific Islanders, 18% of Whites, and 20% of unmarried women.”

So strengthening the program and increasing benefits could have an outsized positive effect on those groups. On the other hand, “reforms” that would weaken the program or cut benefits would disproportionately harm retirees—and future retirees—of color.

What Is “Retirement Adequacy”?

“Retirement adequacy” is a term often used in academic circles. Most commonly it refers to whether a person’s retirement income will support a standard of living comparable to that of their working years. Because some expenses go down in retirement, an “adequate” retirement income is often translated as a percentage—such as 70%—of the person’s former, working income. But retirees and their income needs can vary widely.

The Bottom Line

The racial retirement wealth gap suggests that many members of non-White racial and ethnic groups may not have enough money saved for retirement when that day comes. There are a number of reasons for the disparity, with the longstanding racial wage gap being a major one.

Fact checked by Kirsten Rohrs Schmitt
Reviewed by Lea D. Uradu

Maximizing your investment income or retirement savings is more than just committing to the process of saving. In addition to choosing the best options for your savings or investment goals you also need to consider how to minimize your tax burden. A few simple tips for record-keeping, investing, and reporting can apply to most investors and can help you save money.

Key Takeaways

• Tips to help taxpayers save money include reinvesting dividends to reduce taxable gains or investing in tax-exempt municipal bonds.
• Keep accurate records of your reinvested dividends, and review the rules applicable to your situation every tax season.
• Capital losses can offset capital gains, lowering the tax obligation.

Reinvest Dividends

Investors can limit capital gains on the sale of mutual fund shares by automatically reinvesting dividends in the fund. Reinvested dividends increase your investment in a fund, effectively reducing your taxable gain (or increasing your capital loss).

Say you originally invested $5,000 in a mutual fund and had $1,000 in dividends reinvested in additional shares over the years. If you then sold your stake in the fund for $7,500, your taxable gain is $1,500 ($7,500 minus the original $5,000 investment and the $1,000 reinvested dividends). Many people forget to deduct their reinvested dividends and end up paying tax on a higher amount.

While the reduction in taxable income in this example may not seem like a big difference, failing to take advantage of this rule could cost you in the long run. By missing out on tax savings today, you lose the potential compounded growth those extra dollars would have earned in the future, and if you forget to consider reinvested dividends year after year, your tax-adjusted returns will suffer.

Keep accurate records of your reinvested dividends, and review the tax rules applicable to your situation every tax season.

Bonds

When the stock market performs badly, investors look elsewhere for places to put their money. Many find a haven in bonds, which often perform counter to equities—and provide interest income to boot. The best part: You may not have to pay tax on all the interest you receive. If you bought the bond in-between interest payments (most bonds pay semiannually), you usually won’t pay tax on the accrued interest prior to your purchase. You must still report the entire amount of interest you received, but you’ll be able to subtract the accrued amount on a separate line.

Municipal bonds (aka munis) can also offer significant tax advantages. These bonds are often issued by state governments or local municipalities to finance a particular project, such as the construction of a school or a hospital or to meet specific operating expenses.

Most munis are issued with tax-exempt status, meaning the interest they generate does not need to be claimed when you file your tax return. Those that are highly rated, and thus low-risk, can be very attractive investments.

Reducing Taxes

Investors who invest in small business ventures or are self-employed can write off many operating expenses. For example, if you take business trips during the year that require you to obtain accommodations, the cost of your lodging and meals can be written off as a business expense within specified limits depending on where you travel. If you travel frequently, forgetting to include these types of seemingly personal expenses can forfeit a lot of tax savings.

For homeowners who moved and sold their home during the year, an important consideration when reporting the capital gain on the sale is the cost basis of the purchase. If your home underwent renovations or similar improvements with a useful life of more than one year, you can likely include the cost of the improvements into the adjusted cost basis of your home, reducing your capital gain incurred on the sale and the resulting taxes.

Tax-Deferred Programs

Every time you trade a stock, you are vulnerable to capital gains tax. Making your purchases through a tax-deferred account can save you a pile of money. Tax-deferred accounts come in many shapes and sizes. Individual retirement accounts (IRA) and simplified employment pension (SEP) plans are two examples.

You are not taxed on the funds until you withdraw them, when the money will be taxed as income. Presumably, at that time your tax rate will be lower than now because you’ll be retired with little or no earned income.

Tax-deferred accounts provide an additional benefit of flexibility; investors need not be concerned with the usual tax implications when making trade decisions. Provided you keep your funds inside the tax-deferred account, you have the freedom to close out of positions early if they experience strong price appreciation, without regard to the higher tax rate applied to short-term capital gains.

Match Profits/Losses

In many cases, it is a good idea to match the sale of a profitable investment with the sale of a losing one within the same year. Capital losses can be used against capital gains, and short-term losses can be deducted from short-term gains. Also, if you have a particularly bad year, you can carry $3,000 of your loss over to future years.

So-called paper gains and losses do not count since there is no guarantee that your investments will not change in value before you close out your position.

Important

Capital gains and losses are only applied to your tax return when realized.

Add Broker Fees to Stock Costs

Buying stocks isn’t free. You always pay commissions and may also pay transfer fees if you change brokerages. The Internal Revenue Service does not allow you to write off transactions fees, such as brokerage fees and commissions, when you buy or sell stocks. But these expenses should be added to the amount you paid for a stock when determining your cost basis.

Think of these costs as write-offs because they are direct expenses incurred to help your money grow. After all, brokerage fees and transaction costs represent money that comes directly out of your pocket as an expense incurred while undertaking an investment. Many small brokerage fees incurred over a year can add up.

Hold on to Your Stocks

Short-term capital gains (less than one year) are taxed as ordinary income, a higher rate than the capital gains rate that applies to long-term gains. For example, the capital gains rate is no higher than 15%, while the top marginal tax rate for ordinary income is 37%. When you consider the long-term effects of compounding on the money you save on your taxes today, it can prove beneficial to hold onto stocks for at least one year.

What Tax Forms Do I Need?

The custodians of your investment accounts should provide you with the forms you need to properly file your taxes. Among the forms you’ll likely receive are 1099-DIV and 1099-INT. These forms report your income from dividends or from interest. For example, if you have an account with an online broker, you’ll probably receive a 1099-DIV and maybe a 1099-INT, which also is the form you’ll receive from banks for interest income.

Are There Any Tax-Free Investments?

Not much is 100% tax-free, but an account like a Roth IRA grows tax-free. However, this is partly because it is funded with income that already has been taxed, and you can contribute no more than $7,000 each year ($8,000) if you are older than 50. Also, your income must fall below specific thresholds to be eligible for a Roth IRA.

Should You Take Advantage of a 401(k)?

If your employer offers a 401(k), there are tax benefits to taking advantage of such an account. Because contributions are made with pre-tax dollars, you can lower your taxable income, thus lowering your tax bill. The tradeoff is that you’ll have to pay taxes on the money you withdraw from the account in retirement.

The Bottom Line

Many investors are eager to learn about the next investment opportunity for market-beating returns, but few put in the same effort to minimize taxes. Part of a successful financial plan is astute tax management. This tax season, ensure you’re doing all you can to keep your money. And talk to a tax planner: The savings you uncover may make a healthy boost to your annual return.

Fact checked by Vikki Velasquez
Reviewed by Samantha Silberstein

A U.S. president’s policies can greatly affect gross domestic product (GDP), an indicator used to measure a country’s economic activity. GDP is the monetary value of all finished goods and services produced in a country during a specific period. GDP growth measures the change in GDP between two periods.

Both GDP and GDP growth are used to reflect economic performance during a presidential administration. However, the indicators come with limitations since they can be affected by events and circumstances beyond a president’s control.

Key Takeaways

• A president’s fiscal and monetary policies can significantly impact GDP, which is a crucial measure of economic activity.
• President Franklin D. Roosevelt had the highest average annual GDP growth at 10.1% from increased government spending for World War II.
• President Herbert Hoover had the worst annual GDP growth of all U.S. presidents so far at -9.3% due to the Great Depression.
• The biggest drop in GDP growth was in 1932, the worst year of the Great Depression, when GDP growth was -12.9% during Hoover’s term.

Essentially, GDP serves as a report card on the overall health of the economy. The metric is closely followed by policymakers, investors, and businesses when making strategic decisions. The White House and Congress use GDP to prepare the federal budget, and the Federal Reserve uses it to make decisions about monetary policy.

In this article, we are using real GDP to show the average annual GDP growth rate by president since it accounts for inflation.

Note

Real GDP is the value of a country’s total output of goods and services adjusted for inflation or deflation.

Historical U.S. GDP Growth

According to economists, the ideal average annual GDP growth should be 2% to 3% each year. President Franklin D. Roosevelt had the highest average annual growth at 10.1% because of increased government spending for World War II. President Herbert Hoover had the worst annual GDP growth of all U.S. presidents so far at -9.3%, due to the Great Depression, which began and lasted through his term. The biggest drop in GDP growth was in 1932, the worst year of the Great Depression, when GDP growth was -12.9% during Hoover’s term.

Rapid GDP growth does not always equal a strong economy—if the economy grows too quickly, it can cause inflation or create a bubble.

At the same time, if the economy slows down too much, and too fast, that can cause a recession. The goal is to maintain the GDP at a steady rate that can be sustained over time, so presidents with average GDP growth of 2% to 3%—which economists consider a healthy range—will have the best growth.

GDP Growth by President 

Here’s a breakdown of the GDP growth rate under each U.S. president—starting with Hoover in 1929—and the events that affected each person’s presidency. 

Herbert Hoover (1929–1933)

Average Annual GDP Growth Rate: -9.3%

President Herbert Hoover had the worst average annual GDP growth rate so far at -9.3%. That’s because in October 1929, during Hoover’s first year of his term, the stock market crashed and led to the Great Depression, the most severe and longest economic recession in modern world history.

Hoover took a laissez-faire (low government intervention) approach in response to the Great Depression and vetoed several bills that would have provided relief to Americans impacted by the recession. He also signed the Smoot-Hawley Tariff Act into law which raised the costs of important goods and affected trade. The GDP growth rate fell to -12.9% in 1932, while unemployment soared to 25% in 1933. 

Franklin D. Roosevelt (1933–1945)

Average Annual GDP Growth Rate: 10.1%

President Franklin D. Roosevelt had an average annual GDP growth rate of 10.1% during his four-term presidency, the highest growth rate of presidents so far. FDR introduced a series of government programs known as the New Deal to help stimulate the economy during the Great Depression. The New Deal aimed to maintain infrastructure, create jobs, and boost businesses across the country. The New Deal also included programs such as Social Security.

While the New Deal did help the economy recover and helped reduce income inequality in the United States, some economists question its true impact on the economy and even say it may have prolonged the recession by several years. Critiques of the New Deal say too much government aid may have hindered the economy’s natural way of rebounding after a deep recession. Still, economists consider 1941 as the end of the Great Depression since GDP increased and unemployment dropped. This was also the year when the U.S. entered WWII.

FDR’s social programs also came with major tax increases and national debt. Roosevelt contributed the largest percentage increase to the U.S. national debt between his New Deal initiatives and, more significantly, spending on World War II.

Harry S. Truman (1945–1953)

Average Annual GDP Growth Rate: 1.4%

President Harry Truman had an average annual GDP growth rate of 1.4%. The economy went through two mild recessions during Truman’s term: one in 1945 due to a drop in government spending after the end of WWII and another from 1948 to 1949 as the economy corrected in the wake of a postwar spending boom. 

Truman had the difficult job of transitioning the economy from wartime to peacetime without sending it into a recession and, in large, did manage to maintain a healthy peacetime economy. Truman also wanted to extend some of the New Deal economic programs, such as higher minimum wage and housing. Still, only a few of his proposals became law due to facing opposition in Congress. Truman’s Marshall Plan sent $12 billion to help rebuild Western Europe after WWII, boosting the U.S. economy by creating a demand for American goods. The Korean War began during Truman’s term in 1950, leading to $30 billion in government spending that helped boost economic growth under Truman. 

Dwight Eisenhower (1953–1961)

Average Annual GDP Growth Rate: 2.8%

President Dwight D. Eisenhower had an annual GDP growth rate of 2.8%. During his time in office, the economy went through three recessions and the Korean War ended in 1953. Eisenhower helped boost economic growth with his Federal-Aid Highway Act in 1956, which was aimed at rebuilding the country’s interstate highways. The government spent a total of $119 billion on the project.

The economy contracted into a recession again from 1957 to 1958 when the Federal Reserve raised interest rates. However, Eisenhower refused to use fiscal policy to stimulate the economy in favor of maintaining a balanced budget. 

John F. Kennedy (1961–1963)

Average Annual GDP Growth Rate: 5.2%

President John F. Kennedy had an average annual GDP growth rate of 5.2%. Kennedy and his administration helped end the 1960 recession (the fourth major recession since WWII) by increasing domestic and military spending. Kennedy also raised the minimum wage and increased Social Security benefits. 

Lyndon B. Johnson (1963–1969)

Average Annual GDP Growth Rate: 5.2%

President Lyndon B. Johnson had an average annual GDP growth rate of 5.2%. LBJ was sworn in two hours after Kennedy’s assassination and was re-elected in 1964 after getting 61% of the vote.

Johnson increased government spending and pushed through tax cuts and the civil rights bill proposed during Kennedy’s term. Johnson’s Great Society program in 1965 created social programs such as Medicare, Medicaid, and public housing. While the economy grew under LBJ with strong businesses and low unemployment, prices began to rise rapidly and inflation ticked up. However, Johnson did not raise taxes to curb spending and cool inflation. Johnson also escalated the Vietnam War, which began during his term, but he was unable to end it.

Richard Nixon (1969–1974)

Average Annual GDP Growth Rate: 2.7%

President Richard Nixon had an average annual GDP growth rate of 2.7%. Though Nixon attempted to cool the inflation that began during LBJ’s term without causing a recession, his economic policies caused a period of stagflation that lasted for a decade. This period was a result of double-digit inflation and economic contraction.

Nixon imposed tariffs and wage-price controls, which led to layoffs and slower growth. The value of the dollar also fell during Nixon’s term when he ended the gold standard. The aftermath of Nixon’s economic policies are called the Nixon Shock.

Gerald R. Ford (1974–1977)

Average Annual GDP Growth Rate: 5.4%

President Gerald R. Ford had an average annual GDP growth rate of 5.4%. The economy had contracted and was in a recession from 1974 to 1975 due to stagflation from Nixon’s time. Ford and his administration cut taxes and reduced regulation to stabilize the economy, and ended the recession. However, inflation still remained high.

Jimmy Carter (1977–1981)

Average Annual GDP Growth Rate: 2.8%

President Jimmy Carter had an average annual GDP growth rate of 2.8%. Stagflation continued into Carter’s term, and was made worse by an energy crisis that led to soaring gas prices and shortages. Carter deregulated oil prices to stimulate domestic production and also deregulated the airline and trucking industries. The Iranian hostage crisis in 1979, however, led to economic contraction. Carter also had the highest inflation rate among U.S. presidents to date.

Ronald Reagan (1981–1989)

Average Annual GDP Growth Rate: 3.6%

President Ronald Reagan had an average annual GDP growth rate of 3.6%. The economy went into a recession in 1981 after the Fed raised interest rates to 20% in an effort to cool inflation.

Reagan’s economic policies, later known as Reaganomics, aimed to end the recession through decreased government spending, tax cuts, increased military spending, and reduced social spending. While these policies helped bring inflation down, Reagan added over $1.86 trillion to the national debt and made the budget deficit worse. Critics of Reagan’s economic policies also say he widened the nation’s wealth gap, and that his deregulation of the financial services industry may have contributed to the Savings and Loan Crisis in 1989.

George H.W. Bush (1989–1993)

Average Annual GDP Growth Rate: 1.8%

President George H.W. Bush had an average annual GDP growth rate of 1.8%. Bush’s administration had to contend with the fallout of the Savings and Loan Crisis, which unfolded during the 1980s and 1990s and contributed to a recession in 1990–1991. In 1989, Bush agreed to a $100 billion government bailout plan to help banks out of the Savings and Loan Crisis. Bush also raised taxes and cut government spending in an effort to reduce the budget deficit.

Bill Clinton (1993–2001)

Average Annual GDP Growth Rate: 4.0% 

President Bill Clinton had an average annual GDP growth rate of 4%. The economy grew for 116 consecutive months, with 22.5 million jobs created in Clinton’s two terms. Clinton signed the North American Free Trade Agreement (NAFTA) which increased growth by getting rid of tariffs between the U.S., Canada, and Mexico. Clinton also lowered the national debt, creating a budget surplus of $70 billion. Clinton raised taxes on the wealthy and briefly cut government spending to reform welfare.

George W. Bush (2001–2009)

Average Annual GDP Growth Rate: 2.4%

President George W. Bush had an average annual GDP growth rate of 2.4%. Bush’s two terms came with major events such as the 9/11 attacks (2001), Hurricane Katrina (2005), and the 2008 recession. Bush launched the War on Terror by creating and expanding the U.S. Department of Homeland Security (DHS) in response to the 9/11 attacks. Bush also faced the Great Recession in 2008, which was considered the most severe recession since the Great Depression. Bush’s military spending and significant tax cuts in response to the recession added about $4 trillion to the national debt.

Barack Obama (2009–2017)

Average Annual GDP Growth Rate: 2.3%

President Barack Obama had an average annual GDP growth rate of 2.3%. Obama ended the 2008 recession he inherited with the American Recovery and Reinvestment Act (ARRA), an $831 billion stimulus package passed by Congress aimed at cutting taxes, extending unemployment benefits, and improving infrastructure and education. However, Obama is the president who added the most to national debt, in dollar amounts, with his recession relief measures.

Still, Obama bailed out the auto industry in the U.S. and created 11.3 million new jobs during his two terms. Inflation and interest rates also remained low. He also ended the Iraq War and reduced troops in Afghanistan. Obama’s economic policies, now known as Obamanomics, were controversial at the time, and his role in ending the 2008 recession is still debated today.

Important

Note that the following section only highlight’s Trump’s first term in office.

Donald Trump (2017–2020)

Average Annual GDP Growth Rate: 2.3% 

President Donald Trump had an average annual GDP growth rate of 2.3%. While there were no major wars or recessions during Trump’s presidency, he did face the COVID-19 pandemic in 2020, his last year in office. Trump increased spending and cut taxes, while the Fed raised interest rates in response to Trump’s expansionary fiscal policies.

Trump placed import taxes on products from China, particularly steel and aluminum, to boost sales of American-made products. However, it hurt the sales of American exports instead, as China responded by placing tariffs on products it imported from the U.S. It also increased costs for American consumers. 

The economy went into recession with the onset of the COVID-19 public health crisis in March 2020 as businesses closed down and Americans sheltered in place. The recession was short but severe, and the Trump administration responded by declaring a state of emergency and passing a $2 trillion stimulus package called the CARES (Coronavirus Aid, Relief, and Economic Security) Act. The CARES Act provided relief for businesses and individuals through stimulus payments and a pause on student loan payments, among other measures, but it was not enough to pull the economy out of the pandemic-induced recession.

Joe Biden (2021–2025)

Average Annual GDP Growth Rate: 3.2%

President Joe Biden has had an annual average GDP growth of 3.2%, with a cumulative real GDP increase of 12.6% over his term highlighted by a 5.7% growth in 2021. Biden took office in the middle of the COVID-19 pandemic and signed the American Rescue Plan Act in 2021, which was a $1.9 trillion stimulus package to provide economic relief from the pandemic.

While the recession caused by the pandemic was severe, it was short-lived. However, it was followed by record-high inflation, partly due to the Russian invasion of Ukraine, which caused soaring gas in 2022, supply chain snarls, higher demand for goods, and increased consumer spending from federal stimulus checks. The Federal Reserve responded by raising interest rates 11 times since March 2022 in an attempt to cool inflation. In July 2024, inflation cooled to 2.9%, and the Fed signaled a potential rate cut.

How Does the President Impact GDP?

Since GDP is the most popular way to measure economic growth, it can show us how the economy performed under each U.S. president. How the economy does under a president is an important factor that voters consider when evaluating a president’s time in office. Also, economic policies are one of the main issues that presidents address while running for office.

Presidents indeed play a role in determining GDP. The president and Congress set fiscal policy to help direct the economy. The executive and legislative branches, for instance, can lower taxes and increase government spending to boost the economy, or the opposite.

While the president plays an important role in guiding the economy, external factors that can slow down the economy—such as wars, recessions, or public health crises—also significantly impact the economy and can be out of the president’s control. In addition, the Federal Reserve—which is independent of the federal government—sets monetary policy, which influence the economy as well.

What Is the Difference Between Real GDP and Nominal GDP?

Nominal GDP is the total value of all goods and services produced over a given time period, either quarterly or annually. Real GDP is nominal GDP, just adjusted for inflation. Economists use real GDP because it is a more accurate measure of economic growth since it adjusts for inflation.

Which President Has the Highest GDP Growth Rate in U.S. History?

President Franklin D. Roosevelt had the highest average annual GDP growth rate so far, at 10.1%. However, FDR also contributed the largest percentage increase to the U.S. national debt between his New Deal initiatives and spending on World War II.

What Is the Ideal GDP Growth Rate?

According to economists, the ideal average annual GDP growth should be 2% to 3% each year.

Can GDP Be Misleading?

While GDP is a widely used and accurate indicator, it’s not always a perfect one and has some drawbacks. That’s because it gives more of an overall picture of the economy and does not really account for informal or underground economic activity, income disparities, or the actual economic well-being of citizens. It’s an overall picture of the country’s output and not necessarily a comprehensive measure of a nation’s development or well-being. However, it does show how the economy contracts and expands through the business cycle in response to various economic events.

The Bottom Line

Looking at GDP growth is one of the most widely used measures of economic growth as it is considered one of the most accurate economic indicators. Since a president’s economic policies can have a significant impact on GDP, it can be used as a way to examine how the economy did under each U.S. president.

However, it is important to remember that some economic events such as severe recessions, natural disasters, public health crises, and other catastrophic events can affect the economy and have little to do with who is in office. Still, the way a president, along with the central bank, sets and enacts monetary policy in response to such events also influences the economy.

Fact checked by Ryan Eichler
Reviewed by JeFreda R. Brown

What Is the Risk-Reward Calculation?

Are you a risk-taker? When you’re an individual trader in the stock market, one of the few safety devices you have is the risk-reward calculation. The actual calculation to determine risk vs. reward is very easy. You simply divide your net profit (the reward) by the price of your maximum risk.

Sadly, retail investors might end up losing a lot of money when they try to invest their own money. There are many reasons for this, but one of those comes from the inability of individual investors to manage risk. Risk-reward is a common term in financial vernacular, but what does it mean?

Key Takeaways

• Calculate risk vs. reward by dividing your net profit (the reward) by the price of your maximum risk.
• To incorporate risk-reward calculations into your research, pick a stock, set the upside and downside targets based on the current price, and calculate the risk-reward.
• If the risk-reward is below your threshold, raise your downside target to attempt to achieve an acceptable ratio; if you can’t achieve an acceptable ratio, start with a different investment.

Understanding Risk vs. Reward

Investing money into the markets has a high degree of risk, and you should be compensated if you’re going to take that risk. If somebody you marginally trust asks for a $50 loan and offers to pay you $60 in two weeks, it might not be worth the risk, but what if they offered to pay you $100? The risk of losing $50 for the chance to make $100 might be appealing.

That’s a 1:2 risk-reward, which is a ratio where a lot of professional investors start to get interested because it allows investors to double their money. Similarly, if the person offered you $150, then the ratio goes to 1:3.

Now let’s look at this in terms of the stock market. Assume you did your research and found a stock you like. You notice that XYZ stock is trading at $25, down from a recent high of $29.

You believe that if you buy now, in the not-so-distant future, XYZ will go back up to $29, and you can cash in. You have $500 to put toward this investment, so you buy 20 shares. You did all of your research, but do you know your risk-reward ratio? If you’re like most individual investors, you probably don’t.

Special Considerations

Before we learn if our XYZ trade is a good idea from a risk perspective, what else should we know about this risk-reward ratio? First, although a little bit of behavioral economics finds its way into most investment decisions, risk-reward is completely objective. It’s a calculation, and the numbers don’t lie.

Second, each individual has their own tolerance for risk. You may love bungee jumping, but somebody else might have a panic attack just thinking about it.

Next, risk-reward gives you no indication of probability. What if you took your $500 and played the lottery? Risking $500 to gain millions is a much better investment than investing in the stock market from a risk-reward perspective, but a much worse choice in terms of probability.

In the course of holding a stock, the upside number is likely to change as you continue analyzing new information. If the risk-reward becomes unfavorable, don’t be afraid to exit the trade. Never find yourself in a situation where the risk-reward ratio isn’t in your favor.

How to Calculate Risk-Reward

Remember, to calculate risk-reward, you divide your net profit (the reward) by the price of your maximum risk. Using the XYZ example above, if your stock went up to $29 per share, you would make $4 for each of your 20 shares for a total of $80. You paid $500 for it, so you would divide 80 by 500, which gives you 0.16.

This means that your risk-reward for this idea is 1:0.16. Most professional investors won’t give the idea a second look at such a low risk-reward ratio, so this is a terrible idea. Or is it?

Using the Risk-Reward Calculation

To incorporate risk-reward calculations into your research, follow these steps:

1. Pick a stock using exhaustive research.
2. Set the upside and downside targets based on the current price.
3. Calculate the risk-reward.
4. If it is below your threshold, raise your downside target to attempt to achieve an acceptable ratio.
5. If you can’t achieve an acceptable ratio, start over with a different investment idea.

Once you start incorporating risk-reward, you will quickly notice that it’s difficult to find good investment or trade ideas. The pros comb through charts each day—sometimes hundreds of them—looking for ideas that fit their risk-reward profile. Don’t shy away from this. The more meticulous you are, the better your chances of making money.

Limiting Risk and Stop Losses

Unless you’re an inexperienced stock investor, you would never let that $500 go all the way to zero. Your actual risk isn’t the entire $500.

Every good investor has a stop-loss or a price on the downside that limits their risk. If you set a $29 sell limit price as the upside, maybe you set $20 as the maximum downside. Once your stop-loss order reaches $20, you sell it and look for the next opportunity.

Because we limited our downside, we can now change our numbers a bit. Your new profit stays the same at $80, but your risk is now only $100 ($5 maximum loss multiplied by the 20 shares that you own), or 100/80 = 1:0.8. This is still not ideal.

What if we raised our stop-loss price to $23, risking only $2 per share or $40 loss in total? Remember, 40/80 is 1:2, which is acceptable. Some investors won’t commit their money to any investment that isn’t at least 1:4, but 1:2 is considered the minimum by most. Of course, you have to decide for yourself what the acceptable ratio is for you.

Notice that to achieve the risk-reward profile of 1:2, we didn’t change the top number. When you did your research and concluded that the maximum upside was $29, that was based on technical analysis and fundamental research. If we were to change the top number, in order to achieve an acceptable risk-reward, we’re now relying on hope instead of good research.

What Is Risk?

Risk is defined in financial terms as the chance that an outcome or investment’s actual gain will differ from the expected outcome or return. Risk includes the possibility of losing some or all of an original investment.

What Is Reward?

Reward is defined in financial terms as the potential profit or return that an investor can expect to gain from an investment. Essentially, it’s the positive outcome of taking on a risk.

What Are the Elements of a Risk-Reward Calculation?

To calculate risk-reward, divide your net profit (the reward) by the price of your maximum risk.

• Net profit is the total amount of money that an investor keeps after subtracting all costs and expenses associated with their investments, including commissions, fees, and taxes.
• Maximum risk is the potential for the largest possible loss on an investment. It typically occurs when an investor puts all their money into a single, highly volatile asset, potentially losing the entire investment if the asset performs poorly.

The Bottom Line

Every good investor knows that relying on hope is a losing proposition. Being more conservative with your risk is always better than being more aggressive with your reward. Risk-reward is always calculated realistically, yet conservatively.

Correction—May 29, 2023: This article has been revised to correct the examples of ratios throughout, placing the figure for risk as the first element of the ratio and the potential reward as the second element.

Triple-Leveraged Funds Promise Big Returns But Pack Hidden Dangers

Reviewed by Andy Smith

Suppose you’re sure you can make a trade now that would net you a 5% gain. That would be great, but what if you could instead net a 15% profit? That’s the appeal of triple-leveraged (3x) exchange-traded funds (ETFs), investments that aim to triple the returns of the markets they track. But this magnification of gains has a flip side that some investors don’t fully grasp until it’s too late.

For experienced day traders, 3x ETFs can be worthwhile and beneficial tools. However, these products hide mathematical quirks that make them ticking time bombs for long-term investors. Even a choppy but flat market can steadily erode significant value through compounding—meaning you could lose money even when the market ends up exactly where it started. Below, we examine the advantages and disadvantages of trading in these funds.

Key Takeaways

• Triple-leveraged (3x) exchange-traded funds (ETFs) come with substantial risk and aren’t appropriate for long-term investing.
• Compounding can cause large losses for 3x ETFs during volatile markets, such as occurred with several such funds in the volatile markets of the 2020s.
• Since they maintain a fixed level of leverage, 3x ETFs eventually face complete collapse if the underlying index declines more than 33% on a single day.
• Because their high leverage creates a risk of enormous single-day losses, it’s not recommended to hold leveraged ETFs overnight.

When 3X ETFs: Recent Cautionary Tales

As with other leveraged ETFs, 3x ETFs track a wide variety of asset classes, such as stocks, bonds, and commodity futures. The difference is that 3x ETFs apply even greater leverage to gain three times the daily or monthly return of their respective underlying indexes. The idea behind 3x ETFs is to take advantage of quick market moves. They are not meant to—and shouldn’t—be held for the long term and aren’t recommended to be held even overnight.

Numerous market events in the 2020s provided stark examples of how quickly these investments can go very, very wrong. While quick-footed day traders might navigate these waters with less trouble, anyone else was likely given expensive lessons in the potential hazards for your portfolio.

For example, in late August 2024, the Direxion Daily Semiconductor Bull 3x Shares (SOXL) plunged 22.5% in a single day as tech stocks stumbled—its worst performance since March 2020, the start of the pandemic. That was after the fund had dropped more than 60% from July into August 2024. The 22.5% plunge took place after a mid-month rebound, demonstrating the extreme volatility of SOXL.

Here are just some of the other critical moments faced by triple-leveraged fund investors in the 2020s:

March 2020 (COVID Crash)

• ProShares UltraPro QQQ (TQQQ) plunged 70% in weeks.
• Many other triple-leveraged ETFs lost over half their value.
• Some investors mistakenly bought the dip, not understanding daily resets, which we’ll discuss below.

April 2020 (Oil Price Collapse)

• Leveraged oil ETFs were ravaged when oil futures briefly went negative.
• Several funds were forced to restructure or liquidate.
• Small investors were caught off guard by complex oil futures mechanics.

January-February 2022

• TQQQ dropped more than 40% as the U.S. Federal Reserve signaled rate hikes.
• Tech-focused leveraged funds were hit especially hard.
• While funds like the Invesco QQQ Trust ETF (QQQ) were hit hard, investors in the 3X TQQQ were devastated.
• Rising rates exposed risks of growth stock leverage.

March 2022 (Nickel Market Crisis)

• WisdomTree’s 3x Short Nickel ETF collapsed to zero.
• Nickel prices soared 250% in days during what ended up being a short squeeze.
• The fund was forced to redeem all shares, wiping out investors.

September-October 2022

• TQQQ fell 30% amid inflation fears.
• Semiconductor leveraged funds like SOXL also suffered steep declines.
• This showed the dangers of concentrating in a given sector while also using leveraged funds simultaneously.

August-September 2024

• SOXL plunged 22.5% in one day.
• Tech sector leveraged funds were hit especially hard in a broad sell-off.
• Many new investors learned painful lessons about using these funds for anything other than day trading or other extremely short-term trading, especially during market volatility.

Note

Leveraged ETFs are intended for very short holding periods, typically less than a trading day. Over time, their value will tend to decay even if the underlying price moves favorably.

Key Lessons From Recent Major ETF Losses

• Never hold these funds overnight unless you’re prepared for potential major losses.
• Market volatility can trigger catastrophic declines even when the underlying index only drops moderately.
• Even good news can hurt—a choppy rise in prices can erode value through daily resets.
• The more volatile the sector (like tech or commodities), the riskier the leveraged ETF.

To understand how these disasters can unfold so quickly, let’s examine four key risk factors: how daily compounding works against you, how these funds amplify the volatility of markets, the complex derivatives these funds use, and the “constant leverage trap” that makes recovery from losses nearly impossible.

Derivatives: The Engine Behind the Leverage

Triple-leveraged ETFs don’t simply borrow money to amplify returns. Instead, they use complex financial contracts called derivatives to create their leverage, typically a mix of futures contracts, swaps, and options.

Each of these has specific risks:

• Futures contracts can move differently than the actual market they track.
• Swaps depend on other financial firms keeping their promises to pay.
• Options can expire worthless if market timing is off.

If any of these building blocks fails, the ETF can crumble. Here are the risks you’re indirectly signing onto:

• Market risk: The chance that the derivatives’ value moves differently than expected. For example, a futures contract tracking the S&P 500 might fall more sharply than the index itself during market stress.
• Counterparty risk: The chance that the other party in a derivative contract can’t or won’t pay up. If a bank providing swap contracts to a leveraged ETF fails, the fund could face severe losses.
• Liquidity risk: The possibility that an ETF can’t easily buy or sell its derivative positions at all or without moving market prices. During market turmoil, derivatives can become much harder to trade, forcing funds to accept unfavorable prices.
• Interconnection risk: How problems in one part of the financial markets can spread to others. When derivatives markets seize up, it can create a domino effect hitting multiple funds and market sectors simultaneously.

This complex web of risks means that even if the market index a fund tracks moves as expected, the fund itself could perform very differently because of trouble with its derivative positions.

Volatility: Triple the Gains and Triple the Losses

For most investments, volatility makes for sometimes nausea-inducing ups and downs. But for triple-leveraged ETFs, volatility can be lethal. Even small market swings get amplified into dramatic price moves that can quickly snowball into major losses.

Consider the difference between the Nasdaq-100 tracking fund QQQ and its triple-leveraged cousin TQQQ, whose price chart is above. When tech stocks hit turbulence in March 2020, QQQ dropped about 28%—a significant but manageable decline. TQQQ, however, plummeted 70% during the same period. That’s ends up far worse than simply triple the loss, thanks to the fund’s daily reset mechanism magnifying each day’s volatile moves.

Even in calmer markets, TQQQ regularly sees daily price swings of 5% or more, while QQQ might move just 1% to 2%. This extreme volatility makes these funds especially dangerous for overnight holding— a post-market news announcement that might knock QQQ down 3% could send TQQQ plunging 9% or worse before you can even place a trade.

The Daily Reset Trap

In addition to simple volatility, investors in triple-leveraged ETFs need to beware the daily reset trap. These funds must reset their leverage every day because they must maintain exactly 300% exposure to their target index at all times.

So each day at market close, the fund adjusts its holdings to get back to that 300% target. Let’s look at an example.

First, an Up Day

• An index that starts at 100.
• A 3x leveraged ETF that starts with $100, designed to move three times the index.
• The index borrows money to maintain exposure to $300 worth of assets (3x the index)
• On day one, the index rises from 100 to 110 (+10%)
• On day one, the 3x ETF gains 30%, with a new value of $130.
• Under the daily reset, the ETF must now control $390 worth of assets (3 x $130), because it must maintain three times the fund’s total assets in exposure to the index. So it buys another $90 of exposure.

Then, a Down Day

So far so good, because the index went up on day one. But let’s look at what happens when the market goes down the next day.

• The index falls 10% (the same percentage as the previous day’s rise), from 110 to 99.
• The 3x ETF should lose 30%, so its value drops from $130 to $91.
• So since the start of trading on day one, the index has gone up 10% then down 10%, yet lost 1% of its overall value.
• Meanwhile, the 3x ETF has gone up 30% and down 30%—but lost 9% of its original value.

This illustrates the peril of the daily reset and holding such a highly leveraged instrument for multiple days, especially in a choppy market.

Compounding

This brings us to compounding, which also heightens the risk for investors (as well as the potential reward). With compounding, gains and losses stack up quickly even over very short periods, particularly in choppy markets.

With compounding, the daily reset trap can become even more painful if you continue to hold. Extending our example above, consider what would happen if the index again rose 10% on the third day and fell 10% on the fourth. The index would end up at 98.01, a loss of 1.99%, but the 3XETF’s value would be $82.81, a loss of 17.19%—all while going up and down by the same percentage.

Important

Even in flat but volatile markets, these funds can lose money because of a mathematical effect called compounding.

High Expense Ratios

Beyond the inherent risks of these investments, triple-leveraged ETFs also have very high expense ratios, which make them unattractive for long-term investors. All mutual funds and exchange-traded funds charge their shareholders an expense ratio to cover the fund’s total annual operating expenses.

The expense ratio is expressed as a percentage of a fund’s average net assets, and it can include various operational costs. The expense ratio, which is calculated annually and disclosed in the fund’s prospectus and shareholder reports, directly reduces the fund’s returns to its shareholders.

Even a small difference in expense ratios can cost investors a substantial amount of money in the long run. Triple-leveraged ETFs often charge around 1% per year. For example, TQQQ, which seeks to triple the daily returns of the Nasdaq 100, has an expense ratio of 0.84%.

Compare that with typical stock market index ETFs, which usually have low expense ratios. For example, the Invesco QQQ, which is not leveraged and tracks the same index as the TQQQ, the Nasdaq 100, has an expense ratio of 0.20%.

What Does It Mean When an ETF Is Leveraged 3x?

An ETF that is leveraged 3x seeks to return three times the return of the index or other benchmark that it tracks. A 3x S&P 500 index ETF, for instance, would return +3% if the S&P rose by 1%. It would also lose 3% if the S&P dropped by 1%.

What Research Is Needed to Trade in Triple-Leveraged ETFs?

Leveraged ETFs require considerations such as how they are constructed and how often their portfolio is rolled over and rebalanced. For instance, some may use option contracts while others use structured notes. Leveraged ETFs also tend to have relatively high expense ratios, which also has to be considered.

What Happens If Triple-Leveraged ETFs Go to Zero?

Leveraged ETF prices tend to decay over time, and triple leverage will tend to decay at a faster rate than 2x leverage. As a result, they can tend toward zero. Before this happens, leveraged ETFs can undertake a reverse stock split, creating higher-priced shares but reducing the number of ETF units outstanding. Ultimately, if the fund’s share prices drop low enough and there is no demand for a reverse split, the ETF may be delisted.

The Bottom Line

Triple-leveraged ETFs might seem attractive with their promise of tripling market returns, but they can be ticking time bombs for investors who aren’t careful. These complex products are designed for sophisticated day traders, not buy-and-hold investors. Even when markets are relatively flat, these funds can lose substantial value through daily resets and compounding.

Add in high fees, complex derivatives, and the potential for complete collapse if markets drop sharply, and it’s clear why financial experts warn that 3x ETFs should be approached with extreme caution—if at all. For most investors seeking market exposure, traditional non-leveraged ETFs offer a much safer path to achieving their investment goals.

Marcus offers competitive CD rates with terms from 6 to 72 months

Fact checked by Michael Rosenston

Marcus’ high-yield CDs come with competitive rates on all terms, with the highest APY of 4.30% offered on a 9-month term. The APYs on its No-Penalty CD are lower, but this CD type gives you the option of withdrawing your money early without penalty. Finally, Marcus’ Rate Bump CD only comes with one term of 20 months, but it gives you the option to upgrade your rate once if rates increase during your term.

Compare Marcus CDs some of the best high-yield CDs.

Marcus High-Yield CD Overview

In addition to its high-yield CDs, Marcus offers two other CD types: a no-penalty CD and a rate bump CD.

• No-penalty CD: Terms for a no-penalty CD are 7 months, 11 months, and 13 months. The minimum deposit is $500 and the APR is 4.15%.
• Rate bump: The rate bump CD is a 20-month CD with a minimum deposit of $500 and an APY of 3.90%.

Marcus CD Rates: Key Features

• Marcus no-penalty CD key features: An APY of 4.15%, a minimum balance of $500, term range of 7–13 months, and no early withdrawal fee.
• Rate bump CD key features: An APY of 3.90%, a minimum balance of $500, a term of 20 months, an early withdrawal fee of 90 days interest on terms less than 1 year 180 days interest on terms of 1–5 years 270 days interest on terms more than 5 years (with a grace period of 10 days). This CD lets you upgrade your rate once if Marcus raises the rates on its 20-month CDs during your term. 

Compare Marcus CD Rates

Marcus CDs offer competitive rates on its CDs and a range of CD options and types. You can likely find a CD that meets your needs with Marcus, but you may also find higher rates by shopping around and reviewing other CDs rates and terms.

Pros and Cons of Marcus CDs

Pros

• Competitive CD rates

• A range of CD terms

• Rate bump option

Cons

• No branch locations

Pros Explained

• Competitive CD rates: Marcus offers rates on its CDs that are higher than rates on many others.
• A range of CD terms: Marcus CD terms range from 6 months to 72 months, giving you flexibility. Marcus also offers three CD types: a high-yield CD, a no-penalty CD, and a rate bump CD. 
• Rate bump option: With a 20-month Marcus CD, you have the option to increase your CD rate once in its term if broader interest rates rise.

Cons Explained

• No branch locations: Marcus by Goldman is an online bank, so if you want in-person service you should consider CDs from another financial institution.

About Marcus

Marcus by Goldman Sachs is an online bank that offers a variety of accounts, including three types of CDs: a high-yield CD, a no-penalty CD, and a rate bump CD. 

Marcus customers can also open a high-yield savings account or credit card, including either a rewards card, business card, or family credit card.

The Marcus No-Penalty CD doesn’t charge an early withdrawal penalty, but you must wait seven or more days from your opening deposit to make a withdrawal.

Alternatives to Marcus CDs

• High-yield savings accounts: If you’re willing to open an online savings account elsewhere, you may be able to earn higher rates than what Marcus CDs offer. See the best high-yield savings account rates to compare how much you could earn.
• High-yield checking accounts: You may find relatively high rates with some checking accounts. Be aware of their requirements and limits. The best high-interest checking accounts give you easy access to your money.
• Certificates of deposit (CDs): Marcus competitive rates on its CDs. You can also choose from a range of CDs from other financial institutions.
• Money market account: Money market account can also provide a return on your savings. Check the best money market account rates to see how it compares.
• Treasury securities: These government-backed bills, notes, and bonds sometimes offer even higher rates than CDs and may be more liquid. 

Frequently Asked Questions (FAQs)

Are Marcus CDs FDIC-Insured?

Yes, Marcus CDs are FDIC-insured. Provided by Goldman Sachs Bank USA, an FDIC member, Marcus CDs are FDIC-insured for up to $250,000.

What Is the Early Withdrawal Penalty for Marcus CDs?

The early withdrawal penalty on Marcus CDs varies depending on the CD’s term length. The penalty is 90 days of interest on terms less than one year, 180 days of interest on terms of one to five years, and 270 days of interest on terms more than five years. 

What Is the Minimum Opening Deposit for Marcus CDs?

The minimum opening deposit for Marcus CDs is $500. This minimum deposit applies to all three CD types that Marcus offers: high-yield CDs, no-penalty CDs, and rate bump CDs.

Your Guide to CDs

• What Is a Certificate of Deposit (CD)?
• What Is a Brokered CD?
• What Is a CD Ladder?
• Pros and Cons of CDs
• How to Invest With CDs
• How to Open a CD
• How to Close a CD
• CDs vs. Annuities
• CDs vs. Stocks
• CDs vs. Mutual Funds
• CDs vs. ETFs
• CDs vs. Savings Accounts
• Short-Term vs. Long-Term CDs
• CD Rates News
• Best 1-Year CD Rates
• Best 18-Month CDs
• Best Jumbo CD Rates
• Best 6-Month CD Rates
• Best 3-Month CD Rates
• Best Bank CD Rates

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

Each woman reached a milestone in American politics, business, or social movements.

Reviewed by Erika Rasure

Gender discrimination has historically placed barriers to the success of women in the workplace, politics, and education. However, many women have forged a path for future generations by being the first to break down barriers to become the first female doctor or the first elected official in the United States.

Key Takeaways

• In the 19th century, women began to break into previously all-male professions, such as medicine and law.
• Advances in the 20th century included House and Senate seats, a Cabinet appointment, and leading roles in the desegregation and labor movements.
• In the 21st century, women have assumed notable leadership roles in the federal government and financial sectors.

1809

In 1809, Mary Kies became the first woman to receive a patent, for a method of weaving straw with silk. 

1849

In 1849, Elizabeth Blackwell graduated from Geneva Medical College in New York and became the first female doctor in the U.S. Dr. Blackwell founded the New York Infirmary for Women and Children, along with an affiliated medical college for women. The infirmary helped expand medical training to women and medical care to the poor.

1864

In 1864, Dr. Rebecca Lee Crumpler became the first Black woman physician in the United States, graduating from the New England Female Medical College. Dr. Crumpler relocated to Richmond, Va., after the Civil War, where she worked for the Freedmen’s Bureau on the health needs of freed slaves. Dr. Crumpler later wrote the first medical text by a Black author.

1869

In 1869, Arabella Mansfield was the first woman admitted to practice law in the U.S., in Iowa.

1870

Ada H. Kepley is the first woman in the United States to graduate from law school.

1872

The first female presidential candidate in the U.S., Victoria Claflin Woodhull, was nominated by the Equal Rights Party.

1887

Susanna Madora Salter is the first woman elected mayor of an American town, in Argonia, Kansas.

1889

Dr. Susan La Flesche Picotte was the first Native American physician in the U.S., to graduate from the Woman’s Medical College of Pennsylvania as valedictorian. Dr. Picotte opened a hospital in the Omaha Reservation town of Walthill, Nebraska.

1916

The first woman is elected to the U.S. House of Representatives: Jeannette Rankin of Montana.

1928

Amelia Earhart flew an aircraft solo across the Atlantic Ocean.

1932

Hattie Wyatt Caraway of Arkansas became the first woman elected to the U.S. Senate.

1933

The first female Cabinet member, Frances Perkins, was appointed as Secretary of Labor by President Franklin D. Roosevelt. Perkins helped enact a minimum wage, unemployment compensation, and a limit on the employment of children. Perkins also played a role in drafting the Social Security Act.

1955

In March, 15-year-old Claudette Colvin refuses to move to the back of a bus in Birmingham, Alabama. Colvin became one of the plaintiffs in the first federal court case to challenge bus segregation. Later that same year, Rosa Parks refused to give up her seat on the bus to a White man in Montgomery, Alabama. Her protest sparked the 381-day Montgomery Bus Boycott that ended segregation on buses.

1962

Dolores Huerta co-founded the National Farm Workers Association with César Chávez, playing a key role in organizing the 1965 strike of 5,000 grape workers. Huerta championed women’s issues and worked to elect more Latinos and women to public office during the 1990s and 2000s.

1964

Patsy Mink became the first woman of color in Congress, representing Hawaii. Mink was one of the principal authors of Title IX of the Education Amendments of 1972, the landmark legislation that prohibits gender discrimination in education.

1967

Muriel Siebert was the first woman to buy a seat on the New York Stock Exchange. Siebert was later selected to become New York’s first female superintendent of banking in 1977.

1968

Shirley Chisholm was the first Black woman elected to Congress. Representing New York for 14 years, Chisholm advocated for early education and child welfare policies. 

1972

Katharine Graham became the first woman to be CEO of a Fortune 500 company, the Washington Post Company. Graham had been president of the company, which was owned by her family, since the death of her husband in 1963 and ran it until 1991. She was in charge when The Washington Post published the Pentagon Papers in 1971 and when Post reporters Bob Woodward and Carl Bernstein uncovered the Watergate conspiracy in 1972.

1980

Paula Hawkins of Florida, a Republican, became the first woman to be elected to the U.S. Senate without following her husband or father into the job. Hawkins was the leading sponsor of the Missing Children’s Act of 1982 and fought for laws to make it easier for women to enter the job market. 

1981

Sandra Day O’Connor was appointed as the first woman to serve on the U.S. Supreme Court. The court overturned state laws designating a husband “head and master” with unilateral control of property owned jointly with his wife. It also ruled that excluding women from the draft is constitutional.

1984

U.S. Rep. Geraldine Ferraro, D-N.Y., was the first woman to be nominated as the vice presidential candidate on a major-party ticket.

1989

U.S. Rep. Ileana Ros-Lehtinen of Florida was the first Latina and Cuban American to serve in Congress. A moderate Republican, Ros-Lehtinen was the first female to chair a standing committee, the Committee on Foreign Affairs. In her 30-year political career, she was a member of the LGBT Equality Caucus and the Climate Solutions Caucus. 

1997

Madeleine Albright, who served as U.S. ambassador to the United Nations, became the first female Secretary of State.

2007

U.S. Rep. Nancy Pelosi, D-Calif., became the first female Speaker of the House.

2009

Michelle Obama became the first Black first lady of the United States. President Barack Obama appointed Sonia Sotomayor as the first Latina Supreme Court judge.

2014 

Economist Janet Yellen became the first woman to chair the Federal Reserve System.

2016

Hillary Rodham Clinton secured the Democratic presidential nomination, becoming the first U.S. woman to lead the ticket of a major party. She lost to Republican Donald Trump in the election.

2018

Banker Stacey Cunningham became the first female president of the New York Stock Exchange. 

2021

U.S. Sen. Kamala Harris, D-Calif., was the first woman, the first Black American, and the first person of South Asian descent to be vice president of the United States, serving alongside President Joe Biden. First Lady Jill Biden, an English professor at Northern Virginia Community College, became the first first lady to keep her day job.

2022 

President Biden nominated Ketanji Brown Jackson to the Supreme Court in 2022. She was approved by the Senate and took her seat on June 30, 2022, becoming the first Black woman to sit on the Supreme Court.

2024

Following President Joe Biden’s decision not to run for a second term, Kamala Harris accepted the Democratic Party’s nomination as the first Black and South Asian American woman to run for President of the United States. She lost the election to Donald Trump.

Who Was the First American Woman to Become a Doctor?

Dr, Elizabeth Blackwell was the first woman in the U.S. to become a doctor, in 1949 after graduating from the Geneva Medical College in New York. In 1864, Dr. Rebecca Lee Crumpler was the first Black American woman physician and the first Black American author of a medical text.

Who Was the First American Woman To Run for President?

Victoria Claflin Woodhull was the first woman presidential candidate in 1872. Woodhull, who championed women’s suffrage, was nominated by the Equal Rights Party.

Who Was the First American Woman CEO of a Fortune 500 Company?

In 1972, Katherine Graham became the first woman CEO of a Fortune 500 company, The Washington Post.

The Bottom Line

Without the trailblazing work of many women in history, positions in medicine, politics, and law may not have opened for women of future generations. Women still face barriers due to gender-based discrimination, and many professions are still dominated by men.