Compare top digital wealth management platforms with our comprehensive guide and decide what’s best

Fact checked by Suzanne Kvilhaug
Reviewed by Samantha Silberstein

M1 Finance and Merrill Guided Investing are vastly different when it comes to the type of digital wealth management platform they offer and the type of investor they seek to attract. M1 is a relative newcomer to the finance world, and Merrill Guided Investing’s parent company has been around for more than a century. They are difficult to compare head-to-head because they each target a very different group of clients. Both companies are among our top picks, with M1 Finance winning best for sophisticated investors, best for low costs, and best for socially responsible investing, while Merrill Guided Investing is best for education.

To some investors, the offering from M1 Finance will be a far more desirable alternative because it empowers them to fully customize their portfolio and saves them money with no management fees. For other investors, Merrill Guided Investing will be the best option for a robo-advisor because it truly offers a hands-off investing experience by recommending a portfolio based on the investor’s financial goals, risk tolerance, and time horizon. We’ll evaluate the two platforms side by side to help you decide which is a better fit for your investing needs.

Open and fund an M1 Finance High-Yield Cash Account by Jan. 31, 2025 and they will bump up your APY by a half percent for 15 months. If an account is opened after Jan. 31, 2025, you will receive a 0.50% APY boost for your first 3 months. See the M1 website for more details. Get started today.

Key Takeaways of M1 Finance

• Extensive portfolio customization options
• No fees for trading or account management
• Cash accounts, credit cards, and other options available
• Margin loans accessible at low interest rates with $2,000 invested

Key Takeaways of Merrill Guided Investing

• Limited portfolio customization options
• Accounts integrated with Bank of America products and services
• Offers 24/7 customer service
• Provides a robust collection of educational material, investing calculators, and other tools

Account Setup

Both platforms make the onboarding process quick. Each company completes the typical know-your-client (KYC) requirements of the industry in novel ways.

M1 Finance

M1 Finance has streamlined the process for opening an account online and through its app, which is both Android- and iOS-compatible. Once you create a username and password, the education begins, integrated with M1’s onboarding flow. In this way, you learn to work with the platform as you answer general questions about your investment goals and preferences. The portfolio construction part of the process can be as simple or as powerful as you want. Investors have the option to select one of the pre-built investment “Pies” (think pie chart) or customize a portfolio by choosing each investment on their own.

The minimum to open a regular brokerage account is $100, or $500 for a retirement account. Once your portfolio has been finalized, your account selected, and banking information added, you’re ready to start investing.

Merrill Guided Investing

Setting up a Merrill Guided Investing account begins with answering basic investment questions in an online questionnaire. Here you’ll select one specific investing goal and its time horizon. You’ll also document assumptions about future financial contributions and timelines for investing. If you have multiple investment accounts, the questionnaire is comprehensive enough to include them in its eventual calculations as well. Once you have provided a customized name for this goal, you can specify your risk tolerance or answer a few questions that will give you a recommendation to consider. 

The next step requires you to select between a market-tracking portfolio, which focuses on getting the best gains, or a portfolio that favors companies with high scores in environmental, social, and governance (ESG) criteria. Before completing the sign-up, you receive a targeted asset allocation, ranging from conservative to aggressive, based on your questionnaire answers. This tradeoff between performance-seeking and values-based investing allows the platform to cater to your personal preferences. The minimum for opening an account with Merrill is higher: $1,000 to set up a basic online account, or $20,000 if you want an online account that comes with one-on-one help from an advisor. 

Account Setup Verdict: Merrill Guided Investing

Merrill Guided Investing has a more comprehensive onboarding process that results in a portfolio tailored to your risk tolerance. M1 Finance, while easy to get started with, depends on you to know what you are doing in order to build a portfolio to meet your investing goals. We give Merrill Guided Investing the edge here. 

Account Types

M1 Finance

• Individual taxable
• Joint taxable
• Traditional 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

Merrill Guided Investing

• Individual taxable
• Joint taxable
• Traditional IRA
• Roth IRA
• Simplified employee pension (SEP) IRA
• SIMPLE IRA
• 401(k) to IRA rollover
• UTMA and UGMA

Account Types Verdict: M1 Finance

Both Merrill Guided Investing and M1 Finance have all the commonly used investment accounts. We give this category to M1 Finance for the crypto and high-interest account offerings right in the platform, but it is important to note that Merrill customers can also access more financial accounts through the Bank of America side of the business.

Account Services

M1 Finance

M1 Finance offers a variety of account services that give you more flexibility with your money. Investors have over 3,900 individual stocks to choose from when creating their portfolio. When selecting investments, each portfolio can have a maximum of 100 “slices” per “Pie,” with each slice being a minimum of 1%. In addition to setting up an investment portfolio, investors can open credit card accounts and even use margin accounts to borrow up to 50% of the account value once the balance exceeds $2,000.

Merrill Guided Investing

Merrill operates under the umbrella of Bank of America and offers seamless integration with its large array of banking products. Merrill Guided Investing offers two types of robo-advisor accounts:

• Online only: A good choice for those who don’t need comprehensive financial planning or advice. It charges an annual 0.45% of assets under management (AUM) fee and has a minimum investment of $1,000. Currently, Merrill Guided Investing is offering a $0 program fee for 6 months for new enrollments for the online-only account type (other fees may still apply).  
• Online plus financial planner: For those needing additional help with portfolio management, there is an option to add an advisor to their online investment management account. The account type requires a $20,000 minimum and charges an annual 0.85% AUM fee.

Cash Management

M1 Finance

M1 Finance offers the Owner’s Rewards Card credit card, where members can earn up to 10% cash back on their purchases from participating major retailers, and up to 1.5% cash back when shopping at companies outside of the program. M1 also has an innovative feature called Smart Transfers, which allows investors to set a rules-based strategy to allocate cash and investments within and between accounts using “overbalance” and “underbalance” rules.

Merrill Guided Investing

Merrill Guided Investing automatically allocates a small percentage of your portfolio to cash. It also offers access to Bank of America accounts of all kinds, and 4.20% is the current sweep rate paid on the cash balance in the account.

The Preferred Rewards program can also lower fees if you have a 3-month combined average daily balance of at least $20,000 in a Bank of America deposit or Merrill investment account and have an eligible Bank of America checking account. The higher your account balance with Merrill and Bank of America, the larger the discount on the annual fee. The tiered Preferred Rewards program goes far beyond the Merrill Guided Investing fee discounts and includes preferential rates on loans, additional savings, and other perks.

Cash Management Verdict: Tie

Merrill Guided Investing and M1 Finance both show strength in the cash management. M1 Finance has nice features for moving excess money out of your cash account and into investments while Merrill Guided Investing has a solid cash sweep with a good interest rate and crossover benefits with other Bank of America accounts. 

Goal Planning

M1 Finance

At M1 Finance, the emphasis is on providing a simple, intuitive platform that enables seasoned investors ample flexibility to manage their portfolios. Among digital wealth management platforms, M1 stands out from the competition since it doesn’t create a recommended portfolio for you based on your financial objectives and risk tolerance. Because of the focus on this niche investing segment, M1 Finance does not provide financial calculators, goal-planning tools, or the chance to speak with a financial counselor. M1 provides a large collection of articles on its investing blog that cover topics from general investing and news to specific issues such as taxes and health savings accounts (HSAs).

Merrill Guided Investing

Merrill Guided Investing takes you through a questionnaire to enter a birth date, goal amount, goal name, and the goal’s time horizon. You have more opportunity for portfolio customization after this by selecting from goals that may include:

• Retirement at a specific age
• General investing
• Home
• Education
• Family support
• Travel
• Special occasion
• Other large purchases

The task of figuring out appropriate targets or time horizons for these goals falls to you. Though you can only select one for the entire account, the platform does a great job integrating goal-planning tools and tracking functions and providing prompts for funding to help investors stay on track. With these tools, you can set target time frames with educated estimates for each account that you open to meet each selected goal. Additionally, you can update and change goals as your situation or investing needs change.

Goal Planning Verdict: Merrill Guided Investing

Merrill Guided Investing has a robust goal planning process and solid tools to support you, so it takes this category by a wide margin. M1 Finance is designed to help you automate your investing rather than to help you sort out your financial goals.  

Portfolio Construction

M1 Finance

M1 Finance is unique in the business when it comes to offering clients a wide selection of ETFs and OTC securities for asset allocation. In addition to over 6,000 equities and ETFs, investors may use Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), or other cryptocurrency-related assets to form a crypto account and invest in coins or create crypto Pies. M1 Finance also provides four investment solutions to individuals interested in socially responsible investing (SRI): impact investing, ESG, SRI, and faith investing.

• 80 different pre-built Model Portfolios available for selection
• ESG selections available
• Passive investing options
• Custom Pies using stock or ETF M1 offers

Merrill Guided Investing

Merrill Guided Investing makes it easy to construct your portfolio and start investing. Investors can simply fill out all account information online regarding their financial goals and Merrill Guided will utilize investment strategies to meet those needs in your portfolio, which is professionally monitored and rebalanced for you automatically. 

• Market-matching funds available
• Market-tracking portfolios offered within a range of high, medium, or low risk
• ESG portfolios available 
• Strategic and tactical portfolios created by a CIO to outperform passive index portfolios

Available Assets

Portfolio Customization

M1 Finance

M1 Finance shows its strength in portfolio customization over Merrill Guided Investing. Its platform is focused on customizations for investor-defined portfolios. Taking advantage of the Custom Pies and using the research section of the site, you’ll find a screening tool that lets you search for a wide variety of publicly tradable ETFs, REITs, and individual stocks.

Merrill Guided Investing

Merrill Guided Investing, by contrast, gives you a limited ability to customize portfolios. While you cannot select specific assets, you can specify restrictions to exclude a particular fund. There are many funds available to meet a wide variety of investor-defined goals, but nothing with as much customization as is available from M1 Finance. Investors can update their investment goals and preferences at any time, so if their situation or overall financial plan changes, the portfolio allocations can also be prompted to change accordingly.

Portfolio Customization Verdict: M1 Finance

M1 Finance is designed for independent investors looking to automate portfolio management, so it is no surprise that it offers much more in terms of customization. With M1 Finance, you can customize by choosing specific assets or using thematic pies to introduce specific exposure to your portfolio. Merrill Guided Investing mainly sticks to the modern portfolio theory approach using ETFs to allocate your assets according to risk profile and time horizon.

Portfolio Management

M1 Finance

M1 Finance states on its website that the platform “will never initiate a rebalance of your portfolio without your instruction.” This is consistent with the design of the platform and the service it provides to its target customers. What this means is that portfolio management is a manual event. M1 Finance does, however, provide dynamic rebalancing, which means that every deposit of new funds in your account moves your portfolio in the direction of the goal percentages you have established. 

M1 Finance provides two options for portfolio rebalancing:

• Manual rebalancing: When you first build up your portfolio, you will choose the initial asset allocations. Those initial portfolio allocations may deviate from your desired preferences as the market moves. With manual rebalancing, you can choose when to initiate the process of purchasing and selling assets to bring your portfolio back to the predetermined goals.
• Dynamic rebalancing: Investors can choose to implement this type of automated rebalancing. When fresh money is contributed, M1 looks over your portfolio to see whether there are any underweight stock allocations and then buys those stocks to bring them back into line with your goal allocations. In order to maintain portfolio targets, M1 also sells overweight stocks.

Merrill Guided Investing

Merrill Guided Investing rebalances investor portfolios in a way that varies from the typical robo-advisor management. Portfolios are not rebalanced according to a schedule or a specific percentage drift away from allocation targets, but rather based on market conditions and the chance to take advantage of higher-return or lower-risk investment opportunities. These rules are intended to optimize performance for investors while roughly aligning the account to the target asset allocation.

The criteria for rebalancing allows for variations of asset performance, market conditions, and human managers’ discretion to account for unforeseen events. Additionally, investors are required to complete an account review periodically to ensure that the portfolio is still aligned with their goals or if a new recommendation is necessary.  

Portfolio Management Verdict: Merrill Guided Investing

Both Merrill Guided Investing and M1 Finance have unique approaches to portfolio management. M1 Finance does exactly what you tell it until you tell it to do something else. This will be a comfort to the DIY investors M1 Finance is looking to attract. For the set and leave it investors that most robo-advisors cater to, Merrill Guided Investing offers rebalancing but adds the twist of human oversight monitoring the process and related market conditions. This could be a comfort to customers wanting digital investment management with some human guardrails. 

Tax-Advantaged Investing

M1 Finance

M1 Finance does not provide tax loss harvesting. However, to assist clients in minimizing their tax obligations when selling shares, the company does provide a tax minimization strategy by selling securities in the order of lowest to highest tax burden. 

Merrill Guided Investing

Tax-loss harvesting is not offered at Merrill Guided Investing; however, it does offer investors “tax-aware” portfolios that use tax-exempt elements, such as municipal bond indexes. The company expects to offer the service later in 2024.

Tax-Advantaged Investing Verdict: Merrill Guided Investing

Neither M1 Finance nor Merrill Guided Investing stands out for their tax-advantaged investing, but we give Merrill Guided Investing the edge here for the tax-aware portfolios. 

Key Portfolio Management Features

Security

M1 Finance

• Two-factor authentication
• Fingerprint and face recognition for mobile apps
• Military-grade 4096-bit encryption
• SIPC insurance for investments
• FDIC insurance for deposits

Merrill Guided Investing

• Two-factor authentication
• Fingerprint and face recognition for mobile apps
• Heavy-duty 256-bit SSL encryption
• SIPC insurance for investments
• FDIC insurance for deposits

Security Verdict: M1 Finance

M1 Finance and Merrill Guided Investing are both up to industry standards when it comes to security. M1 Finance gets a slight edge with its stronger encryption features. 

User Experience

Desktop

M1 Finance’s blog is extensive and is frequently updated with timely articles. True to its DIY design, the platform offers a great resource, but requires users to sort through it themselves.  

The research tools at Merrill create a feature-rich environment for clients who have opened a robo-advisor account. You have access to a wide array of technical analysis tools as well as reports on fundamental measures. Though these tools aren’t required for ongoing portfolio maintenance, they can be highly useful to the curious investor.

Mobile

The M1 app allows for the full power of the platform’s portfolio construction and management capabilities to take place through your smartphone. If you feel comfortable that you know what you are doing, you’ll like the flexibility. 

Merrill Guided and Bank of America customers have the ability to access their accounts via a single login on their iOS or Android device. Investors have full desktop capabilities to view a complete picture of their finances, bank and invest at their convenience, and even make financial decisions with instant transfers between eligible accounts. 

Customer Service

Customer Service Verdict: Merrill Guided Investing

Merrill Guided Investing takes this category due to having more customer service availability than the M1 Finance platform.

Fees

M1 Finance

M1 Finance doesn’t charge any trading fees or portfolio management fees. The only real cost is the underlying expense ratios on the investment funds you choose. With M1 Finance, investors have to check the underlying expense ratios as they will depend on the specific selections for the portfolio.

Merrill Guided Investing

Merrill Guided Investing doesn’t charge trading fees but does have an annual fee of 0.45% for online only ($1,000 minimum) and 0.85% for online-plus-financial advisor ($20,000 minimum). The Bank of America Preferred Rewards Program can lower fees depending on account balance. In addition to the fee, there will be underlying expense ratios that vary according to the portfolio. Merrill Guided Investing prioritizes low fees as part of its selection criteria. 

Fees Verdict: M1 Finance

M1 Finance is a clear winner here with zero commissions or fees collected for portfolio management. 

The Bottom Line

Comparing M1 Finance and Merrill Guided Investing directly highlights the differences between platforms designed to target different customers. M1 Finance is a better choice for the customizability of portfolios. While the company is not a true robo-advisor, it does offer no-cost portfolio automation and online account automation to investors who prefer a more hands-on approach. Additionally, it is important to remember that M1 Finance is not a bank, although it does offer some banking features.  

Merrill Guided Investing offers its strengths in goal planning and portfolio management to customers who want to invest easily by taking the hands-off approach. However, unlike M1, there is a monthly management fee. For investors who are newer to investing or who don’t have the time to actively manage their investments, Merrill Guided offers a recommended portfolio, with professional account monitoring as well as integrative banking from Bank of America. Because Merrill Guided is part of Bank of America, investors have access to a full suite of banking services with a single login.

Who Is M1 Finance Best For?

M1 Finance is best for experienced investors who are looking for the ability to have greater control over their portfolio assets and allocations, with the benefit of a streamlined and low-cost platform. M1 gives you customization, one-click re-balancing, and basic automation, but you have to keep an eye on your risk levels. If you are looking for a more hands-on approach to your portfolio management, then M1 may be a good option for you.

Who Is Merrill Guided Investing Best For?

Merrill Guided Investing is best for newer investors who want to put their money to work, but may not have the know-how to achieve their desired financial goals. Merrill Guided Investing will also be a good fit for knowledgeable investors who prefer not to spend time selecting and rebalancing their portfolios.

Is M1 Finance a Robo-Advisor?

No, not in the modern sense. M1 Finance has much of the same capability as a robo-advisor once the client sets up their portfolio selections, and it saves time on allocating future deposits the same way a robo-advisor would. However, the expectation now is that robo-advisors take in your profile and goals in order to recommend a portfolio that they will then manage. M1 Finance merely allows you to automate a portfolio once you have set it up.

What Are the Significant Miscellaneous Fees for M1 Finance Clients?

M1 Finance charges $50 for any account that does not maintain its minimum deposit and has no activity for 90 days. The M1 Spend feature charges $25 for outgoing wire transfers.

How We Picked the Best 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. To collect data for our 2024 best robo-advisor awards and rankings, we sent a digital survey with 64 questions directly to each of the 21 companies we included in our rubric. 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 took place 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%
• Account Setup – 5.00%
• Customer Service – 5.00%
• Security & Education – 5.00%
• User Experience – 5.00%

Many of the companies we review for our projects grant our team of expert writers and editors access to live accounts so they can perform hands-on testing. Robo-advisor companies allowed us to do this, as well.

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.

The above material and content should not be considered to be a recommendation. Investing in digital assets is highly speculative and volatile, and only suitable for investors who are able to bear the risk of potential loss and experience sharp drawdowns. Digital assets are not legal tender and are not backed by the U.S. government. Digital assets are not subject to FDIC insurance or SIPC protections.

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

Make your money work for you

Fact checked by Yarilet Perez
Reviewed by Margaret James

Although investors may reap larger returns with higher-risk investments such as stocks, the idea behind a savings account is to allow some money to remain liquid and grow slowly with little or no associated risk. Online banking has expanded the variety and accessibility of savings accounts.

Key Takeaways

• Interest-earning accounts are generally low-risk compared to investments such as stocks.
• Savings accounts, certificates of deposit (CDs), money market funds, treasury bills, and bonds are options for investors.
• Interest rates vary among savings instruments.

1. Savings Accounts

Banks and credit unions offer savings accounts. The money in a savings account is insured by the Federal Deposit Insurance Corporation (FDIC). Restrictions may apply to savings accounts, such as service fees for more than the permitted number of monthly transactions. However, interest rates for traditional savings accounts are typically quite low. 

2. High-Yield Savings Accounts

High-yield savings accounts are a type of savings account, complete with FDIC protection, which earn a higher interest rate than a standard savings account. It may require a larger initial deposit and access to the account may be limited. Many banks and online institutions offer this type of account to valued customers who have existing accounts.

Important

The maximum insurable amount in an FDIC-insured bank account is $250,000 per depositor, per bank.

3. Certificates of Deposit (CDs) 

Like savings accounts, Certificates of Deposit (CDs) are available through most banks and credit unions and are FDIC-insured, but generally offer a higher interest rate, especially with larger and longer deposits. You will have to keep the money in the CD for a specified amount of time, otherwise a penalty is assessed.

Popular CD maturity periods are six months, one year, and five years. Any earned interest can be added to the CD if and when the CD matures and is renewed. A CD ladder allows you to stagger your investments and take advantage of higher interest rates.

4. Money Market Funds

A money market mutual fund is a type of mutual fund that invests only in low-risk securities. Mutual funds, brokerage firms, and many banks offer money market funds. Interest rates are not guaranteed, so it’s important to do a bit of research to find a money market fund that has a history of good performance.

Warning

Money market funds are not FDIC-insured. They are regulated by the Securities and Exchange Commission’s (SEC) Investment Company Act of 1940.

5. Money Market Deposit Accounts

Banks offer money market deposit accounts and typically require a minimum initial deposit and balance, with a limited number of monthly transactions. Unlike money market funds, money market deposit accounts are FDIC-insured. Penalties may be assessed if the required minimum balance is not maintained or if the maximum number of monthly transactions is surpassed. The accounts typically offer lower interest rates than certificates of deposit do, but the cash is more accessible. 

6. Treasury Bills and Notes

U.S. government bills or notes are often referred to as “treasuries” and are backed by the full faith and credit of the U.S. government. Treasuries are exempt from state and local taxes and are available at different maturity lengths. Bills are sold at a discount. When the bill matures, it will be worth its full face value. The difference between the purchase price and the face value is the interest. For example, a $1,000 bill might be purchased for $990. At maturity, it will be worth the full $1,000.

Treasury notes are issued with maturities of two, three, five, seven, and 10 years and earn a fixed interest rate every six months. In addition to the interest, the T-notes can be cashed in for the face value at maturity if purchased at a discount. Both Treasury bills and notes are available at a minimum purchase price of $100. 

7. Bonds

A bond is a low-risk debt investment issued by companies, municipalities, states, and governments to fund projects. When you purchase a bond, you are lending money to one of these entities. In exchange for the “loan,” the bond issuer pays interest for the life of the bond and returns the face value of the bond at maturity. Bonds are issued for a specific period at a fixed interest rate.

Each of these bond types involves varying degrees of risk, as well as returns and maturity periods. Also, penalties may be assessed for early withdrawal, and commissions may be required. Note that, depending on the type of bond, it may carry additional risk, as with corporate bonds, wherein a company could go bankrupt. 

How Can I Buy a Treasury Bill?

You can buy U.S. Treasury bills from the government through the TreasuryDirect website. You’ll need to register and open an account. When you do, it will function like a brokerage account that holds your bonds. T-bills are auctioned on a regular schedule.

What Accounts Are FDIC Insured?

FDIC insurance covers savings, checking, and money market accounts, and certificates of deposit (CDs). The FDIC does not insure investment products such as stocks, bonds, mutual funds (including money market mutual funds), and annuities.

What Is the Savings Account Withdrawal Limit?

Due to a federal law called Regulation D, there is a savings account withdrawal limit. You can make no more than six withdrawals per month.

The Bottom Line

Savings accounts allow you to save money while earning modest, low-risk returns. Due to the large variety of savings vehicles, a little research can go a long way in determining which will work hardest for you.

Many high-risk bonds are not junk

Reviewed by JeFreda R. Brown

Although they are considered risky investments, high-yield bonds—commonly known as junk bonds—may not deserve the negative reputation that still clings to them. In fact, the addition of these high-risk bonds to a portfolio can actually reduce overall portfolio risk when considered within the classic framework of diversification and asset allocation.

Let’s look more closely at what high-yield bonds are, what makes them risky, and why you may want to incorporate them into your investing strategy. High-yield bonds are available to investors as individual issues, through high-yield mutual funds, and as junk bond exchange-traded funds (ETFs).

Key Takeaways

• High-yield bonds offer higher long-term returns than investment-grade bonds, better bankruptcy protections than stocks, and portfolio diversification benefits.
• High-yield bonds face higher default rates and more volatility than investment-grade bonds, and they have more interest rate risk than stocks.
• Unfortunately, the high-profile fall of “Junk Bond King” Michael Milken damaged the reputation of high-yield bonds as an asset class.
• Emerging market debt and convertible bonds are the main alternatives to high-yield bonds in the high-risk debt category.
• For the average investor, high-yield mutual funds and ETFs are the best ways to invest in junk bonds.

Understanding High-Yield Bonds

Generally, a high-yield bond is defined as a debt obligation with a bond rating of Ba1 or lower according to Moody’s or BB+ or lower on the Standard & Poor’s scale.

In addition to being popularly known as junk bonds, they are also referred to as “below investment grade.” Low ratings mean that the company’s financial situation is shaky. So, the possibility that the firm could miss making interest payments or default is higher than that of investment-grade bond issuers.

A bond classification below investment grade does not necessarily mean that a company is mismanaged or engaged in fraud. Many fundamentally sound firms run into financial difficulties at various stages. One poor year for profits or a tragic chain of events can cause a company’s debt obligations to be downgraded.

The opposite can also happen. The bonds issued by a young or newly public company may be low-rated because the firm does not yet have a long track record or financial results to evaluate.

Whatever the reason, being considered less creditworthy means borrowing money is more expensive for these companies. They have to pay more interest on their debt, the same way individuals with low credit scores often pay a higher APR on their credit cards. Therefore, they are called high-yield bonds. They offer higher interest rates because of the additional risks.

Benefits of High-Yield Bonds

Higher Returns

As a result of the increased interest rates, high-yield investments have generally produced better returns than investment-grade bonds. High-yield bonds also have higher returns than CDs and government bonds in the long run. If you are looking to get a higher yield within your fixed-income portfolio, keep that in mind. The number one advantage of high-yield bonds is income.

Bankruptcy Protections

Many investors are unaware of the fact that debt securities have an advantage over equity investments if a company goes bankrupt. Should this happen, bondholders would be paid first during the liquidation process, followed by preferred stockholders, and lastly, common stockholders.

This added safety can prove valuable in protecting your portfolio from significant losses and reducing the damage from defaults.

Diversification

The performance of high-yield bonds does not correlate exactly with either investment-grade bonds or stocks. Because their yields are higher than investment-grade bonds, they’re less vulnerable to interest rate shifts.

This is especially true at lower levels of credit quality, and high-yield bonds are similar to stocks in relying on the strength of the economy. Because of this low correlation, adding high-yield bonds to your portfolio can be an excellent way to reduce overall portfolio risk.

High-yield bonds can act as a counterweight to assets that are more sensitive to interest rate movements or overall stock market trends. For example, high-yield bonds as a group lost far less than stocks during the financial crisis in 2008. When the S&P 500 dropped 37% in 2008, the average high-yield bond lost 26%.

The Bad Reputation of High-Yield Bonds

If they have so many pluses, why are high-yield bonds derided as junk? Unfortunately, the high-profile fall of “Junk Bond King” Michael Milken damaged the reputation of high-yield bonds as an asset class.

During the 1980s, Michael Milken—then an executive at investment bank Drexel Burnham Lambert Inc.—gained notoriety for his work on Wall Street. He greatly expanded the use of high-yield debt in mergers and acquisitions (M&A), which in turn fueled the leveraged buyout boom.

Milken made millions of dollars for himself and his Wall Street firm by specializing in bonds issued by fallen angels. Fallen angels are once-sound companies that experienced financial difficulties that caused their credit ratings to fall.

In 1989, Rudolph Giuliani charged Milken under the RICO Act with 98 counts of racketeering and fraud. After a plea bargain, he served 22 months in prison and paid over $600 million in fines and civil settlements.

Today, many on Wall Street will attest that the negative perception of junk bonds persists because of the questionable practices of Milken and other high-flying financiers like him.

Risks of High-Yield Bonds

Default Risk

High-yield investments also have their disadvantages, and investors must consider higher volatility and the risk of default at the top of the list.

However, the rising level of corporate indebtedness around the world troubles many analysts and economists. High-yield default rates in the U.S. reached over 14% during the last recession in 2009, and they are very likely to rise again during the next downturn.

You should be aware that default rates for high-yield mutual funds are easily manipulated by managers. They have the flexibility to dump bonds before defaults and replace them with new bonds.

How can you more accurately estimate the default rate of a high-yield fund? You could look at what has happened to the fund’s total return during past downturns. If the fund’s turnover is extremely high (over 200%), this may be an indication that near-default bonds are being replaced frequently.

You could also look at the fund’s average credit quality as an indicator. This can show you if the majority of the bonds being held are just below investment-grade quality at BB or B on the Standard & Poor’s scale. If the average is CCC or CC, then the fund is highly speculative.

Important

High-yield bonds tend to have shorter maturities than investment-grade bonds, which can reduce their sensitivity to interest rate changes.

Interest Rate Risk

Another pitfall of high-yield investing is that a weak economy and rising interest rates can worsen yields. If you’ve ever invested in bonds in the past, you’re probably familiar with the inverse relationship between bond prices and interest rates.

As interest rates go up, bond prices will go down. Though they are less sensitive to short-term rates, junk bonds closely follow long-term interest rates.

During a bull market run, you might find that high-yield investments produce inferior returns when compared to equity investments. Fund managers may react to this slow bond market by turning over their portfolios. That will lead to higher turnover percentages and additional fund expenses that are ultimately paid by you, the end investor.

In times when the economy is healthy, many managers believe that it would take a recession to plunge high-yield bonds into disarray. However, investors must still consider other risks, such as the weakening of foreign economies, changes in currency rates, and various political risks.

Alternatives to High-Yield Bonds

Emerging Market Debt

If you’re looking for some significant yield premiums, domestic junk bonds aren’t the only asset in the financial sea. Emerging market debt securities may be a beneficial addition to your portfolio.

Typically, these securities are cheaper than their U.S. counterparts in part because they have much smaller domestic markets individually. As a group, they account for a significant portion of global high-yield markets.

Convertible Bonds

Some fund managers like to include convertible bonds of companies whose stock price has declined so much that the conversion option is practically worthless.

These investments are commonly known as busted convertibles and are purchased at a discount since the market price of the common stock associated with the convertible has fallen sharply.

Other Alternatives

Many fund managers are given the flexibility to include certain other assets to help diversify their investments even further. High-dividend-yield common stocks and preferred shares are comparable to high-yield bonds because they generate substantial income.

Certain warrants also have some of the speculative characteristics of junk bonds. Another possibility is leveraged bank loans. These are essentially loans that have a higher rate of interest to reflect the higher risk posed by the borrower.

Are High-Yield Bonds a Good Investment?

High-yield bonds can be a good investment because they come with higher returns than traditional bonds but come with greater risk. As high-yield bonds are issued by companies with lower credit ratings, they have a higher chance of default. As such, they’re better suited for investors with higher risk tolerances and diversified portfolios.

What Classifies a Bond as High Yield?

A bond is classified as high yield when it has a low credit rating as determined by the three main credit rating agencies: S&P, Moody’s, and Fitch. When a bond is rated BB+ and below by S&P or Fitch and Ba1 or below by Moody’s, it is considered high-yield. High-yield bonds have a higher chance of default, making them riskier investments for investors. Due to carrying higher risk, they also come with higher returns.

What Happens to High-Yield Bonds in a Recession?

In a recession, the prices of high-yield bonds tend to drop and their yields tend to increase. This is so because risk-averse investors shift to safer assets when the economy is doing poorly, which lowers the demand for riskier assets, such as high-yield bonds. The lower demand results in a drop in prices and an increase in yields to attract investors.

The Bottom Line

For the average investor, high-yield mutual funds and ETFs are the best ways to invest in junk bonds. These funds offer a pool of low-rated debt obligations, and the diversification reduces the risk of investing in financially struggling companies.

Before you invest in high-yield bonds or other high-yield securities, you should be aware of the risks involved. After doing your research, you may want to add them to your portfolio if you feel these investments suit your situation. The potential to provide higher income and reduce overall portfolio volatility are both good reasons to consider high-yield investments.

Choosing a stock market strategy that fits your portfolio objectives and skills

Reviewed by JeFreda R. Brown
Fact checked by Timothy Li

An investment strategy is a set of principles that guides your portfolio decisions. With seemingly countless theories and approaches on offer, from simplistic learn-this-one-trick TikToks to dense tomes seemingly only for financial doctorates, it’s easy to feel overwhelmed and uncertain about where to start.

But don’t worry: successful investing doesn’t require a finance degree, complicated math skills, or a TikTok account. However, by focusing on a few key investment strategies, even beginning traders can lay a solid foundation for long-term success in the market. The truth is many successful investors use straightforward strategies that anyone can learn. These time-tested approaches help you make smarter choices about where to put your money and how to manage risk—kind of like having guardrails on a set of stairs.

We rounded up a group of great advisors to help us explore five key investment strategies every aspiring trader should learn before entering the market. We begin with a series of questions to answer to determine your strategy. Then, from value and growth investing to dollar-cost averaging, we’ll break down the core principles and advantages of each, giving you a clear understanding of how they work and when to apply them. At the end, we have a questionnaire you can use to help you decide on which strategy is best for you.

Key Takeaways

• Before choosing a stock market strategy, thoroughly assess your financial situation, risk tolerance, and investment goals. This self-review should be the basis of any approach you take.
• Passive index investing involves putting your money into index-tracking mutual or exchange-traded funds (ETFs), offering built-in diversification and a hands-off approach.
• Investors who follow growth strategies should review the executive teams of the firms they’re investing in and news about the economy and relevant sectors.
• Momentum investors buy stocks trending upward and short-sell them since they view them as likely to come back down to earth.
• Dollar-cost averaging removes the pressure of trying to time the market perfectly. It’s a disciplined approach that involves investing consistently over time, regardless of market shifts.

Getting Started

Before choosing an investment strategy, it’s important to gather some basic information about your finances. Let’s get you started with these important strategic questions:

Strategic Question 1: How Are Your Finances?

Even though you don’t need much money to start, you shouldn’t begin investing until you can afford to do so. If you have debts or other obligations, consider the impact investing will have on your short-term cash flow before you start putting money into your portfolio.

Most advisors recommend paying down your debts and having a three-to-six-month emergency fund before socking away significant amounts in an investment portfolio. As you build toward getting ready to trade, you should sort out how much you can afford to put into your stock market account.

Strategic Question 2: What Are Your Financial Goals?

Next, set out your objectives. Everyone has different needs, so you should determine yours. Are you saving for retirement? Are you looking to make major purchases like a home or car? Are you saving for your or your children’s education?

Answering these questions will help you narrow down a strategy since each approach requires different levels of liquidity, opportunities, and risk.

Important

Ensure you can afford to invest before you start putting money away. Prioritize paying off high-interest debt, for example, before setting money aside for the future.

Strategic Question 3: What Is Your Risk Tolerance?

Next, figure out your risk tolerance. Financial advisors typically have a set of questions to determine their clients. Some are quantitative: your age, income, and how long you have until retirement. Younger investors have time on their side to recuperate losses, so it’s often recommended that younger investors hold more risk than those who are older.

However, some questions to determine your risk tolerance are qualitative and personal.

“Psychological components play a large factor in clients’ tolerance toward risk,” said Nate Creviston, manager of wealth management and portfolio analysis at Capital Advisors in Shaker Heights, Ohio. “Simply put, some are more comfortable taking risks if they know that mathematically, over long periods, they will outperform others who aren’t comfortable taking on risks. However, risk-averse clients aren’t wrong. They deserve to have a portfolio tailored to their comfortability and goals.”

People who grew up in the same home and have very similar experiences and income can have very different reactions to specific financial situations. How would you feel if your investments dropped 30% overnight? How would you react if your portfolio is worth $1,000 less today than yesterday? Sometimes, the best strategy for making money could make you deeply uncomfortable. Your investment strategy will need to align with where your comfort level ultimately is.

Strategic Question 4: Can You Handle Market Volatility?

Relatedly, you’ll need to handle the ups and downs of the market. Alyson Claire Basso, a managing principal of Hayden Wealth Management in Middleton, Massachusetts, told us she makes it a point “to discuss past market experiences and potential future market volatility. This way, [clients] feel prepared and know that volatility is something we’ve planned for.”

This discipline is important when thinking about investment strategies. “We talk about their financial goals and how sticking to their plan can help them ride out the rough patches. I also remind them that diversified investing helps spread risk, so they’re not putting all their eggs in one basket,” Basso said.

Once you’ve answered the strategic questions above, you’ll want to learn the basics of investing: how to read stock charts, etc., and then begin picking some of your favorite companies and analyzing their financial statements. You’ll also need to keep up to date with recent news about industries you’re interested in investing in. It’s a good idea to understand what you’re getting into so you’re not investing mindlessly.

Risk isn’t necessarily bad in investing. Higher-risk investments are often rewarded with higher returns. “A holistic financial plan balances threats, opportunities, risks, and rewards,” said Neil R. Waxman, a managing director of Capital Advisors in Shaker Heights, Ohio. Waxman emphasized the importance of understanding how risks and rewards can be balanced while providing cash flow to those who need it. “A client who understands these connections and has a clear game plan” will have “the perspective and vision needed to be a patient investor.”

Strategy 1: Passive Index Investing

Passive index investing has gained significant popularity since the introduction of passive index-based mutual funds in the 1970s and then similar ETFs in 1993. Unlike actively managed funds, where an individual or team makes decisions on the underlying assets in an attempt to beat the market, passive mutual funds and ETFs track an index like the S&P 500; they don’t work to beat the market so much as match it.

Since the S&P 500, an index of the 500 largest publicly traded American companies, has been up over time, this has been a winning strategy for many investors. Above is a chart of the percentage of large-cap domestic equity funds that have underperformed the S&P 500 since 2001:

In addition, the hands-off approach means fund managers charge lower fees given the less work required vs. active management. The passive investing strategy has the benefit of lower turnover. When assets move in and out of the fund at a slower pace, it results in fewer transaction costs and realized capital gains, which can lead to potential savings when tax filing season arrives.

Pros

• Lower costs because of minimal trading, research, and management fees

• Simplicity and ease of implementation through passive funds

• Broad diversification across multiple sectors

• Potential for long-term growth in line with the market

• Greater flexibility for investors to execute a buy-and-hold strategy

Cons

• Can’t outperform the market

• Exposure to market downturns and volatility

• Missed opportunities in specific sectors or regions

• Reliance on the performance of the underlying index or sector

• Potential for tracking errors (lack of a perfect match in performance) between the fund and the underlying index

Who Benefits From Passive Index Investing

Passive index investing can be a great choice for beginner investors starting to explore the stock market. It’s an ideal entry point for those who may feel overwhelmed by the complexity of the financial markets. Investing in index funds or ETFs that track broad market indexes allows you to gain exposure to a diverse range of companies and sectors without the need for extensive research or stock-picking skills.

Passive investing isn’t just a rookie move: experienced investors also invest heavily in such funds, which now make up about half of all volume traded in mutual funds and ETFs combined.

Long-term investors benefit greatly from passive index investing, particularly those saving for retirement or other distant goals. The buy-and-hold nature of passive index investing allows investors to ride out short-term market fluctuations and benefit from the power of compound growth over time. In addition, the lower fees of passive investing can lead to significant savings over time.

Strategy 2: Value Investing

Pros

• There’s long-term opportunity for large gains as market prices meet up with a company’s true intrinsic value.

• Value companies often have stronger risk/reward relationships.

• Value investing is rooted in fundamental analysis and supported by financial metrics.

• Value companies are more likely to issue dividends as they aren’t as reliant on cash for growth.

Cons

• Value companies are often hard to find.

• Successful value investments take time, and investors must be more patient.

• Even after holding long-term, there’s no guarantee of success since the company may even be in worse shape than before.

• Investing only in sectors that are underperforming decreases your portfolio’s diversification.

Value investors are your bargain shoppers of the investing world. They look for stocks with prices they believe don’t reflect the security’s intrinsic value. Value investing is premised, in part, on the idea that some degree of irrationality exists in the market. This irrationality, in theory, presents prospects to get a stock at a discounted price and make money from it.

It’s not necessary for value investors to comb through volumes of financial data to find deals. Thousands of value mutual funds and ETFs offer shares in baskets of stocks thought to be undervalued. For example, the Russell 1000 Value Index is a popular benchmark for value investors, and several mutual funds track this index.

For those who don’t have time to perform exhaustive research, the price-earnings ratio (P/E) is an often-used measure for quickly identifying undervalued or cheap stocks. The metric derives from dividing a stock’s share price by its earnings per share (EPS).

For a nuanced guide to using the P/E ratio to evaluate stocks, see Investopedia’s Are Stocks With Low P/E Ratios Always Better?

Value investors seek companies with a low P/E ratio; a lower P/E ratio means you’re paying less per dollar of current earnings.

Who Benefits From Value Investing

Value investing is best for investors looking to hold their securities long-term. If you’re investing in value companies, it may take years (or longer) for the businesses to scale up. Value investing focuses on the big picture and often attempts to approach investing with a gradual growth mindset.

People often cite legendary investor Warren Buffett, who is the epitome of a value investor. Consider Buffett’s words when he made a substantial investment in the airline industry. He explained that airlines “had a bad first century.” Then he said, “And they got that century out of the way—I hope.” This illustrates much of the value investing approach: choices are based on decades of trends and with decades of future performance in mind.

A rich set of academic studies has found that value investing can produce superior returns over the long term. However, value investing has had periods where it has underperformed growth investing, especially when tech stocks have posted outsized price gains.

Strategy 3: Growth Investing

Rather than look for low-cost deals, growth investors want investments that offer strong upside potential for future earnings. It could be said that a growth investor is often looking for the “next big thing.” However, this strategy isn’t a reckless embrace of speculative investing. Instead, it involves evaluating a company’s health and potential to grow.

A drawback to growth investing is a lack of dividends. When a company is growing, it often needs capital to sustain its expansion. This doesn’t leave much (or any) cash left for dividends. Moreover, with faster earnings growth comes higher valuations, which are, for most investors, a higher risk proposition.

While there is no definitive list of hard metrics to guide a growth strategy, there are a few factors an investor should consider. Growth stocks tend to do comparatively well during periods of falling interest rates, as newer companies find it less expensive to borrow to fuel their expansion. It’s essential to keep in mind, however, that at the first sign of a downturn in the economy, growth stocks are often the first to get hit.

Growth investors also need to carefully consider the management of a business’s executive team. Achieving growth is among the most difficult challenges for a firm. Therefore, a stellar leadership team is required. You’ll also need to evaluate the competition. A company may enjoy stellar growth, but if its primary product is easily replicated, the long-term prospects are dim.

Pros

• Potentially quicker profits: If you make profits, it’ll usually be quicker than value stocks.

• Growth is sudden: Once growth begin, these companies often experience the sharpest and greatest stock price increases.

• Less need for fundamental analysis: Growth investing doesn’t rely as heavily on fundamental analysis, making it easier for some to begin.

• Momentum is your friend: Growth companies can often be boosted by momentum; once growth begins, future periods of continued growth (and stock appreciation) are more likely.

Cons

• Volatility: Growth stocks are often more volatile. Good times are good, but if a company isn’t growing, its stock price will suffer.

• Some growth companies aren’t for holding long-term: Depending on macroeconomic conditions, growth stocks may not be long-term holds. For example, increasing interest rates works against growth companies.

• Dividends not typical: Growth companies rely on capital for expansion, so don’t expect dividends in the short term.

• High P/E rates: Growth companies often trade at high multiples of earnings; entry into growth stocks may be higher than entry into other types of stocks.

Who Benefits From Growth Investing

Growth investing is inherently riskier and generally only thrives during certain economic conditions. Investors looking for shorter investing horizons with greater potential than value companies are best suited for growth investing. Growth investing is also ideal for investors not concerned with investment cash flow or dividends.

According to a study from New York University’s Stern School of Business, “While growth investing underperforms value investing, especially over long periods, it is also true that there are sub-periods, where growth investing dominates.” The challenge, of course, is determining if these “sub-periods” are occurring. While trying to time the market is often unwise, growth investing is most suitable for investors who believe strong market conditions lie ahead.

Because growth companies are generally smaller and younger with less market presence, they are more likely to go bankrupt than value companies. It could be that growth investing is better for investors with higher disposable income as there is more downside for the loss of capital than other investing strategies.

One reason index investing with the S&P 500 is so popular is that the companies held by the funds are a mix of value and growth stocks.

Strategy 4: Momentum Investing

Momentum investors ride the wave. They believe winners keep winning and losers keep losing. They look to buy stocks experiencing an uptrend. Because they believe losers continue to drop, they may short-sell those securities.

Momentum investors are heavily reliant on technical analysis. They use a strictly data-driven approach to trading and look for patterns in stock prices to guide their purchasing decisions. This adds weight to how a security has been trading in the short term.

Momentum investors are thus in open defiance of the efficient-market hypothesis, which states that asset prices fully reflect all information available to the public. A momentum investor believes that given all the publicly disclosed information; there are still material short-term price moves that can be taken advantage of. Despite some shortcomings, momentum investing has its appeal.

Pros

• High risk/high reward: Higher risk means higher reward, and there’s greater potential short-term gains using momentum trading.

• Short-term trading: Momentum trading is done in the short term, and there’s no need to tie up capital for long periods of time.

• More immediate data to review: This style of trading can be seen as simpler as it doesn’t rely on bigger picture elements.

• Exciting: Momentum trading is often the most exciting style of trading. With quick price action changes, it is a much more engaging style than strategies that require holding securities long term.

Cons

• Experience is a must: Momentum trading requires a high degree of skill to properly gauge entry and exit points.

• Volatility: Momentum trading relies on market volatility; without prices quickly rising or dropping, there may not be suitable trades to be had.

• Taxes: Depending on your investment vehicles, there’s increased risk for short-term capital gains.

• Wipeouts: Losses can happen very quickly; without notice, an entry and exit point may no longer exist and you’re stuck with the losses coming your way.

Below, you can see the price trajectory of iShares Edge MSCI World Momentum Factor ETF (IWMO), which tracks the MSCI World Momentum Index and a typical benchmark, the S&P 500 index.

Who Benefits From Momentum Investing?

Traders who adhere to a momentum strategy must always be at the switch and ready to buy and sell. Profits build over months, not years. This contrasts simple buy-and-hold strategies that take a “set it and forget it” approach.

In addition to being heavily active with trading, momentum investing often calls for a skilled ability to use technical analysis. Momentum investing relies on data for proper entry and exit points, and these points are continually changing based on market sentiment. For those with little interest in watching the market closely, there are momentum-style ETFs.

Strategy 5: Dollar-Cost Averaging

Dollar-cost averaging (DCA) is when you make regular investments over time, such as when you set aside part of your paycheck for your 401(k). It can be and often is used with the other strategies above. However, the point of this is discipline: even if the market is going down or you’re most worried about investing, you still put away a set amount periodically. This means you benefit when stocks are low and you can buy more with the same amount of funds.

“When dollar-cost averaging into ETFs, investors should consider the index that the ETF tracks and whether it’s a good fit for their portfolio, as well as all relevant fees,” said David Tenerelli, a certified financial planner at Strategic Financial Planning in Plano, Texas. “This includes not just the expense ratio of the ETF but also the average trading bid/ask spread and whether they might be paying a premium for the shares relative to the net asset value of the ETF (net asset value, or NAV, is simply the aggregate value of the underlying investments held within the ETF).”

This disciplined approach becomes particularly powerful when you use automated features that invest for you. The benefit of the DCA strategy is that it avoids the market timing strategy, which can be painful and ill-fated for many people. Even seasoned investors occasionally feel the temptation to buy when they think prices are low, only to discover that their market timing was wrong.

To show the benefits of DCA, we simulated investing in an S&P 500 index-based ETF from 2004 to 2024, putting in $50 each month and accounting for fees, taxes, and dividends:

As you can see, if you invest in regular increments, you can capture prices at all levels, from high to low. These periodic investments effectively lower the average per-share cost of the purchases and cut the potential taxable basis when you sell laton.

Pros

• DCA can be combined with the other strategies mentioned above.

• During periods of declining prices, your average cost basis will decrease, increasing potential future gains.

• DCA removes the emotional element of investing, requiring reoccurring investments regardless of how the markets are doing.

• Once set up, DCA can be incredibly passive and require minimal maintenance.

Cons

• DCA can be difficult to automate especially if you are not familiar with your broker’s platform.

• During periods of declining prices, your average cost basis will decrease, increasing your future tax liability.

• You must have steady, stable cash flow to invest to DCA.

• Investors may be tempted not to monitor DCA accounts; however, investments—even automated ones—should be reviewed periodically.

Who Benefits From Dollar-Cost Averaging?

DCA is a wise choice for most investors. It keeps you committed to saving while reducing the level of risk and the effects of volatility. Most investors are not in a position to make a single, large investment. A DCA approach is an effective countermeasure to the cognitive bias inherent to humans. New and experienced investors alike are susceptible to hard-wired flaws in judgment.

A misconception of dollar-cost averaging—putting away a set amount periodically no matter what—is that your portfolio suffers when the markets dip, Tenerelli, the Texas-based advisor, told us. In fact, it’s when you’re buying the same assets at a discount since most indexes return to normal given time.

Loss aversion bias, for example, causes us to view the gain or loss of an amount of money asymmetrically. In addition, confirmation bias leads us to focus on and remember information that confirms our long-held beliefs while ignoring contradictory information that may be important. DCA circumvents these common problems by removing human frailties from the equation.

You must have ongoing cash flow and reoccurring disposable income for a workable DCA strategy. Many online brokers have options to set up reoccurring deposits. You can adjust them based on changes in your personal cash flow or investment preference.

Below is a short quiz to help you determine the investing strategy that best fits your finances, goals, and risk tolerance:

You’ve Picked Your Stategy, Now What?

Suppose you’ve narrowed down a strategy; great! There are still a few things you’ll need to do before you make the first deposit into your investment account. First, figure out how much money you need to start investing. This includes your upfront investment and how much you can continue investing.

You’ll also need to decide on the best way for you to invest. Do you intend to go to a traditional financial advisor or broker, or is a passive, worry-free approach better for you? If you choose the latter, consider signing up with a robo-advisor.

Consider your investment vehicles. Cash accounts can be immediately withdrawn but often have the greatest consequences. Accounts like 401ks can’t be touched until you retire without fees and have more limited options, but your company may match your investment. Different types of IRAs also have various levels of flexibility.

It also pays to diversify. To reduce the risk of one type of asset bringing down your entire portfolio, consider spreading your investments across stocks, bonds, mutual funds, ETFs, and alternative assets. If you’re socially conscious, you may consider responsible investing. Now is the time to figure out what you want your investment portfolio to be made of and what it will look like.

How Do I Set Up an Investment Strategy?

A general investment strategy is formed based on your long-term goals. How much are you trying to save? What is your timeline for saving? What are you trying to achieve? Once you have your financial goals in place, you can set target performance on returns and savings, and then find assets that mesh with that plan.

For example, your goal may be to save $1 million. To reach this, you need to invest $10,000 per year for 29 years and achieve 8% annual returns. Armed with this information, you can analyze various historical investment performances to try and find an asset class that achieves your strategic target.

What Is Warren Buffett’s Investment Strategy?

Warren Buffett has long been widely regarded as among the world’s most skilled and successful investors. Warren Buffett’s investing strategy is based on the principles of value investing. He focuses on identifying undervalued companies with strong fundamentals, consistent earnings, and competitive advantages (which he calls “economic moats“).

Buffett believes in long-term investing, holding stocks for many years or even decades. He also emphasizes the importance of understanding the businesses he invests in and only investing within his “circle of competence.” Lastly, Buffett prefers companies with strong management teams, low debt, and the ability to generate high returns on invested capital.

How Does Risk Tolerance Affect an Investment Strategy?

Risk tolerance is the amount of risk that an investor is willing to endure. It plays a significant role in determining the type of investment strategy that someone chooses and how much they opt to invest. Investors with longer time horizons might be more willing to take on a riskier investment, while investors focused on a short-term financial goal might be more risk-averse.

What Is the Safest Investment Strategy for Earning High Returns?

There’s always a risk-return trade-off. In other words, the safer your investments are, the lower the expected returns over time (and vice versa). That said, there are ways to maximize investment returns while minimizing risk. One effective approach is to create a well-diversified portfolio across various asset classes, such as stocks, bonds, real estate, and commodities.

By spreading your investments across different sectors and industries, you can cut the impact of any single investment’s performance on your overall portfolio. This helps to mitigate unsystematic risk, which is the risk associated with individual companies or sectors. A good way to follow this strategy is to use low-cost index funds or ETFs and follow the model of modern portfolio theory. This provides for a passive long-term portfolio that maximizes return for a given level of risk.

What Is the Least-Risky Thing to Invest In?

Cash is, by definition, the lowest-risk asset since it can’t incur a loss ($1 always = $1), but it will lose purchasing power because of inflation over time. U.S. Treasurys are also considered one of the safest investments, as they are backed by the full faith and credit of the U.S. government. Treasurys have various maturities, ranging from short-term Treasury bills (T-bills) to longer-term Treasury notes and bonds.

While Treasurys are generally considered risk-free in terms of default risk, they are still subject to interest rate risk. When interest rates rise, the value of existing bonds declines, as newer bonds are issued with higher yields.

The Bottom Line

How you choose your strategy may be more important than the strategy itself. Indeed, any of these strategies can generate a significant return if the investor makes a choice and commits to it. It is essential to choose because the sooner you start, the greater the effects of compounding.

Remember, don’t focus exclusively on annual returns when choosing a strategy. Take the approach that suits your goals, income, and risk tolerance. With a plan in place and your goals set, you’ll be on a prudent long-term investment journey.

Reviewed by Doretha Clemon
Fact checked by Daniel Rathburn

During the 2008 financial crisis, Lehman Brothers collapsed just months after posting $4 billion in earnings, brought down by troubles hidden in opaque accounting and complex financial instruments. Nearly 15 years later, history repeated itself when FTX’s collapse wiped out $12 billion in customer funds that many had trusted would be their life savings.

Proponents have long said blockchain technology, born after the 2008 crisis, offers a potential solution to these financial catastrophes through radical transparency. Blockchain’s distributed ledger system could make deceptions like those at FTX nearly impossible by creating an immutable, shared record of all transactions.

While significant hurdles remain—from technical challenges to the kind of institutional resistance Sam Bankman-Fried himself decried while committing his own massive fraud—the technology’s promise of transparency and security has led many of today’s corporate giants to invest hundreds of millions integrating it into their processes. Below, we take you past the marketing and hype to explore the real possibilities ahead for this technology.

Key Takeaways

•  By creating a shared, tamper-proof ledger of transactions, blockchain technology might enable regulators, investors, and the public to verify the accuracy of financial information in real time.
• This could mitigate fraud, improve risk assessment, and increase accountability within the global financial system.
• The transparency, immutability, and traceability inherent in blockchain can be used, proponents say, to improve processes in supply chain management, manufacturing, healthcare, and other industries.
• They argue that this could improve the tracking of goods, increase efficiency, reduce costs, and ensure far better data security across the global economy.

The Case for Blockchain in Financial Security

Blockchain offers shared digital ledgers that everyone can see but nobody can alter without everyone knowing. It’s much like how a group of friends might use a Google spreadsheet to track shared expenses, except this ledger is encrypted, permanent, and extremely difficult to fake.

The technology’s advocates emphasize its potential for protecting the global economy through transparency. When a bank or investment firm makes a transaction on a blockchain, they argue, it’s like writing in permanent ink— there’s no erasing or hiding it. This visibility, they suggest, could help prevent the kind of hidden financial troubles that led to disasters like the 2008 financial crisis.

For example, blockchain supporters point out that if Lehman Brothers had been operating on a blockchain system in 2008, regulators might have spotted their dangerous levels of risky investments months before their collapse. Similarly, they argue that such transparency could have revealed FTX’s misuse of customer funds before billions were lost.

Many people rely on banks to safeguard their life savings and provide capital when needed through loans or credit. Brokerages hold billions of dollars in investment accounts, and money flows between people, institutions, and governments using third parties. Thus, trust is one of the most important factors driving the need for blockchain or something similar. Sitting right beside trust on the financial importance scale is verification. No matter who or what an entity is or claims to be, the trust in them should always be backed up by verification.

Blockchain proponents argue that the technology takes care of these needs by providing any other interested party the opportunity to verify the trust they place in people and institutions.

For blockchain supporters, the idea plays out as follows: A central bank would no longer rely on individual bank reports to review their operations and records. Because there would be a shared record of transactions, regulators could monitor cash flows as transactions are made, which means central banks would always have a realistic picture of liquidity and the distribution of risk. They would also have an understanding of how each individual financial firm is behaving. This could remove large amounts of uncertainty from the process of assessing the financial system’s health. Regulators would know in advance when there’s instability in the markets, and they could adjust monetary policy accordingly before a crisis develops.

Financial Institutions and Blockchains

The adoption of blockchain technology requires buy-in from a wide range of financial institutions, from global banks to local credit unions. However, many major financial players have already developed private blockchains for their internal operations rather than embracing the transparent, public systems that advocates have envisioned.

While these private blockchain implementations aren’t necessarily designed to deceive, critics worry that they may fall short of providing the public accountability that could help prevent future financial scandals. Blockchain advocates argue that only systems allowing public or regulatory scrutiny could effectively deter misleading practices, as participants would know their actions could be monitored by any interested party.

Private Blockchains in Financial Services

Major financial institutions like JPMorgan Chase & Co. (JPM), Goldman Sachs (GS), and Citigroup Inc. (C) are developing private blockchain networks that offer some of blockchain’s promised benefits. These private or “permissioned” systems give institutions more control while still providing the following:

• Internal transparency: Transactions between departments and subsidiaries can be tracked and verified instantly.
• Operational efficiency: Automated settlement and clearing processes cut down on the time and costs for international transfers, trade finance, and securities trading.
• Selective data sharing: Banks can share specific transaction data with regulators or partners while maintaining confidentiality of sensitive information.
• Smart contract automation: Standardized agreements and processes can be executed automatically, reducing manual processing and potential errors.

For example, JPMorgan’s Kinexys platform uses blockchain technology to process billions in daily transactions between institutional clients, and the HSBC-backed Contour network aims to simplify trade finance documentation between banks and businesses.

However, these private systems don’t provide the public accountability that blockchain advocates say is necessary to prevent future financial crises. Critics argue that by keeping their blockchains closed, financial institutions maintain the same opacity that enabled past financial scandals, just with more efficient technology.

Challenges and Limitations

Despite blockchain’s promise, several hurdles remain before widespread adoption could occur:

• Technical scalability: Present-day blockchain systems can process only a fraction of the transactions that traditional financial networks handle daily.
• Regulatory framework: The lack of clear regulations around blockchain technology creates uncertainty for institutions considering adoption.
• Implementation costs: Converting existing financial systems to blockchain requires significant investment in infrastructure and training.
• Energy consumption: Some blockchain systems, particularly those using proof-of-work verification, require substantial computing power and electricity.
• Industry resistance: Financial institutions may resist changes that increase transparency and reduce their control over financial data.

The Road Ahead

While blockchain technology offers potential solutions to many financial system vulnerabilities, its implementation will likely be gradual. Some industries may adopt blockchain more quickly for specific use cases, such as the following:

• Cross-border payments and remittances
• Trade finance documentation
• Securities settlement and clearing
• Supply chain financing
• Digital identity verification
• Regulatory reporting and compliance

The success of these applications could pave the way for broader adoption across the financial sector, though the timeline and extent of this transformation remain uncertain.

How Will Blockchain Affect the Economy?

Blockchain’s impact remains uncertain, but proponents say it could reduce transaction costs, increase transparency across industries, and help prevent fraud. The technology might make financial systems more efficient by automating verification processes and removing intermediaries. However, significant technical and regulatory challenges must be overcome before such changes could be realized.

How Can Blockchain Help Emerging Economies?

Advocates suggest blockchain could help emerging economies by reducing corruption, lowering the cost of cross-border payments, and providing financial services to unbanked populations. However, implementation would require significant investment in technology and training.

What Are the Drawbacks for Implementing Blockchain?

Major challenges include the following:

• Technical limitations in processing large transaction volumes
• High energy consumption, particularly for proof-of-work systems
• Regulatory uncertainty across jurisdictions
• Integration difficulties with existing financial systems
• Industry resistance to increased transparency
• Data privacy concerns
• The costs of implementation and training

The Bottom Line

While blockchain technology offers potential solutions for increasing financial transparency and security, its widespread adoption faces significant hurdles. Financial institutions are exploring private blockchain systems to improve their internal operations.

As with any technology, the ultimate impact of blockchain will depend not just on its technical capabilities but on how institutions, regulators, and markets implement it.

Near the end of 2024, the world’s hottest year on record, major U.S. banks and asset managers withdrew from initiatives under which they had committed to adhere to lending and business practices that would help achieve net zero greenhouse gas emissions by 2050.

They all did so in the weeks after Donald Trump won the 2024 election, with a platform that was part “drill, baby, drill,” and critics say the banks’ actions reflect shifting political winds and their fear of legal challenges as Republicans ascend to power.

Key Takeaways

• Most major U.S. banks and asset managers had joined coalitions that committed them to supporting efforts to eliminate carbon emissions by 2050.
• Banks joined the Net Zero Banking Alliance (NZBA) and asset managers joined the Net Zero Asset Managers (NZAM) coalition. Both are global alliances formed in partnership with the United Nations.
• Most major U.S. banks and asset managers withdrew from their respective coalitions following Donald Trump’s re-election in 2024, but some say they will continue to consider the impact on the climate when deciding whether to finance or invest in a project.
• After the U.S. asset managers’ withdrawal, the NZAM suspended activities.

Banks’ and Asset Managers’ Net Zero Pledges

In joining their respective coalitions, the banks and asset managers committed to aligning their business practices and investment decisions with supporting the goal of achieving net zero greenhouse gas emissions by 2050 or earlier.

For the asset managers, the initiative was also about mitigating financial risk and maximizing the long-term value of assets. Left unaddressed, climate change will wreak havoc on society and the economy, costing an estimated $38 trillion annually just 25 years from now. Estimates show that an increase in global temperatures of 3 degrees Celsius compared to preindustrial levels could reduce global GDP by 25%. (In 2024, the world had experienced 12 consecutive months of temperatures 1.5 degrees Celsius above preindustrial levels.)

Big Banks, Asset Managers Quit Climate Alliances

After Trump’s election win in November 2024, major U.S. banks and asset managers reversed course and began withdrawing from their climate alliances. They included JPMorgan, Citigroup, Bank of America, Goldman Sachs, Wells Fargo, and Morgan Stanley. Top Canadian banks followed suit in the ensuing weeks, and European banks began reconsidering their membership.

Asset manager BlackRock, the world’s biggest investor, announced that it was cutting ties with NZAM, saying its membership in the coalition caused “confusion regarding BlackRock’s practices and subjected us to legal inquiries from various public officials.”

The Politics and Business of Climate Change

The results of the 2024 U.S. election—and politics more generally—prompted these banks to back away from climate-focused initiatives to fend off “anti-woke” attacks from right-wing politicians. Republicans have long viewed climate change as a non-priority—some even deny it’s real—and have advocated for increased use of fossil fuels, a major contributor to greenhouse gas emissions.

The banks and asset managers had faced months of growing pressure from Republican politicians. They also faced legal concerns. Led by Texas, a number of Republican-led states have sued BlackRock, State Street, and Vanguard, alleging that they used their investments in coal and other fossil fuel companies to constrict supplies of these fuels in an effort to reach net zero emissions goals.

Many likely decided that, with or without the political pressure, the opportunity cost of not investing in or lending to fossil fuel companies was no longer worth it.

The Bottom Line

Scientific consensus is that climate change poses an enormous threat the world—perhaps an existential threat to humanity with a likely catastrophic economic impact. Despite that, many major banks have stepped back from agreements and organizations focused on fighting climate change as the political winds have blown back in the favor of rightwing politicians.

As time passes and the impact of climate change becomes clearer, bankers and asset managers will get a better view of how climate change impacts their portfolios.

Fact checked by Giselle Cancio

While you can’t avoid paying taxes altogether, there are several strategies that can help you lower your taxable income, maximize deductions, and take advantage of tax-deferred growth. These simple but effective “tax hacks” can make a big difference when it comes time to file.

You can lower your tax bill with these smart moves.

Key Takeaways

• Use tax-loss harvesting if you had big gains in the stock market.
• Max out contributions to a traditional or Roth IRA.
• Invest in a health savings account.
• Save for your child’s education with a 529 plan, which offers tax benefits.

1. Try Tax-loss Harvesting

If you had a profitable year in the stock market, tax-loss harvesting could be an effective way to reduce your taxable income.

“There are a few different things Americans can do to keep more of their money prior to tax day. If you’re an investor who has sold stocks for a nice gain, you can offset those investments by selling investments that are down. This is called tax-loss harvesting and can help you reduce your taxable income,” says Paul T. Joseph, an attorney, certified public accountant and founder of Joseph & Joseph Tax & Payroll in Williamston, Michigan.

2. Max Out Your Retirement Accounts

Now is the time to focus on boosting your retirement savings—especially with tax benefits in mind. Contributing the maximum allowable amount to a 401(k) or traditional IRA can lower your taxable income, helping you reduce your tax bill. The annual contribution limit for a 401(k) is $23,500 for 2025, up from $23,000 in 2024. The annual limit for an IRA is $7,000 for 2024 and 2025.

“You can contribute to a traditional or Roth IRA until April 15 of this year for it to go toward your 2024 tax year. You will want to know how much in contributions you made in 2024, then deposit the remaining amount (up to the maximum) into the account. Making retirement plan contributions can also help reduce taxable income,” Joseph says.

3. Contribute to a Health Savings Account

Opening and contributing to a health savings account is another way to lower your tax bill. A health savings account is a personal savings account that can be used for qualifying medical expenses. Each contribution is made with pretax dollars, so you won’t pay income tax on the money you put into a health savings account. Earnings also grow tax-free. But there’s a catch. You must have a high-deductible health plan to open a health savings account.

“The contributions can be deducted from your taxable income. This can help you keep more of your own money, and possibly save on health expenses in the future,” Joseph advises.

4. Save for Education With a 529 Plan

A 529 plan can help pay for educational expenses, including college and K-12 education. Its growth is tax-deferred, and withdrawals are tax-free when used for eligible education expenses.

“One other way someone can keep more of their money prior to tax day is to fund a 529 plan or something similar. This can be for their children’s or grandchildren’s future education. Most states allow contributions to this type of plan to be deducted at tax time,” Joseph says.

The Bottom Line

These four tax hacks can help lower your tax bill in 2025. Use tax-loss harvesting to offset gains if you’ve had a good year in the stock market. Contribute to a Health Savings Account (HSA) if you have a high deductible health plan to reduce taxable income while saving for medical expenses. For education savings, open a 529 plan to benefit from tax-deferred growth and tax-free withdrawals. Finally, maximize contributions to retirement accounts before the deadline to reduce taxable income and secure your future. By utilizing these strategies, you can keep more of your money and lower your tax liability.

Reviewed by JeFreda R. Brown

The abundance of investment vehicles out there creates a challenge for the average investor trying to grasp what they’re all about.

Stocks are the mainstay of investing, bonds have always been the safe place to park your money, options have increased leverage for speculators, and mutual funds are considered one of the easiest vehicles for investors.

One type of investment that doesn’t quite fall into these categories and is often overlooked is the real estate investment trust (REIT).

Key Takeaways

• A real estate investment trust (REIT) is a company that owns, operates, or finances income-producing properties.
• Equity REITs own and manage real estate properties.
• Mortgage REITs hold or trade mortgages and mortgage-backed securities.
• REITs generate a steady income stream for investors but offer little in the way of capital appreciation.
• Most REITs are publicly traded like stocks, making them highly liquid—unlike most real estate investments.

What Is a REIT?

A REIT trust company that accumulates a pool of money, through an initial public offering (IPO), which is then used to buy, develop, manage, and sell assets in real estate.

The IPO is identical to any other security offering with many of the same rules regarding prospectuses, reporting requirements, and regulations; however, instead of purchasing stock in a single company, the owner of one REIT unit is buying a portion of a managed pool of real estate.

This pool of real estate then generates income through renting, leasing, and selling of property and distributes it directly to the REIT holder on a regular basis.

Types of REITs

REITs, like most investments, come in a variety of flavors. These funds have classifications that indicate the type of business they do and can be further classified depending on how their shares are bought and sold.

Equity REIT: The most common form of enterprise. This type of entity buys, owns, and manages income-producing real estate. Revenues come primarily through rents and not from the reselling of the portfolio properties.

Mortgage REIT: Also known as an mREIT, this entity lends money to real estate owners and operators. The lending may be either directly through mortgages and loans or indirectly through the acquisition of mortgage-backed securities (MBSs). MBSs are investments holding pools of mortgages issued by government-sponsored enterprises (GSEs).

Their earnings come primarily from the net interest margin—the spread between the interest they earn on mortgage loans and the cost of funding these loans. Due to the mortgage-centric focus of this REIT, it is potentially sensitive to interest rate increases.

Hybrid REIT: This type of enterprise holds both physical rental property and mortgage loans in its portfolio. Depending on the stated investing focus of the entity, it may weigh the portfolio to more property or more mortgage holdings.

Benefits of REITs

When you buy a share of a REIT, you are essentially buying a physical asset with a long expected life span and potential for income through rent and property appreciation. This contrasts with common stocks where investors are buying the right to participate in the profitability of the company through ownership.

When purchasing a REIT, one is not only taking a real stake in the ownership of property via increases and decreases in value, but one is also participating in the income generated by the property. This creates a bit of a safety net for investors as they will always have rights to the property underlying the trust while enjoying the benefits of their income.

Another advantage that this product provides to the average investor is the ability to invest in real estate without the normally associated large capital and labor requirements.

Furthermore, as the funds of this trust are pooled together, a greater amount of diversification is generated as the trust companies can buy numerous properties and reduce the negative effects of problems with a single asset.

Note

Some REITs focus on niche properties, such as data centers, cell towers, healthcare facilities, and timberland.

Individual investors trying to mimic a REIT would need to buy and maintain a large number of investment properties, and this generally entails a substantial amount of time and money in an investment that is not easily liquidated.

When buying a REIT, the capital investment is limited to the price of the unit, the amount of labor invested is constrained to the amount of research needed to make the right investment, and the shares are liquid on regular stock exchanges.

The final, and probably the most important, advantage that REITs provide is their requirement to distribute nearly 90% of their yearly taxable income, created by income-producing real estate, to their shareholders.

This amount is deductible on a corporate level and generally taxed at the personal level. So, unlike with dividends, there is only one level of taxation for the distributions paid to investors.

This high rate of distribution means that the holder of a REIT is greatly participating in the profitability of management and property within the trust, unlike in common stock ownership where the corporation and its board decide whether or not excess cash is distributed to the shareholder. 

Picking the Right REIT

As with any investment, you should do your homework before deciding which REIT to purchase. There are some obvious signs you should look at before making the decision.

Management

It’s always important when buying into a trust or managed pool of assets to understand and know the track record of the managers and their teams. Profitability and asset appreciation are closely associated with the manager’s ability to pick the right investments and decide upon the best strategies.

When choosing what REIT to invest in, make sure you know the management team and their track record. Check to see how they are compensated. If it’s based upon performance, chances are that they are looking out for your best interests as well.

Diversification

REITs are trusts focused on the ownership of property. As real estate markets fluctuate by location and property type, the REIT you decide to buy must be properly diversified.

If the REIT is heavily invested in commercial real estate and there is a drop in occupancy rates, then you will experience major problems. Diversification also means the trust has sufficient access to capital to fund future growth initiatives and properly leverages itself for increased returns.

Earnings

The final item that you should consider before buying into a specific REIT is its funds from operations and cash available for distribution. These numbers are important as they measure the overall performance of the REIT, which in turn translates to the money being transferred to investors.

Be careful that you don’t use the regular income numbers generated by the REIT as they will include any property depreciation and thus alter the numbers.

These numbers are only useful if you have already looked carefully at the other two signs since the REIT may be experiencing anomalous returns due to real estate market conditions or management’s luck in picking investments.

How Do You Buy a REIT?

Some REITs are publicly traded on exchanges, so you can buy them like stocks. Others are private or non-traded, which may require you to go through specific financial advisors to purchase them if they are available for sale.

For publicly traded REITs, you can buy them through your online broker, such as E*Trade or Charles Schwab. If you do not have a brokerage account, you’ll need to open one up. To purchase a REIT, fund the account, and then search for the REIT’s ticker symbol, decide how many shares you want to buy, and then place the order.

What Is the 90% Rule for REITs?

The 90% rule for real estate investment trusts (REITs) is that they must distribute at least 90% of their taxable income to shareholders as dividends. This allows REITs to avoid paying corporate income taxes as long as they meet the distribution threshold. It’s a way to ensure REITs pass most of their profits onto investors.

How Do REITs Make Money?

Real estate investment trusts (REITs) make money by owning and managing income-generating properties, such as office buildings, hotels, apartments, and shopping centers. They earn rental income from these properties and distribute a portion of profits to shareholders. REITs can also make money by purchasing properties, improving them, and then selling them for a profit.

The Bottom Line

With so many different ways to invest your money, any decision you make must be well-informed. This applies to stocks, bonds, mutual funds, REITs, or any other investment. Nevertheless, REITs have some interesting features that may be a good fit for your portfolio. 

Who were they and how did they achieve their success?

Fact checked by Vikki Velasquez
Reviewed by Margaret James

The status of “millionaire” carries special weight in the United States, driven by the country’s emphasis on meritocracy and its perception as a classless society.

According to an analysis of Federal Reserve data, Black families are far less likely to be millionaires than White families. While shrinking, this trend is rooted in the long-standing racial wealth gap that has persisted since the Civil Rights era. With these modern-day facts in mind, early Black millionaires have drawn attention as entrepreneurs who overcame significant structural barriers to achieve stunning success and wealth across a variety of areas. They have also won attention as underappreciated contributors to the formation of American capitalism, with Black contributions to developments such as industrialization gaining recognition in recent decades.

Key Takeaways

• Black Americans are far less likely to be millionaires than White Americans, but early Black millionaires overcame significant obstacles to achieve success.
• While Madam C.J. Walker is often cited as the first Black millionaire, figures like William Alexander Leidesdorff and John Stanly predated her.
• Though Madam C.J. Walker is often cited as the nation’s first Black millionaire, there were several who predated her. The first Black millionaire was likely William Alexander Leidesdorff, according to some authors.
• In recent years, “billionaire” has displaced “millionaire” as a stand-in for the height of success.

William Leidesdorff

William Alexander Leidesdorff (1810-1848) was likely America’s first Black millionaire.

Leidesdorff, who had immigrated to the U.S. from the Danish West Indies, owned the first steamship in San Francisco Bay. He also accomplished a list of other notable firsts, including setting up the first public school in California and creating the first hotel and the first waterfront warehouse in San Francisco.

According to historical accounts, Leidesdorff became a naturalized U.S. citizen in Louisiana in 1834, where he became a ship captain. He landed in California around 1841. It was there—where he spent the rest of his short life—that he would accumulate a fortune in commerce and real estate in the lead-up to the California Gold Rush. He eventually became a millionaire when gold was found on his property.

Leidesdorff was active in business and politics. During the Mexican rule of California, he functioned as the U.S. Vice Consul at San Francisco, and he aided the Californians who undermined Mexican control of the region. He was also a city treasurer, councilman, and school committee member. He died unexpectedly of a fever in 1848. Because he hadn’t set up a will and was a dual citizen, his fortune was auctioned off after much confusion. It was estimated to have been worth around $1,445,000.56

John Stanly

John Carruthers Stanly (1774-1845) was a mixed-race former slave who himself became perhaps the biggest slaveowner in North Carolina. Upon being freed, Stanly became a barber, a relatively stable trade at that time. Eventually, he was able to purchase his wife’s and children’s freedom. Stanly would come to own two plantations on Bachelor’s Creek along the Neuse River and several houses and businesses. Stanly’s involvement in real estate, cotton farming, and turpentine manufacturing made him one of the wealthiest men in his county.

Jeremiah Hamilton

Jeremiah Hamilton (1806-1875), “Wall Street’s first Black trader,” made his fortune in New York in the 19th century.

Not much is known about Hamilton’s early life, but he immigrated to New York after fleeing Haiti, where he helped bring in counterfeit coins for a consortium of New York merchants.

Litigious, secretive, and shrewd, Hamilton cut a figure in real estate speculation, deal brokering, and insurance fraud when the burgeoning business in the state was primarily unregulated. A man of twisting fortunes, Hamilton lost his fortune—which he would later rebuild—in the 1837 financial panic and outwitted a lynch mob during the Civil War draft riots.

By the time of his 1875 death, he left his family a sizable fortune, estimated to be worth about $2 million (or about a quarter of a billion dollars in today’s currency). An exception in every sense, Hamilton apparently showed little interest in racial struggles and was disliked by the Black press of his time. He also invested in railroads that wouldn’t serve Black passengers, or that segregated their compartments.

Mary Ellen Pleasant

Mary Ellen Pleasant (1815-1904) was the most powerful Black woman operating in San Francisco in the heat of California’s Gold Rush. She may have been born a slave, but by the 1820s, she lived in New England and was involved with the Underground Railroad. While there, she married James Smith, who left her a significant amount of money upon his death. She left for San Francisco in 1852; accounts of her life suggest she fled due to her abolitionist work.

Pleasant invested the money she inherited from her husband, including in profitable investments in real estate and mining stocks, and apparently, she listed her profession as “capitalist” on an 1890 census form. She was active in advancing the abolitionist cause. Pleasant provided financial support for fiery abolitionist John Brown, funding his raid on Harpers Ferry. She admitted this to reporters at the end of her life and had “friend of John Brown” inscribed on her tombstone. She was also a plaintiff in a case that went to the California Supreme Court and led to a decision that held that segregating streetcars was unconstitutional.

Robert Reed Church

Robert Reed Church, Sr. (1839-1912), was born to a White steamboat captain and an enslaved seamstress in Mississippi. Reed was enslaved after being captured while serving as a steward on the Victona steamer during the Civil War.

After being freed, he settled in Memphis. He made his money primarily in real estate but also ran a hotel and other businesses, including a saloon. He opened an auditorium, Church’s Park and Auditorium, for Black members of the community, where President Theodore Roosevelt later spoke. He was also involved with founding the Solvent Savings Bank and Trust Company and saving the Beale Street Baptist Church from foreclosure.

Madam C.J. Walker

The title of millionaire serves a financial, technical designation and also a cultural one. It denotes someone with an unusually high net worth who enjoys the freedoms and pleasures associated with that net worth.

Madam C.J. Walker (1867-1919), who started life as a Louisiana sharecropper born to formerly enslaved parents in 1867, is usually cited as the first Black millionaire. She became famous as a successful businesswoman in New York in the Progressive Era, some decades after the end of Reconstruction, when successful Black businesses were relatively rare, but when targeted violence against Black entrepreneurs was not. The infamous 1921 Tulsa Race Massacre, for instance, which burned “Black Wall Street,” a nationwide symbol of Black success, in the Greenwood District of Oklahoma to ashes, occurred two years after Walker’s death. 

Walker made her fortune selling beauty products. Annie Malone, an entrepreneur in the beauty industry and the inventor of the “pressing comb” and the Wonderful Hair Grower, also made a fortune in hair care products and is often discussed alongside Walker.

In terms of net worth, however, Walker was not the first Black millionaire. Shomari Wills, who authored “Black Fortunes,” a book about the first half-dozen Black millionaires in the country, argues that Walker has become memorialized as the first Black millionaire because earlier millionaires were less flamboyant about their success, fearful that it might make them a target of reprisal. The former slave Robert Reed Church, Wills writes, was shot in the head during the Memphis race riots of 1866 because he was noted as a wealthy Black man, though he survived the attack. Afterward, he regained his status but remained careful to keep himself from becoming a target. In this account, it was the cultural perception of Walker as wealthy that accounts for her citation as the first Black “millionaire.”

Daniel Murray

Daniel A.P. Murray (1852-1925) was a librarian at the Library of Congress for more than a half-century. Murray climbed the social order of Washington, D.C., after catching the attention of a senator and a Librarian of Congress. Eventually, he made a fortune as a business owner and developer.

Murray is mainly remembered for advancing Black Americans’ literary accomplishments in concert with the work of Booker T. Washington and W.E.B. Du Bois. However, the end of Reconstruction reduced Murray’s wealth, and he was buried after his death in a segregated graveyard.

Scholarship Around Black Capitalism

Until relatively recently, historical accounts neglected the role Black businesspeople played in the creation of American capitalism. 

Black business was an object of study for writers like W.E.B. Du Bois, with high points in the second half of the 20th century. Nonetheless, prior to Juliet Walker’s 1998 book, “The History of Black Business in America: Capitalism, Race, Entrepreneurship,” most historical accounts took the view that Black Americans lacked a substantial business tradition, citing their relatively few big businesses. Walker’s book persuasively shows that Black business owners have run fewer big-scale businesses because of racism, especially through government institutions, scholars say. Black millionaires didn’t exist before the 19th century, but Walker documents examples of successful enterprises.

Antebellum Black Entrepreneurship

In fact, Black entrepreneurship stretches back before the Civil War, and even into slavery. “Slave entrepreneurs” would sometimes work independently, assuming all the risk, negotiating contracts, and advertising on their own, to establish the venture capital to purchase their own freedom or the freedom of friends or relatives, writes scholar Juliet Walker.

To pick out one antebellum example, an enslaved man known as Free Frank purchased his own time from his slaveowner to establish a thriving saltpeter manufacturing business in Kentucky during the War of 1812. He then bought his own freedom and that of his wife.

Other businesspeople exist about whom it can be difficult to dig up biographical details, and who didn’t quite cross the million-dollar threshold. Based on documents from 1846, Walker identified a number of Black businessmen in Philadelphia—including Joseph Casey, a hairdresser; James Forten, a sailmaker; Robert Purvis, a farmer; and Stephen Smith, a lumber merchant and money broker—as having had significant net worths at that time.

Two Notable Post Civil War Figures

Two other early Black capitalists have been identified.

O.W. Gurley (1868-1935) was a founder of the Greenwood District of Tulsa, Oklahoma, known as “Black Wall Street.” He worked primarily as a successful real estate speculator during segregation, but the Greenwood District was burned down in a race riot in 1921, and Gurley and his wife were detained in a National Guard internment camp. He died in Los Angeles in 1935. Gurley was called the “Bezos of Black Wall Street” by Forbes in 2020.

Hannah Elias (1865-unknown) was a sex worker who became a controversial and wealthy woman after building a real estate empire in Harlem. After a man named Cornelius Williams shot someone he had mistaken for her elderly lover, John R. Platt, in front of her property, a suit alleging that Elias extorted around $645,000 from Platt obliged her to give some details of her life in court. The revelations received extensive newspaper coverage. According to the reporting, Elias said that Platt had given her large amounts of money. The suit was dismissed.

Recent History

In recent years, with interest in inequality and the racial wealth gap, the study of Black contributions to the growth of American capitalism has grown.  Black entrepreneurs have played an active role in the growth of American capitalism, especially since the 19th century, and the 20th and 21st centuries have also brought a growing roster of Black investors.

In recent years, “billionaire” has somewhat displaced “millionaire” as a stand-in for the height of success. The first Black American billionaire is Robert Johnson, who founded Black Entertainment Television (BET) and became a billionaire with its sale to Viacom in 2001.

Who Was the First Black Millionaire?

William Alexander Leidesdorff, co-founder of what eventually became San Francisco, was probably the first Black millionaire in the U.S.

Who Was (Is) the First Black Billionaire?

Robert Johnson, who co-founded BET, became a billionaire in 2001. 

Who Was the First Self-Made Black Woman Millionaire?

Madam C.J. Walker is usually cited as the first Black woman to be a “self-made” millionaire. Other women, including Mary Ellen Pleasant, may have beat her to this status, though this may be contentious because Pleasant’s fortune was partly inherited.

The Bottom Line

Black Americans have an entrepreneurial tradition stretching back into slavery and a distinguished list of early millionaires, beginning in the 19th century. Nevertheless, the racial wealth gap persists. But perhaps the 21st century will finally see it disappear as there is now a growing list of Black millionaires and even some billionaires.

Fact checked by Giselle Cancio

Moving to a state with lower taxes might seem like a great way to save money, especially on income taxes. However, the overall tax picture may be more complicated than you think. While you could pay less in state income taxes, you might face higher costs in other areas.

Here’s what you need to consider before packing up and relocating to another state.

Key Takeaways

• Moving to a state with lower income taxes can save you money, but you may pay more in other types of taxes.
• States with low income taxes often offset the loss by raising other taxes, such as real estate taxes, sales taxes, and personal property taxes.
• Consider all tax implications when moving to a new state.

When You Move to Another State, You Change Your Domicile

When you move to a new state, you’re not just changing your address; you’re changing your domicile, which is your legal, permanent residence. Domicile determines which state you pay taxes in, and it also impacts other legal benefits, such as eligibility for disability or unemployment benefits.

According to Katie Carlson, head of wealth strategy at Bank of America Private Bank, “While you can have multiple residences at the same time, you can have only one domicile,” she said. “There is no single factor that determines whether someone has changed their domicile.”

Steps to Take Before Changing Your Domicile in a New State

If you plan to establish a new domicile in a different state, there are key steps to follow. Carlson recommends the following:

• Own or rent a home in the new state and live there. Spend as much time as possible in the new state and stay out of your old state for 183 days.
• Develop relationships in the new state, including with health care providers, religious organizations, and charitable organizations.
• Obtain a driver’s license in the new state, register to vote in the new state, update car registrations, and update your estate plan to reflect your new domicile–ensure it complies with the new state’s laws and file a declaration of domicile or similar form.

Think Beyond State Income Taxes When Moving

Consider more than getting the best mortgage rate and finding lower state income taxes when moving to a new state.

“State income taxes are often a key driver in changing domicile. Understanding taxes is important, but you can’t let the tax tail wave the dog. You need to make sure moving away from family and friends is worth the new lifestyle and tax savings,” Carlson says. 

A state with no or lower state income tax may recoup that lost income in other taxes.

“Lower tax states will usually try to offset the lack of a state income tax in several ways. Real estate taxes, sales taxes, personal property taxes (cars, boats, etc.) along with generally higher levels of licensing and other official fees are commonly higher,” says Rick Miller, financial planner and investment advisor at Miller Investment Management in Manassas, Virginia. 

“One tip, even though you may not be contemplating buying a new home, realtors often maintain comprehensive lists of locality factors, usually including taxation in all forms. Just ask them for a relocation kit and mention tax concerns.”

The Bottom Line

Moving to a state with no or low state income taxes may save you money on your state tax bill. But there is more to consider like paying more on other taxes such as sales taxes and personal property taxes. So weigh the pros and cons carefully.

To change domicile and the state where you pay taxes, you’ll need to rent or own a home in your new state and stay out of your old state for 183 days. You’ll also want to get a driver’s license in the new state, register to vote, and update your car registrations.