money

Reviewed by Chip Stapleton
Fact checked by Patrice Williams

If you plan to buy a home in a planned community, condo building, or townhouse development, you’ll probably need approval from a homeowners association (HOA). An HOA is a group that makes and enforces rules for the properties in its area. It also collects monthly fees to pay for the upkeep of the community and manages shared amenities such as a gym or a pool. 

HOA communities can be appealing because they often have well-kept amenities and rules that help keep property values up. But they also involve regular fees and rules about what you can do with your property.

Key Takeaways

• Homeowners associations create and enforce rules for residential communities. Membership is often mandatory for all property owners within their jurisdiction.
• HOA fees can run over $800 monthly on top of your mortgage and other housing costs. These fees can fund amenities, maintenance, and reserve accounts for future repairs.
• CC&Rs (covenants, conditions, and restrictions) regulate everything from exterior appearance to pets.
• HOAs have many legal powers, including the ability to impose fines, place liens on properties, and, in some cases, initiate foreclosure proceedings.
• Before purchasing in an HOA community, consider reviewing its governing documents, financial statements, and other information to assess the association’s health and compatibility with your lifestyle.

1. Impact of Homeowners Associations on Homeownership

Homeowners associations can have a significant impact on almost every part of owning a home in their community. The extent of an HOA’s influence varies between communities. Some associations maintain a light touch, focusing primarily on maintaining common areas and enforcing basic standards. Others control nearly all aspects of your property’s appearance and usage. This variation makes it critical to research the association governing your potential new home before purchasing.

2. Homeowners Association Legal Powers 

An HOA’s power comes from a legal document called the covenants, conditions, and restrictions (CC&Rs). These rules explain what homeowners can and cannot do with their property and how they must take care of it.

A CC&R functions as a contractual obligation between you and your homeowners association. When you purchase property in an HOA community, you agree to follow these rules. The CC&Rs are filed with your county recorder’s office and remain in effect even if a particular property’s ownership changes.

Common restrictions found in CC&Rs include:

• Property appearance: Regulations on paint colors, architectural styles, landscaping requirements, and decorative elements
• Structural modifications: Rules governing additions, renovations, fencing, and exterior alterations
• Vehicle restrictions: Limitations on the number, type, and parking locations of vehicles
• Pet policies: Rules about the number, size, breed, and containment of animals
• Usage restrictions: Regulations on home businesses, short-term rentals, and non-residential activities
• Nuisance prevention: Rules regarding noise, odors, visible storage, and other potential disruptions
• Signage limits: Restrictions on political signs, advertisements, and other displays

3. Homeowners Association Costs

If you own a home in an HOA community, you’ll have to pay an HOA fee in addition to your regular mortgage and home insurance costs. The fee is usually paid monthly or quarterly. 

HOA costs can vary widely depending on where you live, from a high of $859 a month in New York to a low of $64 a month in Idaho.

These fees typically cover:

• Maintenance of common areas and landscaping
• Upkeep of shared amenities (pools, fitness centers, clubhouses)
• Insurance for common property
• Utilities for shared facilities
• Operational costs and management fees

Beyond regular dues, HOAs can also impose special assessments—one-time charges to cover unexpected expenses or major projects when reserve funds are insufficient. 

When determining your loan eligibility and amount, your mortgage lender will factor HOA fees into your debt-to-income calculations. 

4. Homeowners Association Governance

If you decide to buy a home in an HOA community, it’s helpful to learn how the HOA works. This could make it easier for you to deal with the HOA and protect your rights as a homeowner. 

Most associations operate through a tiered governance structure that includes general membership (all homeowners), an elected board of directors, and, potentially, professional management. The board typically consists of volunteer homeowners whom community members elect to make operational decisions, enforce rules, manage finances, and maintain community standards. 

The primary governing documents, beyond the CC&Rs, are the HOA bylaws, which establish:

• Board composition and election procedures
• Meeting requirements and voting protocols
• Powers and limitations of the board
• Committee structures and responsibilities
• Amendment processes for governing documents
• Dispute resolution procedures

As a homeowner in an HOA community, you typically have the right to:

• Attend and participate in meetings
• Vote in board elections
• Review association financial records
• Propose changes to rules and regulations
• Run for board positions

5. Homeowners Association Finances

Before deciding to buy a home in an HOA community, it’s a good idea to check the HOA’s finances and how well it’s currently managed. This can help you avoid unexpected costs and determine if the HOA is running properly.

Request and carefully review key financial information, including:

• Current balance sheet showing assets, liabilities, and reserve funds
• Annual budget with income and expense projections
• Any studies indicating anticipated future capital expenses
• History of special assessments over the years
• Delinquency rates among current homeowners
• Recent audit reports or financial reviews
• Meeting minutes discussing financial decisions
• Pending litigation against the HOA

Additionally, consider speaking with current residents of an HOA about their own experiences. Ask specifically about the HOA’s fee history, communication regarding financial decisions, and transparency in the budgeting process.

Homeowners Association Pros

Advantages of HOA communities include:

• Maintained amenities: Many HOAs provide access to pools, fitness centers, parks, clubhouses, tennis courts, and other facilities that would be unaffordable for individual homeowners.
• Property value protection: Houses in HOAs are 6% more valuable than similar homes located outside of HOAs, according to the Cato Institute, a libertarian think tank. 
• Reduced maintenance responsibilities: Particularly in condominiums and townhouses, HOAs often handle exterior maintenance, landscaping, and occasionally utilities, potentially reducing your workload and time commitment as a homeowner.

Homeowners Association Cons

Disadvantages of HOA living include:

• Financial obligations: Monthly dues, potential special assessments, and fines for violating the CC&Rs represent additional costs beyond your mortgage, taxes, and insurance. These expenses can strain budgets, particularly when unexpected assessments arise. 
• Restrictions on property use: Rules regarding exterior appearance and renovations can limit your freedom as a homeowner, and breaking these restrictions could lead to fines.
• Governance challenges: Volunteer boards sometimes lack management expertise, leading to ineffective operations or internal politics within the HOA. 
• Foreclosure risk: In many states, HOAs can foreclose on your property for unpaid dues or fines, sometimes even when the amount you owe is relatively insignificant compared to your property’s value.

The Bottom Line

Homeowners associations create organized living spaces with appealing amenities, helping protect property values. In return, homeowners must pay fees and follow community rules. Before buying a home in an HOA community, it’s important to research the HOA’s rules, finances, and management. You can do this by reading the HOA’s documents and financial reports and talking to people who already live there.

Shares of Tesla Inc. (TSLA) have long confounded Elon Musk’s critics: while sales have collapsed in some key markets, retail investors remain remarkably devoted to the firm.

For example, after news broke that Tesla’s European sales had plummeted 40% year-over-year in January 2025, even as the wider electric vehicle (EV) market grew 26%, retail investors poured $7.3 billion into Tesla stock over the next 12 days, the most of any “buying streak” over a decade, according to JPMorgan’s “Retail Radar.”

The report suggested this was more money chasing after bad: Noting that Tesla’s retail investors were down 7% in the year to date versus 3.3% for the broader S&P 500 index, JPMorgan analysts pointed out, “Most of the drawdown came…as they increased their holdings.”

What gives? “Core investors” have an “undying faith in and love of Elon Musk,” Steve Sosnick, chief strategist at Interactive Brokers, told Investopedia. “In fact, I’ve frequently referred to it as a ‘faith-based’ stock.” But, he added, “that faith is well-earned after making many long-term investors quite rich.”

Key Takeaways

• For retail investors, Tesla’s value proposition extends well beyond its sales figures.
• Elon Musk‘s promises of Tesla’s transition from car manufacturer to AI-driven mobility company continues to fuel investor enthusiasm even as traditional automotive metrics falter.

It’s Not About Tesla’s Past or Present, But Its Future

“Tesla’s electric vehicle business is under pressure from pricing challenges and fierce competition, with 2024 marking its first-ever annual delivery decline,” John Blank, chief equity strategist at Zacks Investment Research, told Investopedia. “Musk’s divided attention and growing political controversies have investors questioning whether Tesla is still his top priority.”

However, it’s Tesla’s long-term prospects that count most. “Musk wants the company to be primarily viewed through the lens of AI and robotics rather than solely as an automotive company,” Blank said.

Among the CEOs of automakers, “only Musk is perceived as an avatar of the future,” Sosnick said.

Hence, investors’ “faith is based less on corporate fundamentals than futurism—robotaxis, etc.—which is why the stock’s valuation is way above that of a conventional auto company,” Sosnick said. “Thus, if you’ve already decided that the stock is all about the future, you can overlook some pesky details about the present.”

That’s borne out in interviews. “To be honest, I’m not a huge fan of Tesla’s EVs,” a retail investor who snapped up more shares of TSLA as its price fell in March 2025 told Business Insider. “My bullish outlook is more on the AI and autonomous side of the business.”

“It is tempting to blame Elon Musk’s political activities for becoming a headwind” for Tesla’s stock underperformance, wrote Sheraz Mian, research director for Zacks Equity Research, in a late-March 2025 report. “But there is no shortage of fundamental issues related to the company’s China exposure, trade/tariff vulnerabilities, and the evolving EV competitive landscape that has to also be at play here.”

Tesla’s Next Chapter

Instead of the usual “dumb money” derision one might expect, analysts we spoke to don’t think these investors are irrationally following market sentiment.

For several years, Tesla has been making a strategic pivot beyond its core automotive business. “Tesla’s long-term growth prospects still remain strong, driven by its thriving energy generation and storage segment, expansive supercharger network, and AI advancements,” Blank said. The company is sitting on a massive cash pile to help make that happen—about $37 billion at year-end 2024.

“Pretty much all” of Tesla’s market cap is based upon future expectations, and that has always been the case, Sosnick said, noting that General Motors Company (GM), Ford Motor Co. (F), and other automakers all have single-digit price-to-earnings ratios, which means investors are valuing them based almost wholly on where they are now, not where they are likely to be in the future.

For core investors, the numbers are compelling: While automotive operations still accounted for 78.9% of Tesla’s total sales in 2024, its Energy Generation/Storage segment showed remarkable growth, with revenues rocketing 113% year over year in the fourth quarter and its energy storage deployment reaching 11 gigawatt-hours, Blank noted. In addition, “the charging business has the potential to evolve into a substantial revenue stream for the company,” he said, especially as major automakers are forced to adopt Tesla’s charging standard.

However, major challenges remain. Sales of the Cybertruck, launched in 2024, sputtered and the vehicles were recalled for significant problems. In addition, most investors surveyed think Musk’s political activities have damaged the company—they’ve sparked mass protests and acts of vandalism against the EVs and dealerships worldwide. Meanwhile, General Motors, Ford, emerging players like Rivian Automotive, Inc. (RIVN) and Lucid Group, Inc. (LCID), and Chinese competitors like BYD are gaining ground fast as Tesla’s overseas sales drop precipitously.

The Bottom Line

The question is whether Tesla’s ambitious expansion into energy, AI, and autonomous driving can offset the significant challenges in its automotive business. Given the headwinds the company faces, the execution of this transformation becomes all the more crucial if the faith of retail investors is to be justified.

Reviewed by Charles Potters
Fact checked by David Rubin

Accrued Expenses vs. Provisions: An Overview

In accounting, accrued expenses and provisions are separated by their respective degrees of certainty. All accrued expenses have already been incurred but are not yet paid. By contrast, provisions are allocated toward probable, but not certain, future obligations. They act like a rainy-day fund, based on educated guesses about future expenses.

It’s very difficult to draw clear lines between accrued liabilities, provisions, and contingent liabilities. In many respects, the characterization of an expense obligation as either accrual or provision can depend on the company’s interpretations.

Key Takeaways

• In accounting, accrued expenses and provisions are separated by their respective degrees of certainty.
• An accrued expense is one that is known to be due in the future with certainty. The expense has already occurred but has not yet been paid.
• Companies elect to make provisions for future obligations whose specific amount or date is unknown.
• Banks account for unpaid loans by making loan loss provisions.

Accrued Expenses

All accruals are divided into either expenses or revenues. An accrued expense is one that is known to be due in the future with certainty. In a publicly listed corporation’s financial statement, there is an accrued expense for the interest that is paid to bondholders each quarter.

When companies buy and sell from each other, they frequently do so on credit. A credit transaction occurs when an entity purchases merchandise or services from another but does not pay immediately. The unpaid expenses incurred by a company for which no invoice has been received from its suppliers or vendors are referred to as accrued expenses. Other forms of accrued expenses include interest payments on loans, services received, wages and salaries incurred, and taxes incurred, all for which invoices have not been received and payments have not yet been made.

Interest payable on the owner’s bonds is a known figure. It can be estimated well ahead of time, and money can be set aside for it in a very specific fashion. The accrued expense is listed in the ledger until payment is actually distributed to the shareholders.

Provisions

Provisions provide protection and specify deadlines for actions. Provisions can be found in the laws of a country, in loan documents, and in investment-grade bonds and stocks. For example, the anti-greenmail provision contained within some companies’ charters protects shareholders from the board passing stock buybacks. Although most shareholders favor stock buybacks, some buybacks allow board members to sell their stock to the company at inflated premiums. 

Provisions are far less certain than accruals. Companies elect to make them for future obligations whose specific amount or date of incurrence is unknown. The provisions basically act like a hedge against possible losses that would impact business operations.

There are general guidelines that should be met before a provision can be justified in the financial statement. The entity must have an obligation at the reporting date; that is, the present obligation must exist. The amount of the obligation needs to be reliably estimated. Most importantly, the event must be near-certain, or at least highly probable.

Special Considerations

Provisions for banks work a little differently than they do for corporations. Banks make loans to borrowers, which come with a risk that the loan will not be paid back. To protect against this, banks make loan loss provisions. Loan loss provisions work similarly to the provisions that corporations make, in that banks set aside a loan loss provision as an expense. Loan loss provisions cover loans that have not been paid back or when monthly loan payments have not been met.

While gig work offers flexibility, it has a significant downside: no employer-sponsored retirement benefits. For millions of freelancers and other independent workers, this means taking retirement planning into their own hands.

“The biggest retirement mistake gig workers make is not saving for retirement,” said Chloé A. Moore, a certified financial planner, founder of Financial Staples, and part of Investopedia’s advisor council. While a significant challenge, there are more and better retirement savings options specifically for independent workers than just a few years ago.

Key Takeaways

• Gig workers should create their own retirement plans rather than waiting for traditional employment opportunities with benefits.
• Starting early—even with small amounts—enables you to gain from the power of compound interest.

The Retirement Savings Gap for Gig Workers

Studies suggest that about a third of U.S. workers are part of the gig economy, with the percentage of those for whom it’s their main or full-time job is 4.3%. Unlike traditional employees who often have access to employer-sponsored 401(k) plans with matching contributions, gig workers must navigate retirement planning entirely on their own.

“Most likely, you will not have access to an employer-sponsored retirement plan, and you’re not building a business that you can eventually sell down the road,” Moore said.

This structural shift is creating a stark divide between those with employer-sponsored retirement benefits and those without. The unpredictable income that many gig workers experience makes consistent saving particularly challenging. Like much else in gig work, more effort will fall on your shoulders. However, this isn’t just a problem for gig workers: only 56% of workers participate in an employer-based retirement plan.

Moore noted that “the amount needed to save for retirement is based on a number of factors (like income needs and desired lifestyle, among others).” Fortunately, “the amount you save and the strategy are more important than the source of income used for retirement savings.”

Building an emergency fund is a crucial first step before retirement planning since it can help you avoid dipping into retirement savings when your gig work income drops.

Retirement Options for Gig Workers

Without employer-sponsored plans, gig workers need to explore alternative retirement vehicles. Here are what experts say are the most effective options:

• Individual retirement accounts (IRAs): Traditional and SIMPLE IRAs may offer a tax deduction for contributions depending on your income and whether you or your spouse has a workplace retirement plan.
• Simplified employee pension plans (SEP IRAs): The self-employed often use these because contribution limits are higher.
• Solo 401(k)s: These plans allow for higher contribution limits than standard IRAs.
• New platforms: Companies like Robinhood Markets Inc. (HOOD) are launching retirement savings plans specifically for gig workers. For example, Robinhood’s program works with Gopuff, Grubhub, and TaskRabbit to provide their independent workers with retirement options. Benefits include a boosted match ranging from 1% to 3% for the first year (subject to a five-year holding requirement).
• SECURE 2.0 Act benefits: Starting in 2027, the “saver’s match” provision will offer eligible low- and moderate-income gig workers a federal contribution of up to 50% on the first $2,000 contributed annually to retirement accounts—a potential $1,000 yearly boost to your savings.

“It is important to start saving for retirement as early as possible,” Moore said. “The longer you wait, the more you’ll need to save. With compound interest, even small amounts invested consistently over time can lead to a sizeable nest egg in the future.”

The Bottom Line

Creating a secure retirement as a gig worker isn’t impossible—it just requires more planning amid more fluctuating income than traditional employment. Start by establishing an emergency fund to weather income fluctuations, then commit to consistent contributions to a retirement account that matches your needs and income level. “Creating your own retirement plan is critical so you can eventually achieve financial independence,” Moore said.

Compare two leading robo-advisors and decide which one suits your needs

Reviewed by Samantha Silberstein
Fact checked by Suzanne Kvilhaug

Merrill Guided Investing and E*TRADE Core Portfolios are two robo-advisors that stand out for their corporate roots and histories. Merrill Lynch & Company was a famous full-service broker that was absorbed by Bank of America in 2009. E*TRADE, the high-profile discount brokerage, was acquired by full-service broker Morgan Stanley in 2020. Additionally, both companies are among the winners in our list of the best robo-advisors of 2024, with Merrill Guided Investing winning best for education, while E*TRADE Core Portfolios is best for mobile.

Both robo-advisors successfully simplify investment decisions by offering a collection of useful portfolio alternatives that don’t require a sophisticated understanding of finances. Both also assume that their clients want a balance of risk management and growth potential, and the option of selecting environmentally friendly investment choices. However, they differ in their approach to delivering these features. As you’ll learn from this head-to-head comparison, the most significant differences are found in the cost, portfolio management, and customer service features of these two platforms.

Key Takeaways of Merrill Guided Investing

• Our pick for best robo-advisor for educational content
• Accounts integrated with Bank of America products and services
• Offers 24/7 customer service
• Provides a robust collection of investing calculators and other tools
• Tax-aware portfolios but no tax-loss harvesting

Key Takeaways of E*TRADE Core Portfolios

• Our pick for best robo-advisor for mobile users
• Improved asset depth as part of the integration with Morgan Stanley
• Quick and efficient setup for E*TRADE customers 
• Can open an account with just $500
• Added tax-loss harvesting in the last year

Account Setup

Merrill Guided Investing

Setting up a Merrill Guided Investing account is a straightforward procedure. You begin by answering basic investment questions in an online questionnaire. Here you’ll specify your investing goals, 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. You can then choose your risk tolerance or answer a few questions that will yield a suggestion to consider.

The next step requires you to choose your primary investing goal and provide a customized name for it. That sets you up 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.

E*TRADE Core Portfolios

The first step includes answering a dozen or so questions which are mostly aimed at helping you understand your risk tolerance. These sections are very well done and will help you better understand the tradeoff every investor has to make between risk tolerance and targeted returns.

The final step in the online questionnaire asks whether you want to add a specific investing focus. Here you are offered a choice of emphasizing ETFs that target socially responsible investing (SRI), similar to the ESG criteria mentioned earlier. Another alternative mentioned is a focus on smart beta strategies in an attempt to outperform the market. It isn’t abundantly clear that this choice is a mutually exclusive tradeoff between favoring a values-based investment style and performance-hunting investing style, but that is the case since you can only select one or neither of them.

Account Setup Verdict: E*TRADE Core Portfolios

E*TRADE Core Portfolios gets the edge in account setup. While both robo-advisors have an easy onboarding, we appreciated the extra level of portfolio detail with the types of funds that would be in the allocation that E*TRADE Core Portfolios creates. E*TRADE also has an edge in account minimums, at $500 versus $1000 for Merrill Guided Investing.

Account Types

For both Merrill Guided Investing and E*TRADE Core Portfolios, the final setup steps are to choose the account type and fund the account.

The account types available on both platforms include:

• Individual or joint brokerage accounts
• Retirement accounts, including traditional individual retirement accounts (IRAs), Roth IRAs, simplified employee pensions (SEP), SIMPLE IRAs, 401(k) to IRA rollovers, and others
• Custodial accounts, including Uniform Transfers to Minors Act (UTMA) and Uniform Gift to Minors Act (UGMA) accounts

Account Types Verdict: Tie

Both of these robo-advisors offer all the commonly used accounts as well as the custodial varieties. The vast majority of investors will find the account types they need at either of these companies.

Account Services

Merrill Guided Investing

This platform offers excellent tools and features, including the following highlights:

• Research tools: The platform offers excellent goal-planning tools and calculators that can be accessed by all clients who meet the minimum starting balance of $1,000.
• Access to financial advisors: Clients can speak with financial advisors if they pay a 0.85% management fee and maintain a $20,000 balance.
• Preferred rewards: Program clients qualify more quickly for Bank of America Preferred Rewards, including management fee discounts and lower interest rates on loans.

E*TRADE Core Portfolios

This platform caters to customers who need assistance along the way by including the following features and services.

• Access to help: Platform clients can speak with staff by phone or at branch offices.
• Values vs. performance portfolios: Clients can select portfolios filtered through sustainability and corporate governance criteria, or they can select portfolios with the goal of beating the market through the use of smart beta strategies.
• Low minimum balance: The $500 minimum lets smaller and younger investors get started investing towards their goals with limited risk.

Cash Management

Neither E*TRADE Core Portfolios nor Merrill Guided Investing stands out in terms of cash management. These digital investment platforms are part of a larger financial ecosystem that offers more cash management offerings like loans, checking accounts, and so on. In terms of cash inside the platform, E*Trade Core Portfolios holds 1% of your portfolio in cash and it is swept into a money market account that yields just 0.01%. Merrill Guided Investing also allocates some percentage to cash and offers a solid 4.14%.

Cash Management Verdict: Merrill

It is difficult to compare robo-advisors that have added cash management features to full financial firms that have added robo-advisors. Both E*TRADE and Merrill Guided Investing have full-featured cash management adjacent to their platforms, just not within them. Merrill Guided Investing takes the category here for having a higher interest rate on cash held in the account.

Goal Planning

Merrill Guided Investing

Merrill Guided Investing shows its strength in goal planning. It has you select a singular goal for your account and then helps you select a portfolio style that gives you the right mix of risk and reward to accomplish your goal.

This platform walks you through its questionnaire and generates more opportunities for portfolio customization after you enter a birthdate, goal amount, and the goal’s time horizon. The platform is focused on retirement by default, but it allows you to define non-retirement goals that include:

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

While there is no guidance for figuring out appropriate targets or time horizons for these goals, and 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.  

E*TRADE Core Portfolios

E*TRADE Core Portfolios doesn’t spend as much time on your choice of goals, but rather assumes you have the singular goal of maximizing your returns for wealth, retirement, or something else. The platform instead orients you to the subject of risk tolerance right from the start.

E*TRADE Core Portfolios seeks to eliminate confusion by simplifying your focus. The platform is built on the assumption that you want to maximize performance, so its opening questionnaire will help you identify your tolerance for fluctuating account values over the years ahead. 

This is a key concept for any investor who wants to achieve their desired performance. Investors who don’t understand their own risk tolerance are much more likely to sabotage their investing goals by changing strategies over time. E*TRADE Core Portfolios users do have access to E*TRADE’s extensive research and educational resources, including retirement calculators and other planning tools, but the functions are not built into the Core Portfolios questionnaire experience, so they are only useful after the account has been opened.

Goal Planning Verdict: Merrill Guided Investing

While both platforms arrive at a similar end through different means, investors who are goal-oriented will appreciate Merrill’s approach.

Portfolio Construction

Merrill Guided Investing

Merrill’s offering has several different investment strategies that align both with the firm’s research and your answers to the questionnaire you completed when opening the account. Though the strategies may target various investing approaches, they follow the classic principles of modern portfolio theory (MPT). 

The platform’s offerings have no set schedule for rebalancing, as they can be triggered by changing risk profiles, contributions, and withdrawals or unspecified market conditions. The platform’s portfolios are directed by a mix of algorithms and fund managers’ guidance. The risk tolerances are low, medium, and high, and there is the option to have socially responsible investment principles inform your allocations. Merrill Guided Investing is all through funds, so it does not offer any exposure to alternative assets like cryptocurrency.

E*TRADE Core Portfolios

E*TRADE Core Portfolios are also based on MPT principles and offer highly diversified swaths of the international and domestic market. This is due to the tie-up with Morgan Stanley increasing the pool of equities and tweaks to the model to consider equities of different sizes to increase overall diversification. In addition to improved asset depth, E*TRADE Core Portfolios has tweaked its risk models. Core Portfolios previously had a range from low-risk portfolios with 20% bonds and cash equivalents and 80% stocks up to high-risk with 80% stocks and 20% bonds. These have been expanded to include an all-risk portfolio which is 100% equities.  E*TRADE Core Portfolios are all done through funds, like Merrill Guided Investing, so no alternative assets like cryptocurrency are available.

Available Assets

Asset Types	Merrill Guided Investing	E*TRADE Core Portfolios
Individual Stocks	No	No
Mutual Funds	Yes	No
Fixed Income	Yes (through ETFs and mutual funds)	Yes (through ETFs)
REITs	No	No
Socially Responsible or ESG	Yes	Yes
ETFs	Yes	Yes
Non-Proprietary ETFs	Yes	Yes
Private Equity	No	No
Crypto, Forex	No	No

Portfolio Customization

As with most robo-advisor solutions, the construction of a portfolio of ETFs and mutual funds begins with a starting allocation algorithmically determined based on the questionnaire answers.  From there, the portfolio strategy can only be enhanced and customized in limited ways, specifically to either incorporate a focus on socially responsible investing (SRI)/ESG criteria or to focus on market-beating strategies, which means accepting greater risk. 

Merrill Guided Investing

Beyond the initial setup of a portfolio, you can specify as part of the questionnaire that you prefer a portfolio solution based on ESG criteria. The fine print on the website adds a bit of caution that investors should take note of; for instance, ESG investing poses certain risks by limiting the account’s investment options. Investors who set their preferences solely based on ESG criteria will waive prospecting investment opportunities that could benefit their portfolio.

E*TRADE Core Portfolios

E*TRADE Core Portfolios customization has improved in the sense that you have more risk models to choose from. With E*TRADE Core Portfolios, you also can nudge the algorithm to go beyond the initial portfolio selection by adopting a focus towards either SRI goals or smart beta goals. This customization creates a tradeoff between a values-oriented strategy and a performance-oriented strategy, though neither customization is a required ingredient of your strategy.

Portfolio Customization Verdict: E*TRADE Core Portfolios

While neither of these robo-advisors stands out in the industry in terms of customization, E*TRADE Core Portfolios takes this category by having more options and a larger underlying tweak to the portfolios with an all-risk model portfolio.

Portfolio Management

This is a major point of differentiation between the two platforms, as E*TRADE’s robo platform uses a set rebalancing schedule and Merrill’s does not. Although this difference is clearly defined, the anticipated benefit or cost of this difference is not. Neither broker provides any data or theory that forecasts which approach is likely to provide better performance. However, it is logical to conclude that the human fund managers included in the Merrill Guided Investing platform are likely related to the higher fees the broker charges. 

Merrill Guided Investing

The platform allows for rebalancing the account under a variety of circumstances. These rules are intended to optimize performance for investors by 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. Merrill Guided Investing also takes your synced accounts under consideration when managing your account.

E*TRADE Core Portfolios

Accounts are monitored daily and rebalanced semi-annually to align with the initial allocation identified by the algorithm at the account opening. E*TRADE Core Portfolios have a drift tolerance of 5%, but most of the rebalancing is going to occur as contributions go in or withdrawals go out.

Portfolio Management Verdict: Merrill Guided Investing

Here again, there is not much daylight between these two. E*TRADE has a very clear approach to rebalancing, which is good, but Merrill actually takes synced accounts into consideration when managing your account. This is rare for a robo-advisor and gives Merrill the edge here.

Tax-Advantaged Investing

Merrill Guided Investing does not provide tax-loss harvesting services. Merrill Guided Investing does have tax-aware portfolios that it will place investors in to minimize income with tax-advantaged investments. E*TRADE Core Portfolios include a component of tax-sensitive strategy in the portfolios it offers. This tax sensitivity includes the addition of municipal bonds in the portfolio, which offer beneficial tax treatment to offset the impact of taxable gains. E*TRADE Core Portfolios also added tax-loss harvesting recently and monitors daily for opportunities to realize losses to offset gains in other parts of the portfolio.

Tax-Advantaged Investing Verdict: E*TRADE Core Portfolios

E*TRADE Core Portfolios has a clear edge over Merrill Guided Investing by offering tax-sensitive portfolio construction and tax-loss harvesting in taxable accounts.

Key Portfolio Management Features

Key Portfolio Management Features
Feature	Merrill Guided Investing	E*TRADE Core Portfolios
Automatic Rebalancing	Rebalancing is done with human oversight and occurs as preferred asset allocations and market conditions change	Monitored daily, rebalanced whenever the account drifts out of line with the portfolio allocations by at least 5%
Reporting Features	Dashboard is available 24/7, along with regular statements	Dashboard is available 24/7, along with regular statements
Tax-Loss Harvesting	No	Yes
External Account Syncing/Consolidation	Yes; external accounts are synced when the user sets up goals and considered when asset allocation and goal planning are determined	No

Security

Merrill Guided Investing and E*TRADE Core Portfolios both use heavy-duty 256-bit SSL encryption and client funds are held in-house at both brokerages. Both platforms are part of large financial institutions that provide Securities Investor Protection Corporation (SIPC) and private excess insurance. Also, state-of-the-art fingerprint, face recognition, and two-factor authentication capabilities are available in mobile apps at both brokerages.

Security Verdict: Tie

Merrill Guided Investing and E*TRADE Core Portfolios use effective security with no differentiation between them. Your money is safe at either of these firms.

User Experience

Desktop

Both brokerage platforms are feature-rich resources available to clients who have opened a robo-advisor account. Each has a wide array of technical analysis tools as well as reports on fundamental measures. Both platforms have gone through years of customer feedback and refinement and are highly useful to the curious investor.

Mobile App

The mobile apps made available from these brokerages are both filled with useful features. E*TRADE’s mobile app was selected by Investopedia as the best for mobile users, where it was praised for being very similar to its desktop counterpart. Its organization and style make it a useful tool for the on-the-go investor. 

While its technical research function is a bit less fluid, the Merrill app has a surprisingly beneficial aspect to its design. It is oriented around the “story” of an individual security. This thematic arrangement of information is less intimidating and creates rapid familiarity for the casual user or beginning investor. 

Customer Service

Both brokerages offer multiple access points for customer service, and both have similar strengths and weaknesses. Customers who enjoy using the mobile apps or desktop version can get their questions answered in comprehensive FAQs and help centers. Phone access to customer service reps is also available for 24 hours per day at both robo-advisors.

Customer Service Verdict: Tie

Both Merrill Guided Investing and E*TRADE Core Portfolios lean heavily on the phone for tricky questions not covered in their comprehensive websites.

	Merrill Guided Investing	E*TRADE Core Portfolios
Phone & Email Available	Phone, 888-637-3343, 24/7	Phone, 866-484-3658, 24/7
Pre-Funding Phone Consultation With a Certified Advisor	No	No
Online Chat Available	Yes (for customers in the platform)	No
Website FAQ Section	Yes	Yes

Fees

Merrill Guided Investing

Merrill Guided Investing requires at least $1,000 to get started and has a management fee of 0.45%. The online-plus-financial advisor program requires $20,000 in your account and has a higher 0.85% fee. The Preferred Rewards program can lower fees if you qualify, bringing the management fee down from 0.05% to 0.15%. The higher your account balance with Merrill and Bank of America, the larger the discount on the annual fee. Merrill Guided Investing customers pay the underlying fees for the funds, with expense ratios ranging from 0.05% to 0.13% depending on the portfolio.

E*TRADE Core Portfolios

E*TRADE’s Core Portfolios accounts require at least $500 to open and have a management fee of 0.3%. In this fee structure, a $10,000 account would have an annual fee of just $30. Core Portfolios customers will also pay ETF expense ratios, which range from 0.05% for the Core offering to 0.14% for smart beta and 0.16% for SRI. 

Fees Verdict: E*TRADE Core Portfolios

E*TRADE Core Portfolios charges less of a headline management fee and has low underlying expense ratios. That said, Preferred Rewards can change the fee picture for Merrill/Bank of America customers, as can a promotional six-month waiver of fees that Merrill Guided Investing currently has.

Fees	Merrill Guided Investing	E*TRADE Core Portfolios
Management Fees for $5,000 Account	$22.50	$15
Management Fees for $25,000 Account	$112.50 (Plus Advisor $212.50)	$75
Management Fees for $100,000 Account	$450 (Plus Advisor $850)	$300
Termination Fees	No	No
Expense Ratios	Between 0.05% to 0.13%, depending on your allocation	Between 0.05% to 0.16%, depending on your allocation
Mutual funds	Dependent on portfolio	N/A

The Bottom Line

Both Merrill Guided Investing and E*TRADE Core Portfolios are successful at simplifying investment decisions for those looking for a set-it-and-forget-it solution. Both offer well-constructed portfolios. E*TRADE Core Portfolio includes rules-based rebalancing for the purpose of keeping the allocations consistent with their recommended targets and tax-loss harvesting. Merrill Guided Investing offers situational rebalancing with the intent that it will optimize the performance of the portfolio. E*TRADE Core Portfolios offers lower costs and a better mobile experience for beginners with smaller accounts, while Merrill offers better goal planning. 

The target customers for Merrill Guided Investing and E*TRADE Core Portfolios are customers who are already in their financial ecosystem. Looking solely at the robo-advisors misses the larger wrap-around ecosystem of services that the companies don’t need to bother replicating within the robo-advisor itself. This includes cash management, loans, net-worth analysis, and so on. If you are already with one of these firms, then its respective robo-advisor is the natural choice. If you aren’t, then it is worth broadening your search to other services with stronger goal-planning support and cheaper fees.

Is Merrill Guided Investing Worth It?

Merrill Guided Investing is worth it for investors looking for a way to automate their investments. Merrill offers situational rebalancing that will help you optimize the performance of your portfolio. However, if you have a low balance when opening your account, you’ll find the fees higher than other robo-advisor options (though the fees even out as your balance grows). Compare all the best robo-advisors before deciding which one is worth it.

How Do You Cancel Your E*TRADE Core Portfolio?

E*TRADE does not offer educational information on its website on how to cancel or close your Core Portfolios account. You can call E*TRADE Core Portfolio’s customer service department at 866-484-3658. A specialist should be available when a customer needs assistance.

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.

Fact checked by Suzanne Kvilhaug

Year after year, you’ve diligently put money in a 401(k) plan for your retirement. Scammers and thieves want that money. Here are the types of scams they are using to steal your 401(k) money and how to protect yourself.

Key Takeaways

• Scammers are targeting your 401(k) plan. Don’t let them steal your retirement savings.
• Protect yourself by using two-factor authentication when accessing your 401(k) plan online. Use complicated passwords, and don’t use the same password for more than one financial account.
• Monitor notifications regarding your 401k) plan. Watch out for scam emails, phone calls, and text messages. Block suspicious text messages and phone calls.
• Only do a 401(k) rollover with a trusted financial institution.

Online 401(k) Scams

Thieves are targeting 401(k) accounts in a number of ways, including online scams. If your login has been swiped, you are vulnerable.

“This has even begun to manifest in high-volume ‘bot attacks’ where criminals are using an automated script and thousands of stolen logins to attempt to identify and compromise victims’ accounts,” says Al Pascual, Chief Executive Officer and Co-founder of Scamnetic.

Phony Investments

Another way thieves are ripping off consumers is by tricking them into putting their 401(k) money into sham investments. The investments aren’t real, but the scam is.

“(Scammers) mislead consumers who have access to a self-directed 401(k) into investing in things like commodities or FX through fake online platforms,” Pascual says. “These platforms have a convincing look and feel, and as the victims watch their investments grow, they are encouraged to invest even more, but when the victim tries to withdraw funds, they are faced with requests for fees and taxes that are really just attempts to steal even more money.”

Phone and Text Scams

Thieves pretend to be financial advisors and deceive 401(k) investors with phone calls and text messages. It is all a ruse to get investors’ personal information, which they use to get into 401(k) accounts.

“Scammers pose as financial advisors or retirement plan representatives and trick innocent individuals into sharing their login credentials, giving up personal information over the phone, or misleading them to malicious phishing links in text messages,” says Clayton LiaBraaten, Senior Executive Advisor of Truecaller.

Scams Through Robocalls

Scammers will attempt to reel in unsuspecting 401(k) investors with robocalls using artificial intelligence (AI) and voice impersonations.

“Another scam is robocalls, even though the FTC reports a decline in this space, AI is opening the door for deepfakes and voice impersonations that make the scams more intricate and harder for people to detect,” LiaBraaten says.

401(k) Rollover Scams

A 401(k) rollover scam is another way thieves are swiping money out of 401(k) accounts. They encourage investors to move their money into a self-directed individual retirement account (IRA) and then convince investors to buy wildly overpriced gold coins.

In a 401(k) rollover scam, thieves also target investors who use paper checks in their rollovers.

“401(k) rollovers still happen using old-fashioned paper checks,” says James Lee, Founder of StratFI. “This creates another source of vulnerability—your mailbox. These checks can be intercepted, endorsed with a forged signature, and fraudulently paid out to someone else.”

401(k) Loan and Withdrawal Scams

One trick is for scammers to persuade a 401(k) investor to make withdrawals or take loans from their account and give it to the scammer.

“And even if they don’t have a self-directed 401(k), scammers have no scruples and are happy to convince their victims to make withdrawals or take loans from their accounts—whether that be in association with an investment scam, a romance scam, a tax scam, or any other,” Pascual says.

Some thieves may be associated with the 401(k) plan itself, but outside scammers are the bigger threat.

“Investment cons are as old as time and can occasionally involve insiders. That said, the far more common threat is from career criminals who are targeting accounts to compromise and investors to mislead,” Pascual says.

How to Protect Yourself from 401(k) Scams

There are several easy steps you can take to guard against 401(k) scams, beginning with additional security measures on your online account.

“Consumers should take advantage of security controls on their accounts, such as two-factor authentication, to reduce the risk of criminals using stolen credentials,” Pascual says.

Here are some additional ways to keep close tabs on your 401(k) account.

“Use complex passwords, and do not reuse passwords for multiple accounts,” says John Wilson, Senior Fellow of Threat Research at Fortra. “Leverage notifications to stay aware of account activity. Scrutinize any request regardless of communication channel. Be aware that scams can be conducted via email, phone, and SMS. Regularly review your account and verify any suspicious activity.”

Block suspicious phone calls and text messages that discuss your 401(k) account.

“The best defense is to stop the scams before they reach you,” LiaBraaten says. “This would require a proactive approach (using) tools to detect and block suspicious calls and texts. Services that identify fraudulent or high-risk numbers, based on large databases and patterns of scam activity, can go a long way to safeguard you from being exposed to fraudsters.”

Step in and help older investors manage their 401(k) accounts. “Older investors should consider adding trusted contacts to their accounts. These are individuals—such as close family members or caregivers—who are notified whenever there is high-risk activity. This can help more quickly detect if an account is compromised, or if the older investor is unwittingly scammed,” Pascual says.

Before attempting to roll over money from a 401(k) plan, stay steps ahead of scammers by following these three tips.

“Consult with a fiduciary such as a fee-only financial planner about the pros and cons of your rollover options. Only roll over your 401(k) to a known financial institution. Keep an eye out for your rollover check in the mail,” Lee says.

If you are not sure whether an email, text, or phone call regarding your 401(k) account is legitimate, reach out to your plan advisor and ask if they sent it or made the call. If you suspect a scam, you can report it to the Federal Trade Commission (FTC).

The Bottom Line

Thieves are after the money in your 401(k) plan. They use online scams and rollover scams, and they con 401(k) investors by text messages and phone calls. They will swipe a 401(k) rollover check from an investor’s mailbox and trick people with fake investments. They convince unsuspecting investors to make loans and withdrawals from their 401(k) accounts and give the money to the thieves.

To protect yourself from 401(k) scams, be on the alert. Watch out for scam emails, text messages, and phone calls. Keep track of all notifications regarding your 401(k) account. Report any suspicious activity to the FTC.

Reviewed by Somer Anderson
Fact checked by Suzanne Kvilhaug

Mergers vs. Acquisitions: An Overview

Mergers and acquisitions are two of the most misunderstood words in the business world. Both terms often refer to the joining of two companies, but there are key differences involved in when to use them.

A merger occurs when two separate entities combine forces to create a new, joint organization. Meanwhile, an acquisition refers to the takeover of one entity by another.

The more common distinction to differentiating a deal is whether the purchase is friendly (merger) or hostile (acquisition).

Mergers and acquisitions may be completed to expand a company’s reach or gain market share in an attempt to create shareholder value.

Key Takeaways

• A merger occurs when two separate entities combine forces to create a new, joint organization.
• An acquisition refers to the takeover of one entity by another.
• The two terms have become increasingly blended and used in conjunction with one another.

Mergers

A merger requires two companies to consolidate into a new entity with a new ownership and management structure (typically with members of each firm). Mergers require no cash to complete but dilute each company’s individual power.

Though mergers might be seen as friendly in comparison to acquisitions, in practice, friendly mergers of equals do not take place very frequently. It’s uncommon that two companies would benefit from combining forces with two different CEOs agreeing to give up some authority to realize those benefits. When this does happen, the stocks of both companies are surrendered, and new stocks are issued under the name of the new business identity.

Typically, mergers are done to reduce operational costs, expand into new markets, and boost revenue and profits. Mergers are usually voluntary and involve companies that are roughly the same size and scope.

Important

Due to the negative connotation, many acquiring companies refer to an acquisition as a merger even when it is clearly not.

Acquisitions

In an acquisition, a new company does not emerge. Instead, the smaller company is often consumed and ceases to exist, with its assets becoming part of the larger company.

Acquisitions, sometimes called takeovers, generally carry a more negative connotation than mergers. As a result, acquiring companies may refer to an acquisition as a merger even though it’s clearly a takeover.

An acquisition takes place when one company takes over all of the operational management decisions of another company.

Acquisitions require large amounts of cash.

Companies may acquire another company to purchase their supplier and improve economies of scale—which lowers the costs per unit as production increases. Companies might look to improve their market share, reduce costs, and expand into new product lines. Companies engage in acquisitions to obtain the technologies of the target company, which can help save years of capital investment costs and research and development.

Examples of Mergers and Acquisitions

Although there have been numerous mergers and acquisitions, below are two of the most notable ones over the years.

Merger: Exxon and Mobil 

Exxon Corp. and Mobil Corp. completed their merger in November 1999 following approval from the Federal Trade Commission (FTC). Exxon and Mobil were the top two oil producers, respectively, in the industry prior to the merger.

The merger resulted in a major restructuring of the combined entity, which included selling more than 2,400 gas stations across the United States. The joint entity trades under the name Exxon Mobil Corp. (XOM) on the New York Stock Exchange (NYSE).

Acquisition: AT&T Buys Time Warner

On June 15, 2018, AT&T Inc. (T) completed its acquisition of Time Warner Inc., according to AT&T’s website. However, due to intervention by the U.S. government to block the deal, the acquisition went to the courts. In February 2019, an appeals court cleared AT&T’s takeover of Time Warner.

The $42.5 billion acquisition realized cost savings for the combined entity of $1.5 billion and revenue synergies of $1 billion. On May 17, 2021, AT&T announced that it would spin off its WarnerMedia business and merge it with Discovery.

Explain Mergers and Acquisitions Like I’m Five

A merger is when two companies come together to form a new company. An acquisition is when one company takes over another. In the business world, the two words are often used together to discuss the combining of two groups because the groups share strategic goals such as growth and cost savings.

What Was the Largest Merger in History?

The largest merger in history is America Online and Time Warner, in 2000.

What Was the Largest Acquisition in History?

The largest acquisition in history is the takeover of Mannesmann AG by Vodafone Group in 1999.

Why Is It Called Merger and Acquisition (M&A)?

A merger is an agreement that unites two existing companies into one new company. An acquisition is a transaction in which one company purchases most or all of another company’s shares to gain control of that company.

Since mergers are so uncommon and takeovers are viewed in a negative light, the two terms have become increasingly blended and used in conjunction with one another. Contemporary corporate restructurings are usually referred to as merger and acquisition (M&A) transactions rather than simply a merger or acquisition. The practical differences between the two terms are slowly being eroded by the new definition of M&A deals.

The Bottom Line

“Mergers” and “acquisitions” are terms that often refer to the joining of two companies, but there are key differences involved in when to use them. In a merger, two separate entities combine forces to create a new, joint organization. In an acquisition, one entity takes over another.

Reviewed by Robert C. Kelly
Fact checked by Suzanne Kvilhaug

The price/earnings-to-growth ratio, or PEG ratio, is a stock valuation metric that combines a company’s price-to-earnings (P/E) ratio with its earnings growth rate over a set period. Unlike the P/E ratio, which focuses only on current earnings, the PEG ratio provides a broader perspective by factoring in future growth expectations.

Investors and analysts widely use the PEG ratio to assess an investment’s overall performance and potential risk.

In theory, a PEG ratio of 1.0 indicates that the market value of the stock is aligned with its projected earnings growth. A ratio above 1.0 suggests the stock may be overvalued, while a ratio below 1.0 is generally considered favorable, indicating that the stock may be undervalued.

Key Takeaways

• The price/earnings-to-growth ratio, or PEG ratio, is a valuation metric that factors in both price and expected earnings growth.
• A PEG ratio under 1.0 may indicate an undervalued stock, potentially signaling a buying opportunity.
• A PEG ratio above 1.0 may suggest the stock is overvalued.
• The PEG ratio is more comprehensive than the P/E ratio because it includes growth forecasts.
• Always be mindful of the time frame used for growth projections when interpreting the PEG ratio.

PEG Ratio vs. P/E Ratio

The price-to-earnings (P/E) ratio gives analysts a good fundamental indication of what investors are currently paying for a stock in relation to the company’s earnings. However, the P/E ratio doesn’t account for future growth potential. The PEG ratio represents a fuller—and hopefully—more accurate valuation measure than the standard P/E ratio.

The PEG ratio builds upon the P/E ratio by factoring growth into the equation. Factoring in future growth adds an important element to stock valuation since equity investments represent a financial interest in a company’s future earnings.

Important

The PEG ratio will differ if you use trailing P/E versus forward P/E. Be consistent and aware of which version of P/E is used.

Calculating the PEG Ratio

To calculate a stock’s PEG ratio you must first figure out its P/E ratio. The P/E ratio is calculated by dividing the per-share market value by its per-share earnings. From here, the formula for the PEG ratio is simple:

$begin{aligned} &text{PEG}=frac{text{P/E}}{text{EGR}}\ &textbf{where:}\ &text{EGR = Earnings growth rate over five years}\ end{aligned}$​PEG=EGRP/E​where:EGR = Earnings growth rate over five years​

Where:

• P/E is the price-to-earnings ratio (market price per share divided by earnings per share).
• EGR is the earnings growth rate over a specified period (typically 5 years).

While you can use different periods for the growth rate, it’s important to note that projections farther out in time tend to be less accurate.

Example of the PEG Ratio

If you’re choosing between two stocks from companies in the same industry, then you may want to look at their PEG ratios to make your decision. For example, the stock of Company Y may trade for a price that’s 15 times its earnings, while Company Z’s stock may trade for 18 times its earnings. If you simply look at the P/E ratio, then Company Y may seem like the more appealing option.

However, Company Y has a projected five-year earnings growth rate of 12% per year while Company Z’s earnings have a projected growth rate of 19% per year for the same period. Here’s what their PEG ratio calculations would look like:

$begin{aligned} &text{Company Y PEG = 15/12$​Company Y PEG = 15/12% = 1.25Company Z PEG = 18/19% = 0.95​

This shows that when you take possible growth into account, Company Z could be the better option because it’s actually trading for a discount compared to its value.

Other Factors to Consider

The PEG ratio doesn’t take into account other factors that can help determine a company’s value. For example, the PEG doesn’t look at the amount of cash a company keeps on its balance sheet, which could add value if it’s a large amount.

Other factors analysts consider when evaluating stocks include the price-to-book ratio (P/B) ratio. This can help them determine if a stock is genuinely undervalued or if the growth estimates used to calculate the PEG ratio are simply inaccurate. To calculate the P/B ratio, divide the stock’s price per share by its book value per share.

Is a High or Low PEG Ratio Better?

In general, a low PEG ratio is preferred, especially if it’s below 1.0. A PEG below 1.0 suggests that the stock is undervalued relative to its expected growth. On the other hand, a high PEG ratio (above 1.0) indicates that the stock may be overvalued, with its price not adequately supported by projected earnings growth.

What Does a Negative PEG Ratio Mean?

A negative PEG ratio can occur when the P/E ratio is negative (usually because the company is losing money) or if the growth rate is negative. Either scenario suggests that the company is struggling financially or is expected to have declining earnings, making it a less favorable investment.

What Are Some Limitations of the PEG Ratio?

Getting an accurate PEG ratio depends highly on what factors are used in the calculations. Investors may find that PEG ratios are inaccurate if they use historical growth rates, especially if future ones may deviate from the past. In order to make sure the calculations remain distinct, the terms “forward” and “trailing” PEG are often used.

The Bottom Line

The PEG ratio is a valuable metric for assessing a company’s stock price in relation to its expected earnings growth. It offers a more complete picture than the P/E ratio, which only looks at current earnings without considering future potential. A PEG ratio below 1.0 is typically seen as an indication of an undervalued stock, while a ratio above 1.0 could signal overvaluation.

However, like all financial metrics, the PEG ratio should not be used in isolation. It’s best to consider it alongside other valuation measures and factors to gain a well-rounded understanding of a stock’s investment potential.

Reviewed by Eric Estevez
Fact checked by Kirsten Rohrs Schmitt

Over the last 100 years, there have been several large stock market crashes that have plagued the American financial system. For example, during the Great Depression of 1929, stock prices dropped to 10% of their previous highs and during the crash of 1987, the market fell more than 20% in one day. 

Key Takeaways

• Stock markets tend to go up. This is due to economic growth and continued profits by corporations.
• Sometimes, however, the economy turns or an asset bubble pops—in which case, markets crash.
• Investors who experience a crash can lose money if they sell their positions, instead of waiting it out for a rise.
• Those who have purchased stock on margin may be forced to liquidate at a loss due to margin calls.

Selling After a Crash

Due to the way stocks are traded, investors can lose quite a bit of money if they don’t understand how fluctuating share prices affect their wealth. In the simplest sense, investors buy shares at a certain price and can then sell the shares to realize capital gains. However, if dwindling investor interest and a decline in the perceived value of the stock results in a dramatic drop in the stock price, the investor will not realize a gain.

For example, suppose an investor buys 1,000 shares in a company for a total of $1,000. Due to a stock market crash, the price of the shares drops 75%. As a result, the investor’s position falls from 1,000 shares worth $1,000 to 1,000 shares worth $250. In this case, if the investor sells the position, they will incur a net loss of $750. However, if the investor doesn’t panic and leaves the money in the investment, there’s a good chance they will eventually recoup the loss when the market rebounds.

Important

While stock markets have historically gone up over time, they also experience bear markets and crashes where investors can and have lost money.

Buying on Margin

Another way an investor can lose large amounts of money in a stock market crash is by buying on margin. In this investment strategy, investors borrow money to make a profit. More specifically, an investor pools their own money along with a very large amount of borrowed money to make a profit on small gains in the stock market. Once the investor sells the position and repays the loan and interest, a small profit will remain.

For example, if an investor borrows $999 from the bank at 5% interest and combines it with $1 of their own savings, that investor will have $1,000 available for investment purposes. If that money is invested in a stock that yields a 6% return, the investor will receive a total of $1,060. After repaying the loan (with interest), about $11 will be left over as profit. Based on the investor’s personal investment of $1, this would represent a return of more than 1,000%.

This strategy certainly works if the market goes up, but if the market crashes, the investor will be in a lot of trouble. For example, if the value of the $1,000 investment drops to $100, the investor will not only lose the dollar they contributed personally but will also owe more than $950 to the bank (that’s $950 owed on an initial $1.00 investment by the investor).

Margin and The Depression

In the years leading up to the Great Depression, many investors took advantage of this strategy by taking large margin positions. However, when the depression hit, these investors worsened their overall financial situation because they lost everything they owned and owed large amounts of money. Because lending institutions could not get money back from investors, many banks had to declare bankruptcy. To prevent such events from occurring again, the Securities and Exchange Commission created regulations that prevent investors from taking large positions on margin.

By taking the long-term view when the market realizes a loss and thinking long and hard before buying on margin, an investor can minimize the amount of money they lose in a stock market crash.

The Bottom Line

While stock price shifts are more about changing perceptions of value rather than money physically moving from point A to point B, they do mean the perceived value of an investor’s stock changes. It means other investors aren’t willing to pay as much as they were before should the investor wish to sell it. However, that value drop may not be permanent and may rebound if the investor holds on to their investment, taking a long-term view.

Reviewed by Marguerita Cheng
Fact checked by Vikki Velasquez

The RMD Penalty Hit

If you’re at least 73 years old and have a traditional tax-advantaged retirement account, the Internal Revenue Service (IRS) requires that you withdraw a minimum amount of money every year and pay the taxes owed on the money.

This required minimum distribution (RMD) is necessary if you have a traditional individual retirement account (IRA), a SEP IRA, a SIMPLE IRA, a company-sponsored 401(k) account, or a 403(b) account. Withdrawals are not required for money in a Roth account rather than a traditional account.

There are serious consequences for failing to take the required minimum distribution (RMD): A penalty of 25% of the amount that should have been withdrawn plus any income taxes owed on that amount.

The penalty may be reduced to 10% or waived entirely if you take prompt action.

Note: A “traditional” account contains money that was not taxed at the time it was paid into the account. The alternative, a Roth account, contains money that was taxed at the time it was paid in and, therefore, no further taxes are owed. All are “tax-advantaged” accounts because the IRS gives their owners a tax break to encourage them to save money for retirement.

Key Takeaways

• If an RMD deadline is missed, the account owner will owe the IRS a 25% excise tax on the shortfall, plus the income taxes due on the withdrawal.
• The penalty may be reduced to 10% or waived entirely if you can show that the shortfall was due to a “reasonable error” and that you are taking steps to remedy it.
• When requesting a penalty waiver, file Form 5329.

Important

If you have a retirement account, the account custodian should notify you by January 1st of the amount you must withdraw during the year. The IRS also supplies worksheets that can be used to calculate the amount to withdraw, which is based on your age.

How the RMD Penalty Works

The purpose of the RMD is clear: The government has deferred taxes on some of your income for many years, and now it wants some of that money.

The amount you owe is determined by your age. You must withdraw money the year you reach 73 and every year thereafter. The IRS supplies worksheets to determine how much you must withdraw for the year.

If you fail to withdraw the RMD by the applicable deadline, the IRS can charge you a penalty of 25% of the amount you should have withdrawn, plus the income taxes that would be due on that amount.

You will, of course, owe the income taxes if you withdraw the money on schedule.

However, if the failure is “timely corrected within two years,” according to the IRS, the penalty is reduced from 25% to 10%. In some cases, the penalty may be waived.

Here are the steps you should take if you’re facing a possible RMD penalty.

Step 1: Request a Waiver

If you feel that you missed the deadline due to a reasonable error, you may ask the IRS to waive the 25% excise tax by filing IRS Form 5329 and attaching a letter of explanation for the waiver.

When requesting a waiver, do not pay the excise tax immediately. Instead, follow the instructions for requesting a waiver in the Instructions for Form 5329. If the IRS does not honor your waiver request, you will be notified.

Step 2: Pay the Excise Tax

If you don’t qualify for a waiver, you must pay the excise tax. The amount owed must be calculated and reported on IRS Form 5329 and IRS Form 1040 and filed with your federal tax return for the year in which the RMD shortfall occurred.

If you are not required to file your taxes with IRS Form 1040, you may file Form 5329 by itself and pay the excise tax owed. The IRS website offers instructions for Form 5329. (Only people whose income is less than the standard deduction don’t need to file a Form 1040.)

Complete the form with the requested information, and enclose your check or money order made payable to the United States Treasury. On the check or money order, write your Social Security number, the current tax year, and “Form 5329.” (Check the IRS website for other payment options.)

Step 3: If You Inherited the Account

People who inherit retirement accounts must take RMDs, following IRS rules based on the type of beneficiary. Beneficiaries are also subject to the 25% excise tax if they miss their RMD deadline.

If you are a designated beneficiary who inherited a retirement account from an owner who died in 2019 or earlier, and the person’s death occurred before their required beginning date (RBD), you are required to take annual beneficiary RMDs over your life expectancy, starting the year after the owner’s death.

There is one instance in which a beneficiary can get an automatic waiver of the excise tax. Some beneficiaries (who are not surviving spouses or dependents of the deceased) might be subject to the five-year rule instead.

Under the five-year rule, you don’t need to take distributions for the first four years but you must withdraw the entire balance by the end of the fifth year.

The five-year rule was increased to 10 years under provisions of the SECURE Act of 2019. Most SECURE Act provisions have since expired. IRS FAQs updated on Dec. 10, 2024, indicate that the five-year rule now applies.

If you are uncertain which rules apply to you, check with your IRA custodian or plan trustee.

How to Use the 5-Year Rule

While the excise penalty will generally apply if you do not withdraw the RMD amount on time, the penalty may be waived if you switch from the life expectancy rule to the five-year rule and withdraw the full balance of the account by Dec. 31 of the fifth year following the year when the retirement account owner died.

Let’s look at the following example:

In 2018, John, age 63, inherited an IRA from his husband Ron, who died at age 65. Since Ron died before his RBD, John has two options for distributing the IRA balance:

1. John can distribute the assets over his own life expectancy. For most IRA plan documents, this is the default option and is consistent with the provisions of RMD regulations.
2. John can distribute the assets by December 31 of the fifth year following the year when Ron died.

John chooses the life-expectancy option. The RMD for 2019 is $10,000, but John fails to withdraw any amount by December 31, 2019. If John wants to continue using the life-expectancy method, then he will have to pay the IRS an excise tax of $5,000 (the tax was 50% in the years before 2023) and must file Form 5329.

He may request a waiver if he feels the failure is due to a reasonable error. However, John will receive an automatic waiver of the penalty if he withdraws the account balance by Dec. 31, 2024, the fifth RMD year following the year his husband died, plus an extra year’s extension (because 2020 isn’t counted due to the CARES Act).

How Is a Required Minimum Distribution Calculated?

The annual RMD is determined by dividing the retirement account’s prior year-end fair market value by a life expectancy factor published by the IRS.

Can an Account Holder Withdraw More Than the RMD?

Account holders can and often do take more than the RMD each year, commonly during retirement. The IRS has no problem with this as long as you pay the taxes due.

What If I Have Multiple Retirement Accounts?

It depends on the type of account.

An IRA owner must calculate the RMD separately for each IRA but can withdraw the total amount from one or more of the IRAs. Similarly, a 403(b) contract owner must calculate the RMD separately for each 403(b) contract but can take the total amount from one or more of the 403(b) accounts.

However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans, have to be taken separately from each of those accounts.

RMDs for inherited accounts cannot be combined with RMDs for accounts you hold as owner.

The Bottom Line

Missing your RMD deadline can be costly. To ensure it doesn’t happen, make sure your distribution occurs by the deadline. You can arrange with your account custodian for automatic withdrawals on a predetermined date. Submit your withdrawal requests well before the deadline, and check your statements to ensure that the correct amount was distributed.