bonds

SMBX: Crowdfunded Bonds For The Small Investor

March 3, 2021 By Vicky Monroe Leave a Comment

Due to the pandemic, small businesses need our support now more than ever. As of September, nearly 100,000 small businesses have closed their doors for good because of COVID-19, and many more are struggling.

In an effort to help, we’ve all been donating to GoFundMe campaigns and ordering as much takeout as we can. But if you’re looking for new ways to support small businesses and earn a profit at the same time, consider crowdfunded bonds.

Nobody has heard of crowdfunded bonds, because they’re new. Title III of the 2012 Jobs act made them possible (here). However, it has taken a while for the finance industry to have products suitable for small investors. There are at least three companies in the crowdfunded bonds space: worthy, honeycombcredit, and SMBX. Of these crowdfunded bonds companies, SMBX is the most interesting. There isn’t much on it, so I decided to do a review here. But first, here is an overview of crowdfunded bonds.

What Are Crowdfunded Bonds?

A bond is basically any interest bearing government or corporate security that obligates the issuer to pay bondholders a specified sum of money, at specific intervals and to repay the principle amount of the loan at maturity. Bondholders basically have an IOU from the issuer, but no corporate ownership privileges, as stockholders do. Crowdfunded bonds are basically the same as regular bonds, but bond investors are smaller and pool their investing dollars to fund the bond purchases. So basically, when you purchase a crowdfunded bond, you’re essentially buying a small piece of a business loan.

Why Should You Invest in Crowdfunded Bonds?

Crowdfunded bonds support small businesses, but they also have financial benefits for you as an investor. Here are the main reasons you should add them to your portfolio.

1) They’re Somewhat Safer Than Stocks

Crowdfunded bonds carry less risk than other assets like stocks. They also provide a set monthly income, so they’re a vital part of every investor’s portfolio. Investing in loans by purchasing bonds is safer than buying stocks because the company has an obligation to repay you to the best of their ability. If the worst happens and the business goes bankrupt, there’s a chance that you’ll get some of your money back as they liquidate their assets and reorganize their debt.

In many cases, people who own stock lose their entire investment if the company goes belly up. This makes stocks a riskier asset.

2) Crowdfunded Bonds Reduce Risk

Bonds balance the risk in your portfolio, which is why experts recommend them for every investor. As a general rule of thumb, the amount of stocks you have in your portfolio should be 100-your age. So if you are 25, you should have 75% of your portfolio in stocks. If you are fifty years old, half should be in stocks. The amount of your portfolio not in stocks, should be alternatives like bonds and cash.

3) Relatively High Returns, Paid Out Monthly

Another great thing about crowdfunded bonds is that they provide a set return that’s higher than what you’d get from a bank account or CD.

The federal funds rate dropped to near zero last year, and won’t be increased until at least 2023. Because of this, returns on safer investment vehicles like CDs and money market accounts have been pretty low and will continue to stay that way.

If you’re looking for a way to increase your income without drastically increasing your risk, crowdfunded bonds are a great option. The bonds you buy on SMBX can earn you up to 9% interest, which is paid out monthly.

Shortly after the bond is funded, you’ll start receiving fixed principal and interest payments and generating income from your investment. You can spend the money, save it, or reinvest it to maximize your returns. In these unpredictable times, it’s definitely nice to have some extra money coming in every month.

The only downside of crowdfunded bonds is that they don’t have much liquidity. You won’t be able to sell or transfer bonds you buy through SMBX for at least one year. After that, there’s no guarantee that you’ll be able to find someone to buy it.

So you shouldn’t invest any money that you need constant access to and can’t afford to lose, such as your emergency fund.

How SMBX Supports Local Small Businesses

SMBX is the first marketplace that allows retail investors cheaply buy crowdfunded bonds. They connect small investors like you and me with local businesses that need access to affordable loans. Business owners who raise capital through SMBX pay as little as 4% interest plus a small processing fee.

They don’t have to sign a personal guarantee either, which means their personal assets won’t be on the line if their business fails. Many lenders require personal guarantees and charge higher interest rates, so SMBX is giving small businesses access to a better financing solution.

They’re also helping people of color and other entrepreneurs who are underserved by big banks get the capital they need to thrive. It’s part of their mission to create a more equitable economy, which is something I can definitely get behind.

SMBX bonds cost $10, which means they’re accessible for pretty much anyone who has a pulse. This also means that small investors, instead of big banks, can get access to high yielding bond opportunities. Basically, they’re designed for the Jane and Joe average.

My Experience with SMBX

Investment platforms can sometimes be hard to navigate, but not SMBX. It has an attractive, user-friendly interface that makes signing up a breeze. The whole process took me under 15 minutes, so it’s easy to fit investing into your busy schedule.

First, you have to create an account by entering your name, date of birth, address, and email.

You’ll also be asked for your estimated annual income and net worth. If you’ve invested any money in crowdfunding over the past 12 months, you’ll have to enter that too. SMBX needs this info to calculate your investment limit.

Then you can connect your bank account or credit card to the platform and start investing. There’s a 4% surcharge on credit cards, but buying bonds with your bank account is completely free. I chose to link my bank account, which was super easy.

SMBX uses a data transfer network called Plaid that allows you to securely sign in to your bank account. I just had to enter my login details, account number, and routing number, and I was ready to go.

Investing in Crowdfunded Bonds with SMBX

Now for the fun part—picking which businesses you want to support!

SMBX currently has 15 different small businesses you can invest in. They add new bonds all the time, which allows you to keep expanding your portfolio.

Each small business bond has a dedicated page with lots of information about the company.

On the right-hand side of the page, there’s a quick bond summary with bond duration, yield, and the minimum and maximum amounts of money the company needs to raise. You can also see when the fundraising period is set to end and how much money has been collected so far.

Further down the page, there’s an about tab where you can learn more about the founders and how they started and grew their business. All of the stories I read were really inspiring and worth taking a few minutes to read.

There’s also a section about how they plan to use the funds to grow their operation and achieve their goals. I loved seeing how my investment would benefit the company and make a real difference.

Under the documents tab, you can access the bond prospectus, which gives you detailed information about the investment. There’s also a link where you can view the company’s financial information.

And if you’re short on time, there’s a handy summary of important details from the bond prospectus and the company’s financials.

Choosing a Bond

With so many worthy businesses to choose from, it’s pretty hard to decide which one to invest in. I spent a good 30 minutes reading each company’s story and learning about their products.

There was a keto cookie company, a minority-owned trucking business, and more, so it was a tough choice. But ultimately, I decided to invest in Jule’s Foods, a vegan cheese company based in California.

I eat a plant-based diet, so I always want to support small businesses that produce delicious food for people with dietary restrictions. I was also inspired by Julie and her husband Stephen’s story.

They decided to adopt a healthier plant-based diet after Julie was diagnosed with Stage 4 colorectal cancer. Now they share their lifestyle and love of fine foods with others through their business.

Another thing I like about this bond is that it’s partially secured by collateral. Half of the loan amount—approximately $100,000—is backed by the new equipment that Jule’s Foods is buying. They’re getting a new cashew grinder, equipment for their aging room, a walk-in freezer, and more.

Although I hope this doesn’t happen, there’s always a chance Jule’s Foods won’t be able to pay back their loan. In that case, they’ll sell some or all of that equipment and use the money to pay back their bondholders.

This means that the chance of losing my investment is much lower, which is part of what drew me to this bond. I’m not only investing in a company with a great mission, but also making a sound financial decision. It doesn’t get any better than that!

Buying a Bond

Once I decided which company to choose, the process of buying the bond was easy. You just have to hit the yellow button on the left side of the screen that says “buy bonds” and a separate window will pop up.

Then you can enter how much money you want to invest. Each bond costs just $10. So even if you don’t have a lot of spare cash, you’ll be able to invest. I chose to put in $50, which got me 5 bonds.

You’ll also be able to see the estimated return based on how much money you plan to invest. The bond I picked has a 7.5% interest rate with an estimated total return of $60.11 on my initial $50 investment. That means I’ll receive around $1 per month over the total duration of the bond, which is 60 months.

A few business days after the fundraising period ends, I’ll get my bond certificate and start receiving interest and principal payments soon after. I’m looking forward to seeing how my investment performs!

Wrapping Up

Buying local is really important during the pandemic. But if you want to support small businesses even more, investing in crowdfunded bonds is a great way to do it.

I thought signing up and purchasing my first bond was easy. I liked how much information SMBX provided to help me make a good investment decision and learn more about amazing local businesses.

It was pretty tough to decide which business to invest in, so I could definitely see myself making another investment in the near future. The bonds provide a high return of up to 9% and support awesome companies, so it’s really a win-win.

I’d highly recommend the platform to anyone who wants to invest in local American businesses to keep our economy and communities strong.

If you want to try out SMBX, you can sign up here. Let us know which crowdfunded bonds you buy!

For more great savingadvice article, read these:

Thirty Eight Ways To Make Money On The Side

Seventeen Bills In Your Wallet Worth More Than Face Value

Take The 365 Day Quarter Challenge And Save!

Should You Drive With The Gas Tank Full Or Empty?

How To Invest When It’s Late in the Bull Market Cycle

May 5, 2018 By Troy Bombardia Leave a Comment

Late bull market cycle -- what do you do?

Although the economy is nowhere near a recession today, there could be one soon in the next few years because this economic expansion is already so stretched. That said, here are several ways to invest when it’s late into the bull market cycle.

Remember first that you don’t always have to be fully invested. Many long-term investors believe that Warren Buffett remains invested in stocks throughout a bear market.

Nothing could be further from the truth. Buffett raises cash and shrinks his position sizes when he thinks that valuations are expensive.

Wait to Buy

He does this because he doesn’t see a lot of good investment opportunities during the late stage of a bull market. Buffett invests heavily when he thinks that valuations are cheap and opportunities are plentiful.

Blindly holding onto stocks throughout a recession can lead to your portfolio being underwater for more than half a decade.

So remember: if there are no good investment opportunities, stay in cash. Don’t force yourself to take investment opportunities when there are few good ones available.

Wait a Little Before Buying Long-Term Bonds

Right now we are in a unique situation in which:

A bear market might be two to three years in the future.
A bear market is not imminent either.
The current bull market still has one to two years left.

This means that it’s not a good time to invest in long-term Treasury bonds yet. Interest rates are extremely low right now, and with the Fed on track to hike rates another two times in 2018, interest rates will rise throughout this year. That means bond market investors will probably lose money over the next year.

Investing in long-term bonds will become a good idea when the next bear market begins. Rates don’t usually rise during bear markets because central banks are lowering interest rates, unless there is hyperinflation.

Treasury Inflation Protected Securities

Historically, inflation always rises during the last legs of an economic expansion — and that’s what we’re in right now.

Investing in the stock market to protect yourself from inflation in the short run is not a good idea because it can be very volatile. The simplest way to protect yourself from inflation is to buy Treasury Inflation Protected Securities: Their value rises and falls with inflation, effectively giving you protection from rising inflation.

Dividend Stocks

Some people still feel that they have to invest in stocks. If you are one of those people, at least recognize the danger of a bear market and try to minimize your losses. Investing in dividend stocks is better than investing in growth stocks during a bear market. Here’s why:

Growth stocks s (like Facebook, Amazon, Netflix, and Google) fall faster than average during bear markets.
Growth stock rise faster than average during bull markets.

Dividend stocks are exactly the opposite; they tend to be slow-moving companies with low volatility (for instance, utilities). In a bear market, they typically fall less than the rest of the market.

Plus you also get dividend yield even during the bear market — but keep in mind that dividends tend to get reduced during bear markets.

Prepare for the Next Bear Market

If you own all stocks right now, you might consider moving entirely to cash when you think the next bear market is just around the corner — then either stay entirely in cash or shift to short-term Treasury bonds.

The Fed tends to lower interest rates during bear markets, which means that short-term bondholders may be rewarded.

Troy Bombardia is a professional trader who shares his thoughts on the markets at Bull Markets.

If you would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

Why Are Investors Worried About Inflation?

February 23, 2018 By Jackie Cohen Leave a Comment

Over the past month we’ve had a series of economic announcements signaling that inflation is speeding up and the markets have gone down following each of them. Why? These pronouncements suggest inflation is accelerating toward a potentially unhealthy level, where the dollar loses value, and the markets become more turbulent.

Investors Worried About Inflation

This week, the market headed south just on expectations of interest rate language in the Fed’s meeting minutes from January — and then there turned out not to be anything specific about it in the release.

The market also had a down day last week following the release of the consumer price index, which indicated surging inflation both the month of January and the year. it jumped 0.5% last month, surpassing economists’ forecasts for a 0.3% increase.

This news followed a report earlier in the month of another inflation indicator: the largest wage gain in over eight years.

While that is good news for consumers, the markets get skittish, fearing the Fed will raise interest rates.

The fear is there all right: Some estimates say there could be three interest rate hikes by the end of the year, and that expectation is being priced into stock and bond transactions.

They’re Buying the Dip

So far, the downward trading in response to the inflation news has been short lived: Investors have taken advantage of opportunities to buy stocks at lower prices following the dips.

This appears to be the beginning of a pattern in volatility that some analysts say might continue until the end of the year — or at least until the uncertainty is resolved.

In this case, the uncertainty surrounds what the Fed will do in response to the heightened inflation. When will the next interest rate increase occur, and will the economy cool off as a result?

Readers, what concerns do you have about inflation? How are you seeing it play out in your daily finances? When do you think the next interest rate hike should happen?

Asset Classes 101

August 15, 2017 By Alexa Mason 1 Comment

There are multiple types of asset classes, each with its own rules, risks, and types of investors. Before you invest, here are some characteristics of three asset classes and their ideal investors.

Stocks: Investing For Growth

Stocks are a growth investment, which means they seek to increase your money over time. You can either invest directly in a stock, or invest in a mutual fund that owns stock. When you invest in mutual funds that own stock, your mutual fund actually buys part ownership in the companies it invests in.

Stock also relies heavily on the company. If you buy a stock in a company that ends up doing well, the share price could increase. This would lead to a profit on your part if you chose to redeem your shares then. Conversely, if the company does not do well, or even if the stock market suffers, the price of the stock can drop. In this way, stocks tend to fluctuate often.

Although stocks have a high investment risk, historically they have provided the highest returns across time. It is essential to remember, however, that past performance is no guarantee of future results.

Should you invest in stocks?

Stocks are a good option for investors in it for the long run. This means stock investors should intend on not needing their money for roughly seven years or more. Stock investors must also be comfortable with the inherent investment risk of stocks.

Bonds: Investing For Income

Bonds are an income investment. Income investments provide a steady stream of income paid out on a schedule. You can buy bonds individually, or invest in a mutual fund that buys bonds. When you invest in mutual funds that buy bonds, your mutual fund lends money to the companies or governments that issue said bonds. The issuers promise to repay the fund’s loan with interest.

Bonds fluctuate as well, usually in reaction to interest rates. If interest rates decrease, the market value of an issued bond increases. If interest rates increase, the market value of an issued bond decreases.

Since the risk of fluctuation has more to do with interest rates, the risk on bonds is average. Since the return on investment acts like income, the potential return of bonds is also average.

Should you invest in bonds?

Bonds are a good option for investors willing to accept moderate risk. They are also best for investors who may not need their money for three to seven years.

Short-Term Investments: Investing For Capital Preservation

Short-term investments do not add to your wealth, but rather act to preserve the money you already have. When you buy short-term investments, such as money market funds, certificates of deposit (CDs), and Treasury bills, you are lending money to the issuers for a short period of time, usually less than a year.

Unlike bonds and stocks, short-term investments are usually stable. They also tend to provide a steady rate of return. Because of this, they have a low investment risk. However, they also provide lower returns than stocks or bonds over time.

Should you make a short-term investment?

Short-term investments are a good option for conservative investors who may not need their money for one to three years. They are also for investors who are willing to accept the risk of not keeping up with inflation, or else to balance a more aggressive portfolio.

With such varied asset classes, it can be difficult to choose which one is right for you. Focus on the length of your investment and what you are willing to risk, and you are sure to find the best asset class for you.

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How to Start Trading Online

March 9, 2016 By Alexa Mason 2 Comments

A person that considers trading online, whether it’s with stocks or bonds or even into commodities, realizes that there is quite a learning curve that they must go through. It is difficult to assess what needs to be done, and then find a way to get the funding that you will need to start making your trades. Instead of spending your money right away, if you really want to be successful, it’s important to practice without using any of your own existing capital. Here is how you can start successfully trading online using these proven strategies that can help people get started in the right way.

Where Should You Begin With Trading Online?

If you want to start with trading online where most people have the most luck, it is definitely a good idea to start with the Forex market place. This is where about 5 trillion dollars are traded every single day. You can tap into this amount, and as long as you understand how to make the trades, and also know which direction the market is going in using proven algorithms, you can start to make quite a bit of money doing day-trading. It is recommended that you start an account where you can begin to trade on your own without the use of any money at all. You can take advantage of all of the software programs that the company will have, and when you are ready, you can use one of their brokers to start making actual cash flow.

Things To Be Careful About When Trading Online

There are several things that you need to be careful about such as doing at least a few weeks of practice trading before you begin. Instead of just using what is available on the website where you have set up your test account, you should invest in some type of investment program. You can see what others have done in the past, how successful they were, and what strategies actually work the best. The more current version of this training, the more likely it is that it will still work today, helping you to become successful trading not only for X, but any other type of stocks or commodities online. There are different programs out there for each venue, making sure that you will have all of the latest information on how to become a successful trader. It is just easier to work with day-trading platforms, such as Forex, because of the high success rates associated with this particular form of online trading.

Your ability to succeed will only be limited by the amount of time that you spend preparing for using actual currency to trade. You simply have to choose the best combination of currencies, and decide which way the market is going to go, before controlling them. As long as you are able to choose the right direction, and do so consistently, you should have a very profitable way of investing your money. This has happened for thousands of people, and it can happen for you, once you start to do trading online.

Photo: Flickr: GotCredit

What Are Alternatives to Money Market Accounts?

December 14, 2015 By Amanda Blankenship Leave a Comment

People with money market accounts (MMA) have probably realized the time has come for them to find an alternative for saving (or investing) money. MMAs have offered investors a low-risk account to have same-as-cash investments. These types of accounts have been considered a go-to for decades. However, the time for an MMA may have come and gone.

Interest rates on MMAs have been just barely above zero for years Many people leave their money in the account as a type of savings alternative. However, this approach could hurt you in the long run. Money market accounts have lost their value, but have no fear. There are still plenty of alternatives for the MMA.

Savings Accounts

Instead of opening an MMA, just open a savings account. This seems like an “old” idea. Of course, savings accounts aren’t as exciting as investing your money, but a savings accounts may have a higher interest rate, especially if you don’t touch the money for a period of time. Savings accounts are likely much more accessible as well. Many banks have savings accounts available to their customers. Check to see if your bank offers one.

If you’d like to open a separate savings account with another institution, there are many high-yield savings accounts throughout many different banks. Savings accounts, unlike MMAs, are also FDIC-insured.

Bank Money Market Accounts

Bank MMAs and money market mutual funds may look the same on the outside, but there is one key ingredient that makes them fundamentally different. The traditional MMA and a bank MMA may have similar interest rates. They may even own the same types of assets. However, a bank MMA will likely be FDIC-insured up to $250,000. Obviously, only invest money within a strong financial institution, but when choosing between a mutual fund and a bank MMA, choose the bank’s option. It will provide you piece-of-mind with your investment.

Short-Term Bond Funds

If you don’t need daily access to the money you’d like to place in an MMA, but may need access to it a couple times a month (at most), then a short-term bond fund may be the perfect alternative to an MMA for you. The only thing to look out for with short-term bond fund is the potential fees you may acquire if you take from the fund too often. Sometimes if the funds are held for any less than 120 days, you can meet a 1 to 2 percent fee.

Fixed Income Focused ETFs

Exchange Traded Funds (ETFs) can be the perfect alternative for any MMA. Although these often hold a little bit of a higher risk, ETFs can create a much higher yield than an MMA. You can open a Short Term Maturity ETF and gain access to your money whenever you would like. There are some ETFs that can be traded through apps or online trading companies where the company practically does the work for you (you just put the money in). There are also some more hands-on opportunities.

If you have an MMA and have been looking to take your money and put it elsewhere, there are plenty of alternatives. With interest rates for MMAs so low, changing the way you invest your money may be a smart move.