Understanding your true investing risk tolerance goes much further than checking a few boxes on a risk tolerance quiz.Investment risk encompasses several broad concepts, with multiple iterations of each. Longevity risk encapsulates the possibility that you’ll outlive your money. Risk tolerance taps how much of an investment loss you can psychologically withstand. Jason Escamilla, CEO at Impact Labs in San Francisco, describes a two-step plan for tackling client risk: First, protect the client’s wealth and second, ensure they can meet their goals. When approaching risk, Escamilla incorporates both emotion and analytical risk analysis.Here are a few steps for protecting your mental health and financial wealth by understanding your risk tolerance:Define what you consider to be riskier assets.Access your risk tolerance.Categorize your risk level.Manage your risk. Defining RiskWhen discussing risk, it’s common for the investment community to focus on standard deviation or volatility of investment returns. The standard deviation of investment returns measures how far from the average annual investment returns plot on a graph. When applied to annual investment returns, past returns are used to calculate the current standard deviation.A standard deviation close to zero means that the returns are consistent and approximate the average. A certificate of deposit has a standard deviation close to zero. Invest $1,000 in a certificate of deposit, and as long as the investment is owned until maturity, the consumer receives the stated interest rate.For a riskier asset, the 10-year average standard deviation of the SPDR S&P 500 ETF (ticker: SPY) is 12.69. A higher standard deviation means that there’s a likelihood that returns will deviate from the mean, both up and down.Riskier assets, like stocks, have more dispersed returns and typically a higher standard deviation. For example, since 2008, the S&P 500’s greatest loss was in 2008, with a decline of 36.55%. While in 2013, the S&P 500 gained a 10-year record of 32.15%.An investor seeking higher returns must also accept the possibility of greater losses.Longevity risk is akin to risk capacity and relates to the possibility of an investor outliving her wealth. Wealthier individuals have a high-risk capacity or low-longevity risk. Those with more limited means have a greater chance of outliving their assets.A wealthy investor might have a low-longevity risk and still be uncomfortable with investment losses. This investor would be conservative, despite the portfolio’s ability to withstand losses.Assessing Risk“Risk tolerance is a concept that can be difficult to gauge with clients. A client's risk tolerance can change with the direction of the market. When the market is doing well, clients want to be very aggressive and when the market is experiencing some downward volatility, clients can be fearful and want to go to cash,” says Mario Hernandez, a certified financial planner at Gemmer Asset Management in the San Francisco area. Gemmer has a unique strategy to assess client risk. He educates clients with data, describing past stock market declines and then asks them how they'll sleep under those circumstances. That informs the level of risky equities to include within a client portfolio.Brandon Renfro, an assistant professor of finance at East Texas Baptist University, uses a similar approach. For older investors, he asks clients what they did during the onset of the Great Recession and then queries them about how they would react to a future stock market drop.Typical risk tolerance questionnaires ask investors about how they would respond to distinct levels of investment declines. Typical response choices include sell, hold, or buy more of the risky asset after a decline. Investors' responses attempt to describe individuals' risk aversions.But these risk quizzes are historically inaccurate and the more “in vivo” discussions of Renfro and Gemmer are likely to yield more accurate risk-tolerance levels.Categorizing Risk LevelsThe simplest way to categorize risk levels is by time. Short-term investors who will need their funds within one to four years should invest conservatively, with minimal exposure to equities and the greatest allocations to cash and short-term bonds. That’s due to the unpredictability of the stock market in the short term. Investors don’t want the $50,000 downpayment for their new home to be worth $40,000 in two years when they are ready to buy.In contrast, one might assume that long-term investors are aggressive, but that assumption is too simplistic.In the long term, over decades, stock prices trended upwards. But the positive stock market average returns over the long term mask short-term volatility. Realistically, the future is uncertain and there are no guarantees that the upward trend of stock prices will continue. That’s why assessing risk tolerance is tricky.For the mid- to the long-term investor, risk levels will vary from conservative to aggressive. The risk level is represented by the amount of loss an investor is willing to withstand. Even an investor with great wealth may not be willing to tolerate the loss potential of a stock-heavy investment portfolio.A conservative investment portfolio typically holds between 70% and 90% cash and fixed assets, with the remainder in stocks. While an aggressive investment portfolio ranges between 80% and 90% stock investments, with the remainder in bonds.The most common risk tolerance levels vary between conservative and aggressive, with conservative portfolios owning fewer stock assets and more aggressive ones owning greater amounts of riskier holdings.Managing Risk“To manage risk, we believe that it is essential to diversify your assets – whether your risk tolerance is conservative, moderate or aggressive. We recommend reviewing your investment goals, risk tolerance and time horizon with your financial professional on a regular basis to make sure they are aligned with your asset allocation,” says Chris Haverland, an asset allocation strategist at Wells Fargo in Greensboro/Winston-Salem, North Carolina. Diversification reduces portfolio volatility so that if one asset class loses value, others will offset the loss with investment gains. That’s why it’s important to own stocks, bonds and possibly other financial assets like real estate.Some investors prefer to manage risk with a passive portfolio. In this scenario, the investor maintains a constant mix of assets such as 60% stocks and 40% bonds. While others prefer to manage risk actively by adjusting investments according to market and economic conditions.Rick Lear, chief investment officer at Lear Investment Management in Dallas takes an active approach to risk management. Lear conducts in-depth research to determine which asset classes might go up. Then the firm heavily weights the asset classes projected to rise in the future, considering both the research and the economic cycle.Victor Haghani, chief investment officer at Elm Partners in Philadelphia, uses an active value and momentum-based asset allocation strategy. The unique Elm Partners algorithms manage risk by integrating value measures into their asset selection and overlaying those asset class picks with a momentum screen. All clients of Elm’s managed portfolio sign up for an asset allocation that adjusts according to an active assessment of fundamental and momentum factors.Understanding risk tolerance is an active process that incorporates personal, economic and market factors. It’s important to understand one’s time horizon, risk tolerance and risk capacity before constructing an investment portfolio. A comprehensive understanding of investment risk will minimize the likelihood of buying high and selling low.
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Index mutual funds and exchange traded funds can offer all-in-one exposure to the stock market through the indices they track. But there's another way to match the performance of a benchmark index without buying into funds: direct indexing.What Is Direct Indexing?"Simply put, it attempts to replicate the performance of an index by purchasing the underlying individual equities instead of using an ETF or mutual fund in an investor's portfolio," says Rob Cavallaro, chief investment officer at RobustWealth.Though the concept has been around for decades, it's only recently begun to move into the mainstream. Digital investing platforms and fractional share trading have made the direct index method more accessible to a broader range of investors, beyond just the ultra-wealthy.With more financial advisory firms and robo advisory platforms offering this option, it could give traditional index funds and ETFs a run for their money.How direct indexing works.The direct index advantage.It may not be right for every investor.How Does Direct Indexing Work?It may sound complicated but it's a simple enough concept."At its core, direct indexing is the idea of owning an index," says Michael Neuenschwander, a certified financial planner at Outlook Wealth Advisors in HoustonRather than purchasing a mutual fund that holds all of the stocks in the S&P 500, for example, investors can purchase shares of all 500 stocks individually. This is made easier through fractional investing."Fractional share trading allows very small amounts of money to be invested in each position, allowing even the smallest investor to participate, Cavallaro says." That's a boon for investors who want to own larger companies, such as Alphabet (ticker: GOOG, GOOGL) or Amazon (AMZN) but doesn't have thousands of dollars to tie up in a single share.Daniel R. Hill, president and CEO of D.R. Hill Wealth Strategies, says this approach hinges on the idea that owning all the securities in an underlying asset class will provide some premium above the index return."This concept was developed when the research showed that the active manager fails to beat the market the vast majority of the time, so investors have a higher probability of success if they just own the index," he says.The Direct Index AdvantageThere are several benefits this approach can offer over other investing strategies. The first is tax-efficiency, says Shana Sissel, senior portfolio manager at CLS Investments in Omaha, Nebraska. "With a direct indexing portfolio, the portfolio manager can go in and harvest tax losses at the individual position level for the client when the opportunity arises," Sissel says.This offers more control over gains and losses throughout the year, while still maintaining the risk-return profile of the benchmark the investor is attempting to match. It becomes easier to optimize tax outcomes and minimize the chances of receiving an unexpected tax bill for capital gains. With an indirect strategy, the entire fund would have to be bought or sold to harvest losses, offering a lower level of customization to investor needs and objectives.Customization also extends to building a portfolio that reflects individual values. "Investors and advisors can select individual securities that align with their ethical and moral beliefs or avoid securities that don't," Cavallaro says. The result is a completely personalized portfolio.Another advantage is reduced operating costs for the do-it-yourself investor who's trading securities from a chosen index themselves through a brokerage account. Kip Meadows, founder and CEO of fund administration firm Nottingham, says cost benefits are realized when the trading account is large enough to absorb transaction costs associated with making trades.When trading index mutual funds or ETFs, investors pay not only transaction costs but the individual expense ratios for each fund. The expense ratio reflects the annual cost of owning the fund, expressed as a percentage. Buying full or fractional stock shares individually avoids that cost.Finally, direct indexing can be a pathway to managing risk."Research shows that investors can reduce company risk by owning more companies," Hill says. "By owning the index instead of some lesser portion of the index one reduces the overall volatility of their portfolio."It May Not Fit Every InvestorWhen considering any new investment strategy, it's always important to look at the potential drawbacks. The first challenge associated with direct indexing is that it requires the willingness to be a hands-on investor."There is an intensive management aspect to it," Sissel says.Indexing directly may be fairly straightforward when buying securities for an index such as the S&P 500. But it can get more complicated when attempting to replicate something like the Russell 2000, where liquidity issues may exist with underlying assets, or an international stock index.Aside from that, the trading frequency may be higher, particularly if the stock market enters a volatile period. That could mean paying more in trading or management fees.Neuenschwander says this is true for both the DIY investor and one who indexes directly with the help of an investment firm or advisor. "If all you're getting for those trading and management fees is the risk and return of the index, the extra expenses may not be worth direct indexing," he says.Comparing transaction fees against fund expense ratios can put costs in perspective."With an index like the S&P 500, transaction costs for 500 securities, even at $5 per transaction, still total $2,500," Meadows says. "If your index portfolio is $250,000, that equals 1%, which is likely significantly higher than a comparable index fund or ETF."For that reason, experts often agree that direct indexing may be most appropriate for investors who have large after-tax investments. Smaller investors, on the other hand, or those who are newer to the stock market may continue to be better served by the simplicity and cost-efficiency of an index fund or ETF.There's also diversification to consider. Hill says investors should take time to understand how a particular index is cap weighted such as large cap versus mid cap or small cap indexes.The Dow Jones Industrial Average, for example, is composed of large cap, blue chip companies. An investor who indexes directly would need to ensure they're balancing out those large cap holdings appropriately elsewhere in their portfolio."For investors where direct indexing does fit, then the natural next step is to determine what combination of indices fit your goals and objectives," Neuenschwander says. That means keeping risk tolerance, risk capacity, which refers to the amount of risk needed to achieve investment targets, and overall portfolio diversification in view.
Investing in stocks is simple as more companies have simplified the process and allow beginners to open an account through a website or mobile app.Common stocks allow stockholders to vote on company issues, but most of the time stockholders receive one vote per share. Several companies also give stockholders dividend payouts – these payouts typically change based on the company's profitability. Adding stocks in a portfolio means that you own a small percentage of a company that should increase its growth and value. Beginning investors should note there are two ways to make money from stocks: dividend payments and selling stocks when the share price goes up.How to Invest in StocksInvesting in stocks can be done in many ways. If you would like to form a strategy and manage your own investments, you can open a brokerage account. If you're unsure about where to start, consider opening an account with a robo advisor who will do the work at a lower cost. For those who want more guidance about their retirement plans, turning to financial advisors might be a good solution.For beginners who do not want to do the legwork in managing their portfolio or who are new to investing, a robo advisor could be a great first step, says Rick Swope, vice president of investor education at E-Trade, a New York-based brokerage.The portfolios managed by robo advisors typically consist of exchange-traded funds aligned to an investor's goals, risk tolerance and time horizon. ETFs also provide diversification at a lower cost."Young investors who are just starting out should look to simple solutions like robos and when investors graduate to more complex financial needs, like estate planning, they may turn to the services that a financial advisor can provide," he says.The number of companies offering brokerage accounts has increased, including banks such as Ally Bank. Some brokerage companies provide a simplified version such as Robinhood where investors can buy and sell stocks, ETFs, options and cryptocurrency from a mobile app for free. Although Robinhood doesn't offer trade options for mutual funds or foreign stocks. Stocks can also be purchased in individual retirement accounts such as a traditional or a Roth IRA. This allows investors to grow their retirement money in a tax-deferred account.Competition has spurred many brokerages to slash commission fees, which can add up quickly if you buy and sell stocks, mutual funds or ETFs frequently. Robinhood is not the only company that does not charge commission fees. Starting in October, Interactive Brokers is providing an unlimited number of commission-free trades on U.S. exchange-traded stocks and ETFs along with no account minimums or inactivity fees."Investing has become much easier," says Steve Sanders, executive vice president of marketing and new product development at Greenwich, Connecticut-based Interactive Brokers. "More of your hard-earned money will go straight toward your portfolio and not toward paying fees. I think this will be extremely helpful for beginning investors as well as others who like to save money."How Much Money Should You Invest in the Stock Market?Since many brokerages such as TD Ameritrade do not require a minimum amount to open a trading account, you can start investing with even $100.Discount brokers are a boon for beginners with little money, who are looking to get stock market exposure with smaller portfolios. But a discount broker does not typically provide advice or analysis. Many of these brokers do not require a minimum amount to start an account while some have a low beginning threshold of $1,000. Building a diversified portfolio is the priority for beginners who should consider adding index funds that capture the broader market, Swope says. Mutual funds and ETFs are the easiest solutions since they own hundreds to thousands of stocks and are less volatile than individual stocks. ETFs tend to have low minimums, allowing investors to spread their first $10,000 between a few funds and gain access to a variety of areas in the market, he says."A mix of ETFs, mutual funds and individual stocks can provide even broader diversification between investment vehicles," Swope says. "Bottom line: If you're just getting started, keep it simple."Good Stocks to Invest in for BeginnersChoosing the right stock can be a fool's errand, but investing in high-quality stocks such as blue chips and dividend-yielding ones are often good strategies. One reason investors opt for blue chips is because of the potential for growth and stability and because they produce dividends – these include companies such as Microsoft (ticker: MSFT), Coca-Cola Co. (KO) and Procter & Gamble Co. (PG). Coco-Cola, for example, generates a dividend of 2.9%, and the stock is less volatile as its share price has hovered between $44 and $55 during the past 52 weeks. Dividends can generate much-needed income for investors, especially higher-dividend ones.Another thing for beginners to consider is diversification. Diversifying your stocks and not concentrating on one sector is another advantage. One other tip is to be consistent. An investor's best bet is to invest consistently such as socking away $400 a month.The habit of saving and putting away money regularly is the single biggest decision "young people can make to ensure a good life down the road," says Ron McCoy, president and CEO of Florida-based Freedom Capital Advisors. Automatic investing can help remove the need to make decisions about when and how much to invest, creating consistent investing habits, Swope says. Automatic investing takes advantage of dollar-cost averaging, which often mitigates portfolio volatility over several decades."Instead of investing a lump sum all at once, investments are made incrementally with the same amount at regular intervals on a fixed and automatic schedule," he says.Dollar-cost averaging is a great way to accumulate long-term wealth because you are always the same number of shares which can be beneficial if you're buying during a downtown and paying a lower price before the stock rebounds, says Chris Osmond, chief investment officer at Prime Capital Investment Advisors."This strategy also helps remove emotion because you're systematically investing in a long-term plan," he says.The news cycle about a company's stock performance can be overwhelming. Instead, remove the short-term noise, so you can maintain perspective of your strategy for the long run, experts say."The secret with investing is to remove emotion," Osmond says. "When emotion is removed from the equation, an investor is less likely to sell and buy at the most inopportune times."Billionaire Warren Buffett, a legendary investor, advises people to buy and hold stocks for several decades instead of selling and re-buying them constantly. At a minimum, the stock should be one that an investor would own for at least 10 years, he advises.
Payout ratio is a key figure for income stocks.
Dividend payments can a reliable source of income for investors. But a dividend is only as safe as the company paying it. When a company runs into financial trouble, dividend cuts are often one of the first ways to stop the bleeding. One quick way to assess dividend reliability is to look at a stock’s payout ratio, the percentage of a company’s profits that is committed to dividends. Generally, the lower the payout ratio, the safer the dividend. Here are seven stocks to buy with payout ratios of less than 40%, according to Morningstar.
BMW (ticker: BMWYY)
BMW is a German luxury automaker that owns the BMW and Rolls-Royce brands. Analyst Richard Hilgert says BMW has strong global brands that give the company pricing power and competitive advantages. Its worldwide presence also provides geopolitical diversification. Hilgert says BMW shares are “attractively valued” given the stock’s yield and its steep earnings multiple discount to peers. Despite a difficult auto market, BMW reported solid earnings and revenue growth last quarter. BMW pays a 4.3% dividend and has just a 22% payout ratio. Morningstar has a “buy” rating and $44 fair value estimate for BMWYY stock.
China Telecom (CHA)
China Telecom is the third-largest Chinese telecommunications company, with more than 230 million mobile subscribers. Analyst Dan Baker says mobile services revenue growth slowed to just 4.4% in the most recent quarter, down from 5.6% in the first half of 2019. However, he says China Telecom’s overall services revenue growth of 1.8% last quarter outpaced its two larger peers and the company added 7 million mobile customers. China Telecom pays a 3.5% dividend, with a 36% payout ratio. Morningstar has a “buy” rating and $63 fair value estimate for CHA stock.
Enel Americas (ENIA)
Enel Americas is a South American electrical energy conglomerate that operates in Argentina, Brazil, Colombia and Peru. Analyst Charles Fishman says Enel Americas provides investors with a rare combination of value, revenue growth and dividend yield. Electricity demand in the four countries mentioned is projected to average 4% annual growth in the long term compared with less than 1% annual growth in developed countries. The company’s diversification also helps minimize political risk. Enel Americas pays a 3.7% dividend with a 36% payout ratio. Morningstar has a “buy” rating and $13 fair value estimate for ENIA stock.
General Motors (GM)
General Motors investors have watched from the sidelines while Tesla (TSLA) has captured all of the market headlines and gains in the past six months. However, analyst David Whiston says GM stock offers investors much more value at its current level. Now that the autoworker’s strike is over, Whiston says 2020 may be another difficult year for automakers as a glut in used vehicles drives down prices. However, he says GM’s autonomous ride-hailing business, its OnStar data-gathering and its 9% stake in Lyft (LYFT) provide potential upside. GM pays a 4.3% dividend with a 27% payout ratio.
Marathon Petroleum (MPC)
Marathon Petroleum owns 16 petroleum refineries and is one of the largest refiners in the U.S. Analyst Allen Good says the energy company is well-positioned to grow earnings in a weak macro environment in 2020, as it delivers on its projected $1.4 billion in synergies from its acquisition of Andeavor. Marathon also is in the process of spinning off its Speedway retail business and undergoing a strategic review of its midstream segment. Marathon pays a 3.7% dividend with a 34% payout ratio. Morningstar has a “buy” rating and $89 fair value estimate for MPC stock.
Banco Santander (SAN)
Banco Santander is the largest Spanish bank, but more than 70% of its revenue comes from international markets. European banks have been challenged due to the low rate environment, but Santander has heavy exposure to higher-growth markets overseas. Analyst Johann Scholtz says Santander’s focus on retail banking and its geographical diversification differentiate it from struggling European peers. In addition, management has a long track record of smart acquisitions that create value for shareholders. Santander pays a 6.4% dividend, with a 37% payout ratio. Morningstar has a “buy” rating and $5.60 fair value estimate for SAN stock.
Mitsubishi UFJ Financial Group (MUFG)
Mitsubishi UFJ Financial is Japan’s largest financial institution. Analyst Michael Makdad says the difficult environment for Japanese banks will likely continue in the coming years. That said, Mitsubishi’s price-book ratio of less than 0.5 makes it one of the best values among global bank stocks. Mitsubishi also has a significant market share in several underbanked regions in Southeast Asia, which could provide long-term revenue growth opportunities. Overseas loans now represent 40% of its total loans. Mitsubishi pays a 3.3% dividend, with a 27% payout ratio. Morningstar has a “buy” rating and $6.77 fair value estimate for MUFG stock.
Dividend stocks to buy with low payout ratios:
BMW (BMWYY)China Telecom (CHA)Enel Americas (ENIA)General Motors (GM)Marathon Petroleum (MPC)Banco Santander (SAN)Mitsubishi UFJ Financial Group (MUFG)
Tesla (ticker: TSLA) founder and CEO Elon Musk is tantalizingly close to securing the largest executive paycheck ever. If shares of the electric automaker can go six months with average prices valuing the company at $100 billion, Musk will take in options worth $346 million. Given the fact that even the most well-rewarded CEO in the S&P 500 “only” took home $129.4 million in 2018, this would almost certainly make Musk the highest-paid CEO in the U.S.But in the grand scheme of things, this insane payday is nothing compared to Elon Musk’s net worth and pales in comparison to how much money Musk could make in the coming years. The Elon Musk salary: no cash, all contingent. In 2018, Tesla and Musk agreed to a wild, record-setting CEO pay package. Yet, for some reason, the performance plan never received much press. Which is funny, because Musk’s total compensation under the agreement, if all the milestones were eventually hit, totaled $55 billion. Compared to numbers like that, $346 million is nothing. It’s a paltry 0.6% of the Renaissance man’s potential compensation. Here’s how it works: The 2018 agreement is entirely performance-based, and spans 10 years. At the time it was struck, Tesla was worth about $59 billion. Musk gets nothing unless Tesla itself does well; the first opportunity for a payday comes if Musk guides the Palo Alto, California-based automaker to a valuation of $100 billion (and maintains it for at least six months). Even then, Tesla also needs to hit certain operational metrics, based on either revenue or adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), for Musk to collect. Then, the enigmatic CEO gets paid in the form of Tesla stock options controlling 1.7 million Tesla shares. To get the full $50 billion-plus payday, Musk would have to guide the company to a $650 billion valuation by 2028. In the meantime, he’ll earn options for another 1.7 million shares at every $50 billion milestone in between, as long as Tesla hits increasingly demanding operational metrics along the way.Does Elon Musk need a $50 billion incentive to guide Tesla well? For John Engle, president of the investment firm Almington Capital, the answer is simple: no. It’s “certainly hard to find any justification” for rewards of that magnitude, Engle says, emphasizing the fact that “there's no precedent for the kind of payout Musk has been handed by his board.”Engle says that you need to put things in context “to understand just how obscene Musk's pay package is.” To do this, Engle recounts the compensation agreement for arguably the greatest CEO of all time: Steve Jobs. “When [Steve Jobs] came back to Apple (AAPL) in 1997, the company had just posted a $1 billion annual loss. By the time he left in 2011, Apple's annual profit was close to $26 billion. Jobs was compensated in stock, receiving 5.5 million shares over the course of his tenure, worth about $2 billion when he stepped down,” Engle says.What’s even more mind-boggling than Elon Musk’s ability to earn 25 times what Jobs walked away with is the fact that Musk could do it without even turning Tesla profitable. Remember, the metrics the billionaire’s company needs to hit in order for Musk to max out his pay package have absolutely nothing to do with real, honest-to-God profits. That’s unfortunate for shareholders, since stock prices, over the long-run, tend to follow real profits. That said, not everyone agrees profitability needs to be at the forefront of payment plans like this. “Tesla isn't a traditional company,” says Hatem Dhiab, a managing partner at Gerber Kawasaki Wealth and Investment Management. It has “outsize goals and aspirations and its comp structure is reflective of this.”He adds, “All of these incentives are in line with what shareholders would want the company to accomplish for it to constitute a great investment.” And while it’s true that a $50 billion-plus payday for Musk would require an 11-fold increase in the company’s valuation over 10 years, the fact of the matter is that Musk didn’t need a $50 billion incentive to want to make this happen. In fact, the Silicon Valley icon already owns about 20% of Tesla’s outstanding stock today – he’s already incredibly motivated to drive share prices as high as he possibly can. He’s got $20 billion riding on it. “If Tesla and SpaceX go bankrupt, so will I,” Musk tweeted recently. “As it should be.” The reason behind the plan: Musk is an all-or-nothing risk taker. And Mars is on the mind.Elon Musk’s net worth is $32.2 billion at last check, making him the 23rd richest person in the world. But for the man whose exploits have been compared to that of a real-life Tony Stark, that sort of wealth might not be enough. Famous for unyielding, far-reaching ambitions with global implications for the future of humanity, Musk has helped change how the world uses money (PayPal (PYPL), championed sustainable, efficient transportation (Tesla, Hyperloop), worked toward making life multiplanetary (SpaceX), lobbied for prophylactic measures to ensure a benevolent artificial intelligence (OpenAI), and started a company that aims to merge machines with humans via a brain implant (Neuralink). These projects cost a lot of money, and the efforts to diversify the human species into space and across multiple planets is of particular importance to the entrepreneur. “I want to die on Mars, just not on impact,” Musk has stated previously.The problem with achieving that goal is that it’s expensive, and it’s quite difficult to monetize in the early innings. Having foreseen this problem, the iconic billionaire has spoken openly about becoming independently wealthy enough through his other projects to self-finance the initial phases of colonizing Mars. Though this motivation isn’t often mentioned by the press, it seems to be the primary justification for Musk to seek such an unusually gracious pay package. Species-level goals aside, however, the potential to earn $55 billion – even if Musk lines the pockets of shareholders in the process – is hard to justify from a corporate governance perspective. Not when Musk is already more than sufficiently motivated to see Tesla succeed for years to come.
More firms are announcing free trade options.
Major brokerages such as Interactive Brokers, Charles Schwab and E-Trade, among others, recently announced that they would stop charging commissions to their clients who trade stocks and exchange-traded funds. Anytime people can pay less or nothing to invest, it helps them boost returns by keeping more money. Market watchers say brokerage houses' decision to drop certain trading fees is part of a trend of lower investment costs in general over the years such as falling expense ratios. But brokerages aren't offering free trading services because they're altruistic. These companies are fending off competition from newer online brokerages. Here are eight facts you should know about free trades.
Brokerage firms are looking to retain clients.
Scott Coyle, CEO of Click IPO, which allows investors to buy individual initial public offerings, says these bigger firms likely made the move to retain clients as they may have seen customers transfer to newer platforms like Robinhood, which has been offering free trades for about seven years. If the more established brokerage firms see less attrition in their customer base, they not only keep those customers but can now recruit newer customers with the added lure of free trading. "These broker dealers that have been around much longer have more robust platforms, they offer a lot more things than some of the newer free-trading firms do," he says.
Mutual funds are not included.
The brokerage firms touting their free stock and exchange-traded fund trades were silent about mutual funds. That’s because mutual funds aren’t part of the no-commission deal, says Kevin Dorwin, managing principal at wealth management firm Bingham, Osborn & Scarborough. “Mutual funds, for the most part, are still priced much higher because they're harder for the brokerages to administer. And I think a lot of people use mutual funds, so they're not really saving on that at this point,” he says. Fees vary widely by brokerages and the type of mutual fund but they can cost between $20 to $40 to trade. Many brokerage houses are also allowing people to trade options commission-free, although option traders may still need to pay a fee of 65 cents per contract.
The average investor may not save much money.
Trading fees and expense ratios for stocks, ETFs and options have dropped over the past several years, which benefits investors overall. The trend of lower expense ratios for ETFs and mutual funds has helped average investors. But this move by brokerage houses to eliminate trading commissions may not save the average person who doesn’t trade a lot, Dorwin says. “Most ordinary people don't trade so much for that to be a huge benefit. The people who do truly win are those who trade frequently, and that's not always a great strategy for individual investors,” he says.
Free stuff isn’t always a good thing.
Todd Rosenbluth, director of ETF research at CFRA Research, says if people don’t have to pay a commission to trade, it could entice more trading. “The key takeaway to me is just because something is unlimited, it doesn’t mean that investors should take full advantage of it,” he says. The downside to no-cost trading may mean people will trade more than they do now, which means they could be moving in and out of the market and trying to make short-term calls because there’s no cost to do so. “It’s a lot harder to time the market and you’re a lot better off having time in the market,” he says.
Brokerages make money in other ways.
Jim Besaw, principal and chief investment officer at GenTrust, says it was easy for brokerages to offer free trading since the money earned on commission by many of the custodians wasn’t a large portion of revenue. They make more money on other services, he says. Payment for order flow, which is the pay that firms receive for directing orders to different parties to execute trades, can generate revenue particularly in low-liquidity markets, he says. Firms also make money on securities lending programs, when investors loan stock to other traders who want to sell short the security. Investors and brokers are supposed to split the revenue earned, but the divide isn’t always clear. These money-generating activities are fine. But Besaw says it’s not easy for customers to easily figure out these costs as some brokerages are less transparent than others.
Watch cash sweep accounts.
Besaw says cash sweep accounts, which is where brokerages deposit investor cash until investors deploy it into another investment vehicle, are a top money-generator for firms. That’s because firms often pay low interest rates on these cash deposits or move these funds into a in-house money market mutual fund, with a high expense ratio. “In many cases, that’s a much higher number than the other fees,” he says. “If a client has 5% or 10% of their money in cash, in many cases, the custodian's paying them 1% less than they should. So the custodians really making 1% on that 10%, which is 10 basis points, which are pretty big numbers.” Investors can avoid this by not letting their money sit long in a cash sweep account.
Investors may make better fund choices.
Before eliminating trading fees, some brokerages had a list of ETFs they offered for no-commission trading and Rosenbluth says fee-conscious investors often gravitated to those without considering other investing aspects. “Now the whole universe is open,” he says. Investors can now sort through ETFs based on expense ratios, liquidity, performance and other factors without being influenced by trading fees associated with the funds. It may also encourage better portfolio maintenance. Investors who use a broadly diversified strategy with five or six ETFs might be more likely to rebalance that portfolio regularly because there isn't a cost to buy and sell those positions, he says.
Investors may be less likely to liquidate accounts.
Rosenbluth says he’s heard discussions that axing trading fees may increase demand for highly liquid, ultra-short-term bond ETFs during volatile times. These ETFs have maturity and duration of less than one year, such as iShares Short Treasury Bond ETF (ticker: SHV), which has a yield of 2% and an expense ratio of 0.15%, a cost of $15 for every $10,000 invested. With no trading fees, investors could move to these safer ETFs, rather than liquidate all their holdings and stuff it in a low-interest bank savings account. Investors may return to the stock market quicker when they feel like taking more risks since there’s no cost to trade, he says.
Facts about no-commission trading:
Brokerage firms are looking to retain clients.Mutual funds are not included.The average investor may not save much money.Free stuff isn’t always a good thing.Brokerages make money in other ways.Watch cash sweep accounts.Investors may make better fund choices.Investors may be less likely to liquidate accounts.
Environmental, social and governance funds, or ESG, belong to the family of sustainable, responsible and impact investing, sometimes referred to as SRI. This alphabet soup of investment strategies is a newer investment approach that strives to generate high long-term returns and positive societal results.ESG investing can be accomplished by investing in individual stocks and bonds, specifically targeted SRI funds, and employing a digital or a robo investment manager who specializes in this approach.From minimal ESG investing opportunities in the 1990s to about $12 trillion in assets under management in 2017, socially responsible investing is growing in popularity. The US SIF Foundation's most recent biennial report found that one in four dollars of professionally managed funds is directed toward ESG investing. (https://www.ussif.org/sribasics)Not only individual investors but credit unions, community banks hospitals, foundations, religious institutions, venture capitalists and public pensions invest in ESG investing companies.Answering to public demand, robo advisory digital investment managers, a type of nonhuman advisor, are now in the movement.The best ESG robo advisor will incorporate SRI investing criteria that matter to you, the opportunity to customize the investment options and low fees. Here are five of the best ESG robo-advisor services:M1 Finance.Betterment.EarthFolio.Wealthsimple.Motif Impact Portfolios.M1 FinanceThis unique platform offers both managed robo advisors and do-it-yourself investing under one roof. Investopedia's editor in chief, Caleb Silver, (https://www.linkedin.com/in/caleb-silver-9639585/) OK on this source this time. But Investopedia is one of our direct competitors so please avoid in the future.ranks M1 as a top ESG platform. "They have two socially responsible portfolios made up of Nuveen ETFs, listed under Expert Pies or you can construct a collection of stocks that meet your criteria." The account minimum is $100 and there are no trading fees, provided an account has at least a $20 balance. Experts say M1 Finance is unique among the SRI robo advisors in that it doesn't charge any management fee to use the platform.BettermentBetterment customers can choose to invest in their SRI portfolios with low fees and strong socially responsible metrics. This investment choice adheres to Betterment's low-cost and diversified approach while increasing exposure to companies that meet delineated SRI criteria. The Betterment socially responsible investing avoids companies with unsavory corporate governance and unfair labor practices."We'll prioritize excluding inappropriate stocks from the SRI portfolio and replace them with companies deemed to have strong social responsibility practices such as Microsoft (ticker: MSFT), Google (GOOG, GOOGL), Procter & Gamble (PG), Merck (MRK), Coca-Cola (KO), Intel (INTC), Cisco (CSCO), Disney (DIS) and IBM (IBM)," says Adam Grealish, Betterment's director of investing(https://www.linkedin.com/in/adamgrealish/) thank you. For example, in the U.S. large-cap stock allocation, selections include the iShares MSCI KLD 400 Social ETF (DSI). Betterment's low 0.25% management fee is reasonable when compared to other robo advisors and financial planners.EarthFolioEarthFolio is one of a handful of SRI investing robo advisors. This robo advisor invests exclusively in funds classified as sustainable or responsible. To make the cut, the fund's prospectus must delineate the specific ESG criteria used in the stock or bond selection. Unlike some ESG robo advisory competitors, EarthFolio offers bond funds in addition to other ESG funds.Earthfolio requires a $25,000 minimum investment amount and thus may be out of reach for new investors. EarthFolio offers a wider range of ESG investments and also provides a free head-to-head comparison of an investor's current portfolio with the EarthFolio recommendation. With a 0.5% management fee, it is one of the more expensive SRI investment robo advisors, although it compares favorably with traditional financial advisory fees.https://www.earthfolio.net/FAQ/WealthsimpleThere are a few fund names in this graph that don't match up with the tickers that you've given. Take a look. I've provided a few links, too.Launched in 2017, this Canadian robo advisor also operates in the U.S. and the U.K. The SRI options include ETFs representing iShares MSCI ACWI Low Carbon Target ETF (CRBN), Invesco Cleantech ETF (PZD), iShares MSCI KLD 400 Social ETF Is this what you mean?YES, SPDR SSGA Gender Diversity Index ETFIs this what you mean?yes (SHE), Invesco Taxable Municipal Bond ETF (BAB For BAB I'm getting this fund: https://money.usnews.com/funds/etfs/long-term-bond/invesco-taxable-municipal-bond-etf/bab. So do you mean BAB?yes-Investco Taxable Municipal Bond ETF) and iShares GNMA Bond ETF (GNMA) For GNMA, do you mean https://money.usnews.com/funds/etfs/intermediate-government/ishares-gnma-bond-etf/gnma YES iShares GNMA Bond Fund . Around 25% of Wealthsimple's clients have socially responsible portfolios.Wealthsimple offers three investment levels with management fees ranging from 0.4% to 0.5% of assets under management. All Wealthsimple clients have access to financial advisors, and halal portfolios are available for those who want to align their portfolios with Islamic religious beliefs.Motif Impact PortfoliosMotif Impact Portfolios encompasses both robo advisory services, investing in theme-driven portfolios, and more. One of the earlier platforms to use data and analytics to find unique investment opportunities, there are managed portfolios and DIY investing options.Silver recommends the Motif Investing Impact Portfolios which are populated with individual ESG stocks not exchange-traded funds. The ESG offerings fall into one of the categories: sustainable planet, fair labor and good corporation behavior.Motif requires a $1,000 minimum investment amount and charges 0.25% in management fees. The Motif Impact Portfolios offer stocks from five distinct asset classes that adhere to tax-aware rebalancing and minimize asset sales. In addition to the preselected ESG offerings, investors may create their own collections of ESG stocks.More Socially Responsible ESG Robo-AdvisorsThe following list includes other ESG investing companies in alphabetical order: Axos Invest.Ellevest.OpenInvest.Personal Capital.SustainFolio.TIAA Personal Portfolio.More socially responsible robo advisors will likely be added as the socially responsible investing field expands. For those who are seeking a set it and forget it socially responsible platform, there are many SRI robo advisor options from which to choose. It's likely that even if a current robo advisor lacks socially responsible investing choices today, it will offer it in the future. Ultimately, as younger investors more frequently seek to match their money with their hearts, the robo advisory market will continue to meet their needs.
Payout ratio is a key figure for income stocks.
Dividend payments can a reliable source of income for investors. But a dividend is only as safe as the company paying it. When a company runs into financial trouble, dividend cuts are often one of the first ways to stop the bleeding. One quick way to assess dividend reliability is to look at a stock’s payout ratio, the percentage of a company’s profits that is committed to dividends. Generally, the lower the payout ratio, the safer the dividend. Here are seven stocks to buy with payout ratios of less than 40%, according to Morningstar.
BMW (ticker: BMWYY)
BMW is a German luxury automaker that owns the BMW and Rolls-Royce brands. Analyst Richard Hilgert says BMW has strong global brands that give the company pricing power and competitive advantages. Its worldwide presence also provides geopolitical diversification. Hilgert says BMW shares are “attractively valued” given the stock’s yield and its steep earnings multiple discount to peers. Despite a difficult auto market, BMW reported solid earnings and revenue growth last quarter. BMW pays a 4.3% dividend and has just a 22% payout ratio. Morningstar has a “buy” rating and $44 fair value estimate for BMWYY stock.
China Telecom (CHA)
China Telecom is the third-largest Chinese telecommunications company, with more than 230 million mobile subscribers. Analyst Dan Baker says mobile services revenue growth slowed to just 4.4% in the most recent quarter, down from 5.6% in the first half of 2019. However, he says China Telecom’s overall services revenue growth of 1.8% last quarter outpaced its two larger peers and the company added 7 million mobile customers. China Telecom pays a 3.5% dividend, with a 36% payout ratio. Morningstar has a “buy” rating and $63 fair value estimate for CHA stock.
Enel Americas (ENIA)
Enel Americas is a South American electrical energy conglomerate that operates in Argentina, Brazil, Colombia and Peru. Analyst Charles Fishman says Enel Americas provides investors with a rare combination of value, revenue growth and dividend yield. Electricity demand in the four countries mentioned is projected to average 4% annual growth in the long term compared with less than 1% annual growth in developed countries. The company’s diversification also helps minimize political risk. Enel Americas pays a 3.7% dividend with a 36% payout ratio. Morningstar has a “buy” rating and $13 fair value estimate for ENIA stock.
General Motors (GM)
General Motors investors have watched from the sidelines while Tesla (TSLA) has captured all of the market headlines and gains in the past six months. However, analyst David Whiston says GM stock offers investors much more value at its current level. Now that the autoworker’s strike is over, Whiston says 2020 may be another difficult year for automakers as a glut in used vehicles drives down prices. However, he says GM’s autonomous ride-hailing business, its OnStar data-gathering and its 9% stake in Lyft (LYFT) provide potential upside. GM pays a 4.3% dividend with a 27% payout ratio.
Marathon Petroleum (MPC)
Marathon Petroleum owns 16 petroleum refineries and is one of the largest refiners in the U.S. Analyst Allen Good says the energy company is well-positioned to grow earnings in a weak macro environment in 2020, as it delivers on its projected $1.4 billion in synergies from its acquisition of Andeavor. Marathon also is in the process of spinning off its Speedway retail business and undergoing a strategic review of its midstream segment. Marathon pays a 3.7% dividend with a 34% payout ratio. Morningstar has a “buy” rating and $89 fair value estimate for MPC stock.
Banco Santander (SAN)
Banco Santander is the largest Spanish bank, but more than 70% of its revenue comes from international markets. European banks have been challenged due to the low rate environment, but Santander has heavy exposure to higher-growth markets overseas. Analyst Johann Scholtz says Santander’s focus on retail banking and its geographical diversification differentiate it from struggling European peers. In addition, management has a long track record of smart acquisitions that create value for shareholders. Santander pays a 6.4% dividend, with a 37% payout ratio. Morningstar has a “buy” rating and $5.60 fair value estimate for SAN stock.
Mitsubishi UFJ Financial Group (MUFG)
Mitsubishi UFJ Financial is Japan’s largest financial institution. Analyst Michael Makdad says the difficult environment for Japanese banks will likely continue in the coming years. That said, Mitsubishi’s price-book ratio of less than 0.5 makes it one of the best values among global bank stocks. Mitsubishi also has a significant market share in several underbanked regions in Southeast Asia, which could provide long-term revenue growth opportunities. Overseas loans now represent 40% of its total loans. Mitsubishi pays a 3.3% dividend, with a 27% payout ratio. Morningstar has a “buy” rating and $6.77 fair value estimate for MUFG stock.
Dividend stocks to buy with low payout ratios:
BMW (BMWYY)China Telecom (CHA)Enel Americas (ENIA)General Motors (GM)Marathon Petroleum (MPC)Banco Santander (SAN)Mitsubishi UFJ Financial Group (MUFG)
More firms are announcing free trade options.
Major brokerages such as Interactive Brokers, Charles Schwab and E-Trade, among others, recently announced that they would stop charging commissions to their clients who trade stocks and exchange-traded funds. Anytime people can pay less or nothing to invest, it helps them boost returns by keeping more money. Market watchers say brokerage houses' decision to drop certain trading fees is part of a trend of lower investment costs in general over the years such as falling expense ratios. But brokerages aren't offering free trading services because they're altruistic. These companies are fending off competition from newer online brokerages. Here are eight facts you should know about free trades.
Brokerage firms are looking to retain clients.
Scott Coyle, CEO of Click IPO, which allows investors to buy individual initial public offerings, says these bigger firms likely made the move to retain clients as they may have seen customers transfer to newer platforms like Robinhood, which has been offering free trades for about seven years. If the more established brokerage firms see less attrition in their customer base, they not only keep those customers but can now recruit newer customers with the added lure of free trading. "These broker dealers that have been around much longer have more robust platforms, they offer a lot more things than some of the newer free-trading firms do," he says.
Mutual funds are not included.
The brokerage firms touting their free stock and exchange-traded fund trades were silent about mutual funds. That’s because mutual funds aren’t part of the no-commission deal, says Kevin Dorwin, managing principal at wealth management firm Bingham, Osborn & Scarborough. “Mutual funds, for the most part, are still priced much higher because they're harder for the brokerages to administer. And I think a lot of people use mutual funds, so they're not really saving on that at this point,” he says. Fees vary widely by brokerages and the type of mutual fund but they can cost between $20 to $40 to trade. Many brokerage houses are also allowing people to trade options commission-free, although option traders may still need to pay a fee of 65 cents per contract.
The average investor may not save much money.
Trading fees and expense ratios for stocks, ETFs and options have dropped over the past several years, which benefits investors overall. The trend of lower expense ratios for ETFs and mutual funds has helped average investors. But this move by brokerage houses to eliminate trading commissions may not save the average person who doesn’t trade a lot, Dorwin says. “Most ordinary people don't trade so much for that to be a huge benefit. The people who do truly win are those who trade frequently, and that's not always a great strategy for individual investors,” he says.
Free stuff isn’t always a good thing.
Todd Rosenbluth, director of ETF research at CFRA Research, says if people don’t have to pay a commission to trade, it could entice more trading. “The key takeaway to me is just because something is unlimited, it doesn’t mean that investors should take full advantage of it,” he says. The downside to no-cost trading may mean people will trade more than they do now, which means they could be moving in and out of the market and trying to make short-term calls because there’s no cost to do so. “It’s a lot harder to time the market and you’re a lot better off having time in the market,” he says.
Brokerages make money in other ways.
Jim Besaw, principal and chief investment officer at GenTrust, says it was easy for brokerages to offer free trading since the money earned on commission by many of the custodians wasn’t a large portion of revenue. They make more money on other services, he says. Payment for order flow, which is the pay that firms receive for directing orders to different parties to execute trades, can generate revenue particularly in low-liquidity markets, he says. Firms also make money on securities lending programs, when investors loan stock to other traders who want to sell short the security. Investors and brokers are supposed to split the revenue earned, but the divide isn’t always clear. These money-generating activities are fine. But Besaw says it’s not easy for customers to easily figure out these costs as some brokerages are less transparent than others.
Watch cash sweep accounts.
Besaw says cash sweep accounts, which is where brokerages deposit investor cash until investors deploy it into another investment vehicle, are a top money-generator for firms. That’s because firms often pay low interest rates on these cash deposits or move these funds into a in-house money market mutual fund, with a high expense ratio. “In many cases, that’s a much higher number than the other fees,” he says. “If a client has 5% or 10% of their money in cash, in many cases, the custodian's paying them 1% less than they should. So the custodians really making 1% on that 10%, which is 10 basis points, which are pretty big numbers.” Investors can avoid this by not letting their money sit long in a cash sweep account.
Investors may make better fund choices.
Before eliminating trading fees, some brokerages had a list of ETFs they offered for no-commission trading and Rosenbluth says fee-conscious investors often gravitated to those without considering other investing aspects. “Now the whole universe is open,” he says. Investors can now sort through ETFs based on expense ratios, liquidity, performance and other factors without being influenced by trading fees associated with the funds. It may also encourage better portfolio maintenance. Investors who use a broadly diversified strategy with five or six ETFs might be more likely to rebalance that portfolio regularly because there isn't a cost to buy and sell those positions, he says.
Investors may be less likely to liquidate accounts.
Rosenbluth says he’s heard discussions that axing trading fees may increase demand for highly liquid, ultra-short-term bond ETFs during volatile times. These ETFs have maturity and duration of less than one year, such as iShares Short Treasury Bond ETF (ticker: SHV), which has a yield of 2% and an expense ratio of 0.15%, a cost of $15 for every $10,000 invested. With no trading fees, investors could move to these safer ETFs, rather than liquidate all their holdings and stuff it in a low-interest bank savings account. Investors may return to the stock market quicker when they feel like taking more risks since there’s no cost to trade, he says.
Facts about no-commission trading:
Brokerage firms are looking to retain clients.Mutual funds are not included.The average investor may not save much money.Free stuff isn’t always a good thing.Brokerages make money in other ways.Watch cash sweep accounts.Investors may make better fund choices.Investors may be less likely to liquidate accounts.
Tesla (ticker: TSLA) founder and CEO Elon Musk is tantalizingly close to securing the largest executive paycheck ever. If shares of the electric automaker can go six months with average prices valuing the company at $100 billion, Musk will take in options worth $346 million. Given the fact that even the most well-rewarded CEO in the S&P 500 “only” took home $129.4 million in 2018, this would almost certainly make Musk the highest-paid CEO in the U.S.But in the grand scheme of things, this insane payday is nothing compared to Elon Musk’s net worth and pales in comparison to how much money Musk could make in the coming years. The Elon Musk salary: no cash, all contingent. In 2018, Tesla and Musk agreed to a wild, record-setting CEO pay package. Yet, for some reason, the performance plan never received much press. Which is funny, because Musk’s total compensation under the agreement, if all the milestones were eventually hit, totaled $55 billion. Compared to numbers like that, $346 million is nothing. It’s a paltry 0.6% of the Renaissance man’s potential compensation. Here’s how it works: The 2018 agreement is entirely performance-based, and spans 10 years. At the time it was struck, Tesla was worth about $59 billion. Musk gets nothing unless Tesla itself does well; the first opportunity for a payday comes if Musk guides the Palo Alto, California-based automaker to a valuation of $100 billion (and maintains it for at least six months). Even then, Tesla also needs to hit certain operational metrics, based on either revenue or adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), for Musk to collect. Then, the enigmatic CEO gets paid in the form of Tesla stock options controlling 1.7 million Tesla shares. To get the full $50 billion-plus payday, Musk would have to guide the company to a $650 billion valuation by 2028. In the meantime, he’ll earn options for another 1.7 million shares at every $50 billion milestone in between, as long as Tesla hits increasingly demanding operational metrics along the way.Does Elon Musk need a $50 billion incentive to guide Tesla well? For John Engle, president of the investment firm Almington Capital, the answer is simple: no. It’s “certainly hard to find any justification” for rewards of that magnitude, Engle says, emphasizing the fact that “there's no precedent for the kind of payout Musk has been handed by his board.”Engle says that you need to put things in context “to understand just how obscene Musk's pay package is.” To do this, Engle recounts the compensation agreement for arguably the greatest CEO of all time: Steve Jobs. “When [Steve Jobs] came back to Apple (AAPL) in 1997, the company had just posted a $1 billion annual loss. By the time he left in 2011, Apple's annual profit was close to $26 billion. Jobs was compensated in stock, receiving 5.5 million shares over the course of his tenure, worth about $2 billion when he stepped down,” Engle says.What’s even more mind-boggling than Elon Musk’s ability to earn 25 times what Jobs walked away with is the fact that Musk could do it without even turning Tesla profitable. Remember, the metrics the billionaire’s company needs to hit in order for Musk to max out his pay package have absolutely nothing to do with real, honest-to-God profits. That’s unfortunate for shareholders, since stock prices, over the long-run, tend to follow real profits. That said, not everyone agrees profitability needs to be at the forefront of payment plans like this. “Tesla isn't a traditional company,” says Hatem Dhiab, a managing partner at Gerber Kawasaki Wealth and Investment Management. It has “outsize goals and aspirations and its comp structure is reflective of this.”He adds, “All of these incentives are in line with what shareholders would want the company to accomplish for it to constitute a great investment.” And while it’s true that a $50 billion-plus payday for Musk would require an 11-fold increase in the company’s valuation over 10 years, the fact of the matter is that Musk didn’t need a $50 billion incentive to want to make this happen. In fact, the Silicon Valley icon already owns about 20% of Tesla’s outstanding stock today – he’s already incredibly motivated to drive share prices as high as he possibly can. He’s got $20 billion riding on it. “If Tesla and SpaceX go bankrupt, so will I,” Musk tweeted recently. “As it should be.” The reason behind the plan: Musk is an all-or-nothing risk taker. And Mars is on the mind.Elon Musk’s net worth is $32.2 billion at last check, making him the 23rd richest person in the world. But for the man whose exploits have been compared to that of a real-life Tony Stark, that sort of wealth might not be enough. Famous for unyielding, far-reaching ambitions with global implications for the future of humanity, Musk has helped change how the world uses money (PayPal (PYPL), championed sustainable, efficient transportation (Tesla, Hyperloop), worked toward making life multiplanetary (SpaceX), lobbied for prophylactic measures to ensure a benevolent artificial intelligence (OpenAI), and started a company that aims to merge machines with humans via a brain implant (Neuralink). These projects cost a lot of money, and the efforts to diversify the human species into space and across multiple planets is of particular importance to the entrepreneur. “I want to die on Mars, just not on impact,” Musk has stated previously.The problem with achieving that goal is that it’s expensive, and it’s quite difficult to monetize in the early innings. Having foreseen this problem, the iconic billionaire has spoken openly about becoming independently wealthy enough through his other projects to self-finance the initial phases of colonizing Mars. Though this motivation isn’t often mentioned by the press, it seems to be the primary justification for Musk to seek such an unusually gracious pay package. Species-level goals aside, however, the potential to earn $55 billion – even if Musk lines the pockets of shareholders in the process – is hard to justify from a corporate governance perspective. Not when Musk is already more than sufficiently motivated to see Tesla succeed for years to come.