Reasons To Include International Investments In Your Portfolio

The United States currently represents 60% of the global equity market.¹ This means investors with an extreme home bias are ignoring 40% of the equity universe. In truth, doing so over the last 14.5 years would have worked out for you, but markets are cyclical, so it’s unlikely this lasts forever. There’s also a long history of throne-swapping between U.S. and international stocks (see chart). Particularly in today’s challenging market environment, investors should think twice before giving ex-U.S. assets the cold shoulder.

The U.S. stock market doesn’t always dominate

The United States doesn’t always dominate the global equity market! When U.S. stocks are facing headwinds, international stocks may rise to the occasion. Sustained periods of outperformance by one region have been fairly common historically.

These bouts can be significant. For example, consider the ‘lost decade’ for U.S. stocks that started in the early 2000s. Between 2000 – 2009, the cumulative total return for the S&P 500 was negative 9.1% vs positive 30.7% for the MSCI All Country World Index ex U.S.

International stocks could outperform if U.S. stocks are struggling

The graphic above breaks down performance of the S&P 500 vs the MSCI EAFE. During periods when domestic stocks produced below-average returns, international equities did better, by over 2% on average. Further, during all rolling 10-year periods since 1971, the top performer was almost a coin toss: the U.S. only did better 56% of the time.

Since trying to time regime changes is very difficult in real time without the benefit of hindsight, there are reasons to consider allocating both U.S. and ex-U.S. equities to an asset allocation.

Ex-U.S. equity may be able to help reduce risk in a portfolio

Having international exposure in your portfolio in the early 2000s and throughout the Global Financial Crisis would have been a key ingredient in reducing overall risk and maintaining some level of investment return.

By way of example, consider this hypothetical 60/40 portfolio of stocks to bonds. The U.S. only portfolio includes the S&P 500 and Bloomberg Barclays U.S. Aggregate Bond index while the U.S. & international portfolio allocates 20% of the equity exposure to the MSCI All-Country World Index ex-U.S.

Other reasons to consider international assets in your portfolio

  • Different sector concentrations. The U.S. is fairly tech heavy. The S&P 500 is currently about 27% technology companies. Compare that to Europe at 7%. Exposure to other sectors like financials and commodities in emerging markets can add overall diversification.
  • Currency risk and return. At a high level, the relative strength of foreign currencies to the dollar has the potential to help or hurt returns. Asset managers can engage in different strategies to hedge or boost returns around foreign exchange rates, but the takeaway is that currency can be another layer of diversification.
  • Valuations. Valuations outside of the United States have been much cheaper to the long-run averages for quite some time. Especially relative to the U.S., international stocks look much more attractive on a valuation standpoint. Despite the selloff in 2022, the S&P 500 is only now just in line with the 20-year average P/E ratio.

The takeaway

Adding ex-U.S. stocks to your portfolio may be able to help reduce risk over the long-term. But there are downsides to be aware of. Most notably, international assets tend to be more volatile. These swings can be to the upside or the downside. And just as the unique elements of investing overseas (like foreign exchange rates or sector exposure) can help investors at times, they can also hurt U.S. investors in other circumstances.Quintex3-1-2-2-1-1-1-1-1-1-1-1-1-1

As with anything in investing, consider your personal risk tolerance, time horizon, and circumstances. Diversification isn’t a magic bullet, and if you do add international exposure to your portfolio, be sure to appropriately size the position to meet your needs.

I’m a Certified Financial Planner professional specializing in stock options and sudden wealth.

Source: Reasons To Include International Investments In Your Portfolio

International markets are generally divided into 2 categories:

  • Developed markets are located in countries that have established industries, widespread infrastructure, secure economies, and a relatively high standard of living.
    Examples of developed markets include the United Kingdom, Japan, Australia, Canada, and France.
  • Emerging markets are located in countries that have developing capital markets and less-stable economies. However, they’re considered to be in the process of transitioning into developed markets, and they may be experiencing rapid growth. Currently, emerging markets make up about 15% to 20% of international markets in total.
    Examples of emerging markets include India, China, Egypt, South Africa, Mexico, and Russia.

Not surprisingly, developed markets are similar to the United States when it comes to volatility levels and the range of potential returns. Emerging markets are more volatile than developed markets and have a wider range of potential outcomes. For that reason, we recommend that you don’t overweight your allocation to emerging markets.

How to choose an international investment

There are a few ways you can invest in foreign markets:

  • International funds invest only in foreign markets, excluding the United States.
  • Global or world funds provide exposure to both foreign and U.S. markets.
  • Regional funds invest primarily in a specific part of the world, like Europe or the Pacific region.
  • Developed markets funds focus on foreign countries with proven economies, like Japan, France, or the United Kingdom.
  • Emerging markets funds combine investments in countries that are considered to have “developing” economies, like India, Brazil, or China.

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ETFs vs. Mutual Funds: How They Differ

Exchange-traded funds, or ETFs, and mutual funds are both investment products that represent a basket or collection of securities.”They provide investors access to underlying investments, like stocks or bonds, and generally provide more diversification than a single stock or bond,” said Wendy Liebowitz, vice president and branch leader at Fidelity Investments.

However, there are a few key differences between ETFs and mutual funds to keep in mind before investing. Here’s what you need to know:

ETFs differ in how they are traded

Greg McBride, chief financial analyst at Bankrate.com, explained that mutual funds only trade once per day, after the market close at a price based on the value of all the fund’s assets less the expenses. ETFs, as the name implies, McBride said, trade on an exchange and this means investors can buy or sell throughout the trading day at a price that fluctuates as the prices of the underlying investments change.

“Many fund companies offer both a mutual fund and an ETF version of the same investment, and the ETF is typically the lower-cost option in terms of expense ratio,” he said. “Just make sure your brokerage permits you to invest commission-free, as any brokerage commissions erase the modest expense advantage of ETFs.”

ETFs are more passive

Todd Rosenbluth, head of research at VettaFi, explained that similar to mutual funds, ETFs provide investors with the benefits of diversification, by owning stocks or bonds from numerous companies.

“However, most ETFs outperform mutual funds in the same investment style as they cost less and passively track an index like the S&P 500 or the Russell 2000 Index rather than try to pick winners but end up with laggards,” Rosenbluth said. “Most ETFs available track an index and are passively managed, while most mutual funds are actively managed with the team picking through a larger universe of investments.”

ETFs generally cost less

The fees you pay to purchase ETFs tend to be lower than mutual funds, but this does vary depending on the investments. A significant reason it’s cheaper is that an ETF is a passive fund.”ETFs tend to have a lower cost of ownership, with expense ratios often less than 0.20%, while mutual funds are often five times as expensive,” said Rosenbluth.

ETFs can offer tax advantages

Another difference to consider is tax efficiency. “Generally, holding an ETF in a taxable account will generate less tax liabilities than if you held a similarly structured mutual fund in the same account,” said Liebowitz with Fidelity Investments. Although both are subject to capital gains and dividend income tax, Liebowitz said ETFs generally have fewer taxable events than mutual funds.

Understand the ramifications of investing

Liebowitz stated it is important to review the portfolio fundamentals of any fund before investing. “While an ETF and mutual fund might have the same investment objective or investment ‘style,’ the composition of each fund could vary, so investors should compare the annual turnover ratio, concentration risk, expense ratio, and other risk factors to determine if it is right for them and what they are trying to achieve with their investment,” she said.

Despite their differences, Liebowitz explained that both mutual funds and ETFs can offer investors exposure to a diversified basket of securities to help meet their financial goals and objectives – and it doesn’t have to be one or the other. “Investors should pick the best choice for their specific investing needs, keeping their time horizon, risk tolerance, financial circumstance, and short- and long-term goals in mind before making any investment decision,” added Liebowitz.

Source: ETFs vs. mutual funds: How they differ | Fox Business

Critics by InvestorVanguard

ETFs and mutual funds both come with built-in diversification. One fund could include tens, hundreds, or even thousands of individual stocks or bonds in a single fund. So if 1 stock or bond is doing poorly, there’s a chance that another is doing well. That could help reduce your risk—and your overall losses.

ETFs and mutual funds both give you access to a wide variety of U.S. and international stocks and bonds. You can invest broadly (for example, a total market fund) or narrowly (for example, a high-dividend stock fund or a sector fund)—or anywhere in between. It all depends on your personal goals and investing style.

ETFs and mutual funds are managed by experts. Those experts choose and monitor the stocks or bonds the funds invest in, saving you time and effort. Although most ETFs—and many mutual funds—are index funds, the portfolio managers are still there to make sure the funds don’t stray from their target indexes.

An ETF could be more suitable for you. You can buy an ETF for the price of 1 share—commonly referred to as the ETF’s market price. Depending on the ETF, that price could be as little as $50 or as much as a few hundred dollars. A mutual fund may not be a suitable investment. Mutual fund minimum initial investments aren’t based on the fund’s share price. Instead, they’re a flat dollar amount. Most Vanguard mutual funds have a $3,000 minimum. That would buy you 30 shares of a hypothetical fund with a net asset value (NAV) of $100 per share.

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How To Save Money As Inflation and Consumer Prices Rise

Food Price Inflation Drives Grocery Store Prices Of Meat And Poultry Up

The pandemic has delivered another unwelcome threat to our lives — inflation.Consumer prices are rising, and if you’re living paycheck to paycheck, this means you have a harder time paying for food, gas and other items.

Inflation hit its largest annual increase in 30 years in October, with consumer prices up 6.2 percent compared with a year ago, according to the Bureau of Labor Statistics. Data released Wednesday showed that prices rose 0.9 percent in October compared with September.

“Inflation has been a surprising and unwelcome guest seeming to persist at an elevated level at a time when we’re all hoping to put the devastating economic impacts of the pandemic behind,” said Mark Hamrick, senior economic analyst for Bankrate. “Like the pandemic-caused downturn itself, it exacerbates wealth and income inequality. The wealthy can adjust. Those on lower incomes, not so much. It is as if some people just can’t catch a much-needed break.

Prices are way up compared with what we were used to pre-pandemic. But this isn’t a fun ride. Here’s how to handle a rise in consumer prices.

What changes should I make to my budget to beat inflation?

This is a time when you should review how you spend your paycheck. Even if you’ve cut until it hurts, look for additional trims.

Obvious places to cut are eating out or streaming services. When was the last time you looked at your mobile plan?

Use apps and the Internet to find lower prices where they are available, including for gasoline.

“When prices aren’t changing all that much, people may be inclined to invest less of their time shopping, thinking that it might not make all that much of a difference,” Hamrick said. “Think of shopping right now as investing time to find better deals.”

Supply-chain disruptions may continue to push consumer prices up, so you might want to get an early start on your holiday shopping, Hamrick said.

Hamrick makes this great point: Is this a year when something more personal, such as baked goods or a customized photo album, could be substituted at a lower price?

Put off unnecessary purchases until supply issues are resolved and prices go down.

“Whether it’s an updated iPhone or another piece of clothing to mostly hang in the closet, most Americans simply consume more than they need to,” Hamrick said.

Is there anything I can do to reduce my food costs?

In an inflationary environment, substitutions can be your financial friend.

The BLS noted “broad-based” higher prices for energy, shelter, food, used cars and trucks and new vehicles among the larger contributors to higher prices in October.

Food prices have largely been rising because of weather-related shortages, transportation issues and lack of staffing. Meat and fish prices are going up faster than vegetable prices, so take that into consideration in your at-home meal planning.

Hamrick said he went shopping recently to make crab cakes for his son, visiting from Los Angeles. A 50 percent price hike for crabmeat changed the menu.

“I bought chicken thighs and cooked them at a fraction of the price,” Hamrick said. “Now’s the time to try to spend time when possible preparing meals at home, using lower-cost items as much as possible.”

Should I change how I invest for retirement?

Inflation doesn’t really change what you should have been doing all along, which is diversifying, said Carolyn McClanahan, a certified financial planner who founded the fee-only Life Planning Partners, based in Jacksonville, Fla.

“Through thick and thin, the best way to prepare for any economic environment is to have a diversified portfolio,” McClanahan said. “If you aren’t already practicing diversification, now is the time to make that change.”

If you’re an ultraconservative saver who has shied away from stocks because you’re scared of the stock market, you might want to consider that inflation is also a risk. If you don’t at least keep pace with inflation, you’re losing the purchasing power of your money.

“Where interest rates are right now, investors need to take on slightly more risk to get a return that may beat inflation,” said Ben Bakkum, quantitative investing associate at the digital adviser firm Betterment.

Is there anything I can do to take advantage of a rise in inflation?

If you have some cash that you don’t think you’ll need for a while, consider purchasing bonds, McClanahan recommends.

Series I Savings Bonds, which are issued by the Treasury Department, allow investors to earn a combination of a fixed interest rate and the rate of inflation, adjusted semiannually. The composite rate for I bonds issued from May through October was 3.54 percent.

The composite rate for I bonds issued from Nov. 1 through April 2022 is 7.12 percent, a portion of which is indexed to inflation every six months.

To buy and own an electronic I bond, you must establish a TreasuryDirect account. Go to treasurydirect.gov.

Is there any good news about rising inflation?

If you receive Social Security or Supplemental Security Income benefits, you’ll see your payments go up because of rising consumer prices. The Social Security Administration announced a 5.9 percent benefit increase for 2022.

And, if inflation relents next year, which some believe is possible as supply chains normalize, Social Security recipients will continue to get the higher payments anyway, Hamrick said.

Additionally, one of the few potentially beneficial effects of rising inflation will be that the Federal Reserve may well lift benchmark rates sooner rather than later, and more than previously believed, he said. That’s welcome news for savers.

“Previously miserly returns on savings should begin to rise,” Hamrick said.

It’s hard not to panic about inflation when your paycheck doesn’t go as far as you need. Still, keep things in perspective. It’s not the 1970s, when prices skyrocketed.

“Recent headlines about increasing inflation have been alarming, but inflation itself is not abnormal if it’s not out of control,” Bakkum said.

Source: How to save money as inflation and consumer prices rise – The Washington Post

.

More Contents:

What changes should I make to my budget to beat inflation?

Is there anything I can do to reduce my food costs?

Should I change how I invest for retirement?

Is there anything I can do to take advantage of a rise in inflation?

Is there any good news about rising inflation?

Ruane, Michael E. “Two million Delmarva chickens euthanized as virus hobbles processing”

Pros And Cons Of Rebalancing Stock Market Investments

An asset allocation balances investment risk and return by specifying a particular mix of investments based on the investor’s risk tolerance. For example, an investor might decide to invest 60% of their portfolio in stocks, 30% in bonds and 10% in cash. Investment risk tends to increase as the return on investment increases. Investors can manage the risk of their investment portfolio by combining high-risk investments with low-risk investments.

As the investments change in value, however, the mix of investments may drift away from the original asset allocation. This creates a need to rebalance the investment portfolio by selling some investments and buying others. Otherwise, the growth in value of riskier investments might yield more risk than the investor is willing to tolerate.

Advantages of Rebalancing

Part of the purpose of an asset allocation is to dilute the impact of each asset class by limiting both the upside and downside impact of the investments. But, when a particular investment grows in value faster than the other investments, you are exposed to more risk than you originally intended. Rebalancing your portfolio returns your investments to your original risk tolerance and reduces the risk that your portfolio will drop in value.

Rebalancing a portfolio also improves diversification. When one stock grows significantly in value, the portfolio becomes weighted more heavily toward that stock, magnifying the impact of that stock on overall portfolio performance.

For example, suppose you invested $10,000 in Tesla TSLA , Inc. (TSLA) on April 1, 2020, when it was about $100 a share, and $10,000 in Intel Corporation INTC (INTC) when it was about $50 a share. (Figures are rounded to simplify this example.) You would own 100 shares of TSLA and 200 shares of INTC. On April 1, 2021, TSLA reached about $688 a share and INTC reached about $65 a share. Your TSLA shares would be worth $68,800 and your INTC shares would be worth $13,000. Your investment in TSLA would have grown from half of your portfolio to more than 80% of your portfolio.

Rebalancing also avoids the potential for emotions to interfere with your buy and sell decisions. It is hard to follow the advice to buy low and sell high when it means selling winners to buy losers. There can also be some resistance to selling a stock with a lot of gains in a taxable account. (This is why rebalancing is easier in retirement plan accounts, where the investor doesn’t have to pay taxes on capital gains.)

Rebalancing is also a natural consequence of investment glide paths that change the asset allocation over time, such as target date funds. These investment glide paths reduce the risk mix of a portfolio as the target date approaches. An example of a linear glide path is the old rule of thumb that the percentage invested in stocks should be 100 minus your age. It reduces the risk mix of the portfolio as retirement age approaches. Implementing an investment glide path requires rebalancing the portfolio periodically.

Disadvantages of Rebalancing

But, why would you sell investments that are doing well to buy investments that aren’t doing well?

Continuing the previous example, by November 1, 2021, TSLA stock had risen to $1,145 a share and INTC stock had dropped to about $49 a share. If you had rebalanced your portfolio on April 1, 2021, your portfolio would be worth $98,899 on November 1, 2021, about a fifth less than the $124,300 it would have been worth if you hadn’t rebalanced. The portfolio is worth more than the $81,800 the portfolio was worth back in April, but not as much as it might have been worth without rebalancing.

Rebalancing is an uninformed strategy that assumes that high-flying investments have nowhere to go but down or, at best, have no room for further growth. In the case of TSLA stock, it assumes that the investment will drop in value because it has come so far so fast. It argues that rebalancing the portfolio is necessary to protect it from a decrease in value.

But, past performance does not predict future results. Rebalancing is just as guilty of basing investment decisions on past performance as momentum plays, whether the rebalancing occurs on a schedule or upon a specified level of divergence from the target asset allocation. It is a pessimistic form of market timing, which is often less effective than remaining invested.

Rebalancing assumes that stocks are more likely to decrease in value when their value has increased, which is not necessarily true. It also assumes that low-performing investments are hidden gems that will increase in value, without any evidence to support the assumption. When an investment has been demonstrating lackluster performance, there is no reason to expect that it won’t continue to demonstrate poor performance. Sometimes, a stock is a low performer for a reason, in which case rebalancing is unlikely to improve the results.

Rebalancing also conflicts with other common strategies, such as buy-and-hold and harvesting losses to offset capital gains.

The decision to rebalance should be forward-looking, based on expectations about where the stock and bond markets will head in the future. You should sell an investment when your reasons for buying the investment are no longer valid, not because the investment is performing as expected.

For example, selling stocks now to buy bonds is problematic because bonds are likely to decrease in value when the Federal Reserve Board increases interest rates. Interest rates and bond prices usually move in opposite directions. Selling an investment that is expected to increase in value to buy one that is expected to decrease in value is a recipe for losing money.

Returning to the INTC and TSLA example, both stocks are affected by demand for their products exceeding supply, but there is no reason to expect INTC to outperform TSLA. Certainly, the market dominance of Tesla vehicles has eliminated an incentive for Tesla to add certain features that consumers want, such as heads-up displays (HUD) and digital rear-view mirrors. But, Tesla does not face a shortage of demand for its vehicles. Both INTC and TSLA are limited by how quickly they can ramp up production capacity to meet demand.

Rebalancing works well when an investment is volatile, going up and down frequently, especially when the gains and losses are out of sync with other investments. Rebalancing does not work well when one investment consistently outperforms the other investments.

Rebalancing may not be necessary if you have a long investment time horizon, which gives you time to recover from short-term losses.

Rebalancing also increases costs due to transaction charges from buying and selling frequently. In addition to incurring more fees, rebalancing also yields higher taxes from realizing capital gains.

A possible alternative to rebalancing based on percentages is to rebalance based on the original amount invested in each asset class, perhaps adjusted for inflation. That way, the original amount invested retains the same risk profile and can act as a safety net. Gains beyond the original investment are just icing on the cake.

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Source: Pros And Cons Of Rebalancing Stock Market Investments

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Related Contents:

“Portfolio Rebalancing Calculator”. Archived from the original on 2013-04-11.

See Irish Collective Asset-management Vehicles Act 2015 (Original Act available here)

Micro Investing’s Magic Lies in Helping Your Favorite College Grad (or You) Gain Confidence

Micro Investing's Magic Lies in Helping Your Favorite College Grad (or You) Gain Confidence

When you first graduate from college, you might not feel comfortable dumping lots of money into unknown stocks or ETFs. Even if you’re not a new college graduate, you may want to consider a different approach when you don’t have a lot of extra cash lying around. Why not try micro investing?

Micro investing takes the daunting feeling away from investing, and therein lies its true magic. Let’s take a look at what it can do for you and how it can find a place in your portfolio.

What is Micro Investing?

Put simply, when you micro invest, you invest using small amounts of money. In other words, you pony up money to buy fractional shares of stocks or ETFs instead of full shares.

As of today, a single share of Amazon (NASDAQ: AMZN) costs $3,383.87. You may know you can’t even afford one share of Amazon, much less two shares!

Enter micro investing apps. You can buy Amazon for a much smaller amount — even really small amounts, like $10. You can also buy multiple securities to aim for diversification (always a great thing!) and lower your risk in the long run.

Why Micro Invest?

Small amounts, compounded over time, can make an impact. Compound interest makes your money grow faster. You can calculate interest on accumulated interest as well as on your original principal. Compounding can create a snowball effect: The original investments plus the income earned from those investments both grow.

Let’s say you save $1 per day. Your $1 per day adds up to $365 a year. Instead of spending that $365, you could stick it into a micro investing app at 5% interest per year. Your small amount would grow to almost $466 by the end of five years. At the end of 30 years, the amount you originally invested would grow to $1,578.

If you micro invested even more, your investment could grow even faster.

How Does Micro Investing Work?

Have you ever heard of the app, Acorns, which invests small change for you? That’s micro investing. A micro investing app rounds up your purchases to the dollar or makes automatic transfers for you. Think of micro investing as “spare change investing” — many apps round up your transactions from a linked bank account and invest the difference.

In other words, let’s say you go to Chipotle and order a mega burrito with those delicious limey chips. You spend $10.34. The app would take your remaining $0.66 and invest it.

You don’t have to invest a lot to get started, either. Stash allows you to get started with just a penny. Interested in micro investing for your favorite college grad or yourself? Take a look at the following steps to get started with micro investing.

Step 1: Choose a micro investing app.

What’s often the hardest part? Choosing the right investment app. Often the most important question comes down to this: Do you want to get your hands directly on your investments or do you want an app to pilot and direct your money for you?

Quick overview: Acorns and Betterment put a portfolio together for you based on your preferences. Stash and Robinhood allow you to choose the direction you want your money to take by allowing you to choose your own investments.

You may want to choose an app that lets you steer the ship yourself, particularly if you want to take a DIY approach to your investments at some point.

Step 2: Input your information.

Once you’ve chosen a micro investing app, it’s time to let the robo-advisor do its job. You input information to your micro investing app that helps it “understand” how to put together the best portfolio for you. You input your age, income, goals and risk tolerance and it’ll allocate your investment dollars accordingly.

Your money will go into a portfolio of exchange-traded funds (ETFs) based on the level of risk you choose. Based on the information you supply, you could end up thoroughly diversified with shares in many (sometimes hundreds) of different companies.

Step 3: Set up recurring investments.

You can set up investments to go into your investment account on a recurring basis for just a few dollars per month. You can also choose to make one-time deposits. Your robo-advisor will automatically rebalance your account if you have too much invested in a particular asset class. Setting up recurring investing means that you’ll invest without thinking about it. (You’ll never miss pennies!)

Step 4: Don’t quit there.

You can easily track your earnings when you micro invest because those apps are seriously slick. You can even project your earnings through the app’s earnings calculator so you don’t have to wonder how much you’ll have later on.

However, this is important: Remember that micro investing may not make you rich (if, in fact that is your goal). You probably can’t save enough for retirement through micro-investing, either. You probably also won’t net enough to save for larger goals, such as a down payment on a home. You may generate a few hundred dollars a year, which might allow you to save enough to fund an emergency fund, but that’s about it.

The real win involves building the confidence needed to invest. Consider other ways you can invest, such as investing money in a 401(k) or a Roth IRA after you get comfortable with micro investing.

Micro Investing Could Work Wonders

Micro investing can work wonders by breaking down barriers to investing. One of the biggest complaints from young students just starting out is that it’s too expensive to invest.

Micro investing can give you or a new grad the confidence to try bigger things, starting with baby steps. If micro investing is what it takes for a new grad to get more comfortable with smaller investments (then grow investments later), then it’s a great option for young investors just getting started.

By:

Source: Micro Investing’s Magic Lies in Helping Your Favorite College Grad (or You) Gain Confidence

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Critics:

Microfinance is a category of financial services targeting individuals and small businesses who lack access to conventional banking and related services. Microfinance includes microcredit, the provision of small loans to poor clients; savings and checking accounts; microinsurance; and payment systems, among other services. Microfinance services are designed to reach excluded customers, usually poorer population segments, possibly socially marginalized, or geographically more isolated, and to help them become self-sufficient.[2][3]

Microfinance initially had a limited definition: the provision of microloans to poor entrepreneurs and small businesses lacking access to credit.[4] The two main mechanisms for the delivery of financial services to such clients were: (1) relationship-based banking for individual entrepreneurs and small businesses; and (2) group-based models, where several entrepreneurs come together to apply for loans and other services as a group.

Over time, microfinance has emerged as a larger movement whose object is: “a world in which as everyone, especially the poor and socially marginalized people and households have access to a wide range of affordable, high quality financial products and services, including not just credit but also savings, insurance, payment services, and fund transfers.

Proponents of microfinance often claim that such access will help poor people out of poverty, including participants in the Microcredit Summit Campaign. For many, microfinance is a way to promote economic development, employment and growth through the support of micro-entrepreneurs and small businesses; for others it is a way for the poor to manage their finances more effectively and take advantage of economic opportunities while managing the risks. Critics often point to some of the ills of micro-credit that can create indebtedness. Many studies have tried to assess its impacts.

New research in the area of microfinance call for better understanding of the microfinance ecosystem so that the microfinance institutions and other facilitators can formulate sustainable strategies that will help create social benefits through better service delivery to the low-income population.

Due to the unbalanced emphasis on credit at the expense of microsavings, as well as a desire to link Western investors to the sector, peer-to-peer platforms have developed to expand the availability of microcredit through individual lenders in the developed world. New platforms that connect lenders to micro-entrepreneurs are emerging on the Web (peer-to-peer sponsors), for example MYC4, Kiva, Zidisha, myELEN, Opportunity International and the Microloan Foundation.

Another Web-based microlender United Prosperity uses a variation on the usual microlending model; with United Prosperity the micro-lender provides a guarantee to a local bank which then lends back double that amount to the micro-entrepreneur. In 2009, the US-based nonprofit Zidisha became the first peer-to-peer microlending platform to link lenders and borrowers directly across international borders without local intermediaries.

See also

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