The saying “Don’t put all your eggs in one basket” applies to investments, because concentration increases risk. Whether you invest your money yourself or work with a professional, never put all your assets in the same basket—the same kind of stock, bond, mutual fund, or other investment. In addition to avoiding concentration, diversification is key to improving investment results. Various asset classes, or types of investments, tend to perform differently under certain market conditions. Some perform better, and some perform worse, depending on what is going on with the economy and financial markets. The best investment strategy is to have a diverse portfolio that includes a mixture of stocks, bonds, and international investments. Diversification across asset classes helps reduce risk; correlation illustrates this benefit. Correlation measures how things, such as investment returns, move in relation to each other. Some asset class returns are more correlated than others. Say you invest in a…
Disciplined Investing
When you make an investment, you rely on an investment thesis. The investment thesis is based on company fundamental attributes and valuation. Why is a particular stock attractive? Is there a catalyst that will improve earnings? Will the company benefit from a changing competitive landscape? Are there operational or regulatory risks on the horizon? Is the valuation attractive? Being disciplined and considering both fundamentals and valuation are essential when investing in stocks. Being undisciplined and only focusing on fundamentals or on valuation could have negative consequences. For some “hot” sectors, exuberance and a “fear of missing out” can elevate valuations across the board beyond reasonable levels. At the same time, there is a difference between buying a stock that is misunderstood or out of favor and buying a stock that is declining in value for a valid reason. Changing Fundamentals A change in fundamentals will have an impact on your…
Understanding Risk
During the pandemic, we have seen a rise in the number of indiviual or retail investors. We have also seen an increase in the number of active traders. Firms that aim to democratize the markets have helped to fuel this trend. It is important to note that trading and investing are not the same. Traders are focused on the short run, whereas investors have a long-term perspective. Whether you are a trader or an investor, you need to understand the different types of risk you will encounter. Risk is the variability, or volatility, of expected outcomes. The weather is a good illustration. A forecast gives an average, or expected, temperature for a city on a certain day of the year. In some regions, such as Southern California, there is less variability, or volatility, in temperature for a given day of the year. In other areas, such as Chicago, there is much…
Why Investment Fees Matter
Understanding how much you are paying for investments and investment advice is essential. Fees reduce your return. Over time, high fees can hinder the growth of your assets. In the investment arena, fees are usually charged as a percentage of assets quoted in terms of basis points. A basis point is one one-hundredth of 1 percent, or 0.01 percent. In other words, 100 basis points equals 1.0 percent, and 50 basis points equals one-half of 1 percent, or 0.50 percent. There are many kinds of fees. Some fees are transaction-based: these compensate brokers for putting clients in an investment or for executing a trade. With a commission, the brokerage firm charges a fee for each transaction. In contrast to brokers, who charge commissions, fee-based advisers charge an annual fee based on a percentage of assets under management. The adviser is paid to manage your money and not to execute trades. If the…
Understanding Tax Efficiency
As an investor, you need to consider the impact of taxes. The taxes owed on investments depend on the type of investment account. For tax-deferred accounts, such as 401(k)s and 403(b)s, you contribute money from your paycheck before it is taxed, known as “pre-tax dollars.” In other words, you do not pay taxes on the portion of your salary that goes directly into your 401(k) or 403(b). Moreover, you do not pay taxes on the income or capital gains generated each year. Instead, you pay taxes when you withdraw money from the account. Roth IRAs and college savings plans, such as 529s, are examples of a tax-advantaged account. You fund these kinds of accounts with after-tax dollars, and you do not get a tax break upfront. After you fund a Roth IRA or 529, the income, appreciation, and withdrawals are tax-free. For taxable accounts, income and capital gains are not tax-exempt or tax-deferred, so you…
Understanding Fiduciary Duty as a Caregiver
Due to demographic and socio-economic factors, there has been a dramatic rise in the number of people serving as financial caregivers. Going forward, the trend is likely to continue. Although many serve in this capacity, few understand the role’s scope. Have you been asked to serve as a financial caregiver? Are you considering asking someone to serve as a financial caregiver for you or a loved one? The Consumer Financial Protection Bureau (consumerfinance.gov) offers four free guides explaining what it means to serve as a trustee, power of attorney, guardian of property, and as a government fiduciary (for Social Security and VA benefits.) A common trait across these types of financial caregivers is that involve a fiduciary duty. These four guides explain fiduciary duty and offer helpful suggestions on how best to serve in these roles. Guides for Different Types of Financial Caregivers
Financial Fundamentals – How to Think About Risk
The financial fundamentals of risk evaluation are becoming more important than ever. This week, the S&P 500 reached a record level, surpassing the previous peak, which occurred on February 19th. After just a few months, the Index fully rebounded from a decline of 34%, which marks that fastest bear market recovery in history. The S&P 500 Index is market-cap-weighted, meaning that the companies with the largest market capitalization make up more of the Index and have a greater impact on the performance of the overall Index. The top five companies – Apple, Microsoft, Amazon, Facebook, and Alphabet (or Google) – make up more than 20% of the Index and significantly impact the performance. For 2020, the S&P 500 Index is up 4.9%, whereas the S&P 500 Index on an equal-weighted basis is down almost as much. Moreover, the Russell 2000 Index, which is the leading domestic small-cap index, is also…
Alphabet Soup: What Do Financial Credentials Mean
Financial professionals may possess a variety of certifications and designations. These credentials instill a sense of competency. In recent years, however. the number of financial credentials has expanded significantly. If you are choosing to work with a financial professional, you should understand what these credentials mean. The prestige of certifications and designations and their usefulness to clients varies considerably. The Financial Industry Regulatory Authority, or FINRA, has a designation lookup feature on its website, https://www.finra.org/investors/professional-designations. The tool is very helpful, especially because you can compare different designations side by side. FINRA does not endorse or recommend any of these designations. The list of designations on the FINRA website is extensive. Currently, there are more than 200 listed. How do you determine which are the most meaningful? Look up what is required to achieve and maintain the various designations. If you need help with retirement planning, what are the prerequisites for…
Georgetown University Center for Financial Markets and Policy Panel Discussion
On April 28th, the Georgetown University Center for Financial Markets and Policy, the Wall Street Alliance, and the Office of the Provost hosted a panel discussion featuring Nancy Doyle entitled The Markets Have Been Rocked! Where Are They Headed?
Tax Efficiency
As an investor, you need to consider the impact of taxes. The taxes owed on investments depend on the type of investment account. For tax-deferred accounts, such as 401(k)s and 403(b)s, you contribute money from your paycheck before it is taxed, known as “pre-tax dollars.” In other words, you do not pay taxes on the portion of your salary that goes directly into your 401(k) or 403(b). Moreover, you do not pay taxes on the income or capital gains generated each year. Instead, you pay taxes when you withdraw money from the account. Roth IRAs and college savings plans, such as 529s, are examples of a tax-advantaged account. You fund these kinds of accounts with after-tax dollars, and you do not get a tax break upfront. After you fund a Roth IRA or 529, the income, appreciation, and withdrawals are tax-free. For taxable accounts, income and capital gains are not tax-exempt or tax-deferred, so you…