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 investments perform well, the portfolio grows, and the financial adviser also does well. Unlike brokers, who charge transaction-based fees, incentives are aligned for fee-based financial advisers and their clients.…
The Benefits of Diversification
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…
Different Types of Risk
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 more variability, or volatility, in temperature for a particular day of the year. Standard deviation is a measure of volatility that looks at how far an actual outcome might be from the average or expected outcome. The standard deviation in weather for a particular day of the year is larger in Chicago than it is in Southern California. Likewise, for investments, the greater the standard deviation of outcomes or returns, the greater the risk. Investors should be compensated for taking risk and will demand a higher return. In other words,…
The Power of Compounding
I have heard people refer to it as “The magic of compounding.” Personally, I don’t like the term “magic.” Magic implies something mystical, beyond our comprehension. Rather than “magic,” compounding is just math – incredibly powerful math – but it is just math. Compounding means that there is growth on the growth. For example, an investment of $100 that appreciates 7 percent will be worth $107 at the end of the first year. If the investment grows 7% percent again in the second year, the return would be 7 percent on $107 or $7.49. 7% growth on $100.00 = $107.00 7% growth on $107.00 = $114.49 In year two, the dollar amount increase exceeds that in year one. You have a 7% return on the original $100 and a 7% return on the $7 you earned in year one. Each year, you earn a return on the original amount ($100) and…
Yield and Total Return
For any asset, yield is the income earned (interest or dividends) divided by the price of the asset, such as a bond or a share of stock. Price and yield move in opposite directions. If a $100 bond earns 5 percent interest, it earns $5 on a $100 asset, or $5 divided by $100, which is a 5 percent yield. If the price of the bond increases to $105, the yield declines to $5 on a $105 asset, or 4.8 percent. $5 ÷ $100 = 5.0% and $5 ÷ $105 = 4.8% If a share of stock is worth $50 and pays a $1 dividend per share, the yield is $1 divided by $50, or 2 percent. If a company increases its dividend, then the yield will also change. Raising the dividend to $1.10 results in a 2.2 percent yield. $1 ÷ $50 = 2.0% and $1.10 ÷ $50 =…
The Long-term Impact of Investment Fees
Investment fees vary and can have a profound impact on long-term investment returns. It is imperative that you understand all fees associated with any investment. The attached table illustrates the effect. MYFL Long-term Impact of Fees
Advice for Those Just Starting Out – Guest Appearance on Wintrust Business Lunch
Nancy Doyle was a guest on Wintrust Business Lunch. The majority of college graduates leave school with student debt burdens. Moreover, rents in major metropolitan areas are high. Despite these headwinds, people can find a way to save by analyzing their spending. For those just starting out, time is on your side. Save and invest early and consistently to take advantage of the magic of compounding. Listen in beginning at 19:35. See link below: WGN Wintrust Business Lunch
WGN Weekend Morning News – Financial Advice for Those Just Starting Out
On July 28th, Nancy Doyle was a guest on WGN Weekend Morning News to share financial advice for those just starting out. Tracking expenses and using debt wisely are both good habits to establish when you are young. See the link below. WGN-TV July 28, 2018
Nancy Doyle’s guest column in the Daily Herald Business Ledger
Those just starting out in the work force face substantial headwinds—student debt burdens and sky-high rents. Despite these challenges, saving and managing debt prudently are essential. Discipline is key to establishing sound financial practices, especially when you are young. Doyle, Nancy: “Finding a Way to Save While Costs Go Up” Daily Herald Business Ledger See link below: Daily Herald Business Ledger
Manage Your Financial Life: Just Starting Out Featured on Working Woman Report
Working Woman Report, workingwomanreport.com, featured a summary of my new book Manage Your Financial Life: Just Starting Out. “Financial author Nancy Doyle has a new, easy to digest book about MONEY! Manage Your Financial Life: Just Starting Out is for those who are new to managing their money. She educates her readers and lays out a solid action plan for those faced with first-time financial realities.” Working Woman Report