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Investing Terms: From Alpha to Zeta (Part 2)

Nominal vs Real Interest Rate:  When you hear someone mention an “interest rate”, they are most often referring to the current market, or nominal interest rate.  Real interest rates are inflation-adjusted rates used in time-value of money calculations such as annuity or retirement calculations. Rule of 72:  The rule of 72 is a shortcut to estimate the number of years required to double your money at a given annual rate of return. The rule states that you divide the rate, expressed as a percentage, into 72.  Years required to double investment = 72 ÷ compound annual interest rate Sharpe Ratio:  named after William Sharpe, winner of the 1990 Nobel Memorial Prize in Economic Sciences. Sharpe was one of the originators of the capital asset pricing model. He created the Sharpe ratio for risk-adjusted investment performance analysis, and he contributed to the development of the binomial method for the valuation of options, the gradient method for asset allocation optimization, and returns-based style analysis for evaluating the...
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Asset Classes and Their Characteristics

Investments are financial assets because their payoff or return is in money.  However, tangible assets such as real estate or collectibles such as art are non-financial assets because their return is in their utility or enjoyment rather than money. Asset classes are the category of investment to which you are providing your money with the expectation of a financial return on the amount you provided to the other party for use.  An asset class includes groups of investments with similar characteristics, that behave in a similar manner.  Each asset class reflects different risk and return investment characteristics, and is expected to perform differently in any given market environment. Investors interested in maximizing return often do so by reducing portfolio risk through asset class diversification (investing in multiple asset classes.) Investment strategies can be based on income, growth, value, or a variety of other factors that help to identify and categorize investment...
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Investing Terms: From Alpha to Zeta (Part 1)

If you watch CNBC or read the Wall Street Journal, you may hear or see terms and acronyms mentioned by market analysts, investment professionals and the financial press. What do these terms mean?  Although there are many, many terms you may encounter, let’s explain a few of the terms you may need to understand or could be interested in. Alpha:  Alpha is the abnormal rate of return on a security or portfolio in excess of what would be predicted by an equilibrium model like the capital asset pricing model (CAPM).  Alpha could be generated by investors selecting specific holdings and/or weightings based on investment analysis.   Beta:  Alpha and beta are two of the five standard technical risk calculations, the other three being the standard deviation, R-squared, and Sharpe ratio.  Beta represents the overall volatility of an investment relative to the market, which has a beta of 1.0.  If an investment has a Beta of 1.2, it would be...
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An Introduction to Mutual Funds and ETFs

A mutual fund pools money received from investors, and issues fund shares to shareholders. It then invests in securities (stocks, bonds and money market instruments) related to the fund's investment objective. The fund provides shareholders with professional investment management, diversification, liquidity and investing convenience. For these services, the fund charges fees and incurs internal expenses for operating the fund, all of which are charged proportionately against a shareholder's assets in the fund. There also may be front- end (purchase) or back-end (sale) charges (loads), which are sales commissions charged upon buying or selling the mutual fund. However, there are no-load mutual funds available that do not charge sales or redemption fees. Purchases and sales take place between investors and the mutual fund.  Mutual funds issue and redeem shares of the fund at their net asset value (NAV), which is the price at which you can buy or sell a share that is calculated after...
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First Quarter 2017 Key Takeaways

The buoyant mood that pushed stocks higher through year-end 2016 continued into the first quarter as signs of an improving global economy continued to mount. Stock indexes were up across the board. Emerging-market (EM) stocks were the star performers.  (MSCI EM index +11.6%).  Their double-digit gains eclipsed returns for developed international stocks (up 8%), and both outperformed larger-cap U.S. stocks (up 6%). Price-to-earnings multiples in most EM countries’ equity markets remain at the lower end of their 20-year averages, and we expect growth in emerging countries to outpace that of developed markets over the long term.   Investors took the Federal Reserve’s widely anticipated rate hike on March 15 in stride, treating it as another indicator of the U.S. economy’s return to form.  Wage growth has returned, unemployment is well below 5%, and inflation is close to the 2% target.  The Fed is now turning its attention to reducing its $4.5...
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Why Retirees Need Equities

Interest rates have been declining since 1981.  Long-term U.S. Treasury bond yields peaked at 15.21% in October of 1981 and reached a record low of 2.11% in July 2016. In 1960, 41% of private-sector workers were covered by pension plans, but by 2008 only 20% were covered by a defined-benefit pension plan.  Most retirees now need to produce income from tax-deferred accounts or taxable investments in addition to Social Security benefits in order to meet retirement income needs.  Social Security was introduced in 1935 as a program to provide some continuing income after retirement.   However, the estimated average monthly benefit for all retired workers in January 2016 was only $1,341 per month ($16,092 annually).  The Federal poverty level for a family of two for 2017 is $16,240. Retirees are faced with several risks in their retirement years.   The first is longevity risk, the risk of outliving your assets.   Associated to longevity...
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