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Managing a Portfolio of Stocks

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Too many young people rarely—if ever—invest for their retirement years. Some distant date, 40 or so years in the future, is hard for many young people to imagine. But without investments to supplement retirement income (if any), when these people become retirees, they’ll have a difficult time paying for life’s necessities.

Stocks Basics

Smart, disciplined, regular investments in a portfolio of diverse holdings can yield good, long-term returns for retirement and provide additional income throughout an investor’s working life.

One of the reasons most often given for not investing is a lack of knowledge and understanding of the stock market. This objection can be overcome through self-education and step-by-step through the years because investors learn by investing. Classes in investing are also offered by a variety of sources, including city and colleges, civic groups, and not-for-profit organizations, and there are numerous books aimed at the beginning investor.

But you’ve got to start investing now; the earlier you begin, the more time your investments will have to grow in value. Here’s a good way to start building a portfolio, and how to manage it for the best results.

Start Early

Start saving as soon as you go to work by participating in a retirement plan, if it’s offered by your employer. If a plan is not available, establish an Individual Retirement Account and earmark a percentage of your compensation for a monthly contribution to the account. An easy, convenient way to save in an IRA or company provided retirement plan is to create an automatic monthly cash contribution.

Keep in mind that savings accumulate and interest compounds without taxes only as long as the money is not withdrawn, and so it’s wise to establish one of these retirement investment vehicles early in your working life.

Early Higher Risk Allocation

Another reason to start saving early is that usually the younger you are, the less likely you are to have burdensome financial obligations—a spouse, children, and a mortgage, to name a few. Without these burdens, you can allocate a small portion of your investment portfolio to higher risk investments, which can return higher yields.

When you start investing while you’re young—before your financial commitments start piling up—you’ll probably also have more cash available for investments and a longer time horizon before retirement. With more money to invest for many years to come, you’ll have a bigger retirement nest egg.

An Exemplary Egg

To illustrate the advantage of value investing as soon as possible, assume that you invest $200 every month starting at age 25. If you earn a 7% annual return on that money, when you’re 65, your retirement nest egg will be approximately $525,000.

However, if you start saving that $200 monthly at age 35 and get the same 7% return, you’ll only have about $244,000 at age 65.


The idea is to select stocks across a broad spectrum of market categories. This is best achieved through an index fund. Aim to invest in conservative stocks with regular dividends, stocks with long-term growth potential, and a small percentage of stocks with better returns or higher risk potential.

If you’re investing in individual stocks, don’t put more than 4% of your total portfolio into one stock. That way, if a stock or two suffers a downturn, your portfolio won’t be too adversely effected.

Certain AAA-rated bonds are also good investments for the long term, either corporate or government. Long-term U.S. Treasury bonds, for example, are safe and pay a higher rate of return than short- and mid-term bonds.

Keep Costs to a Minimum

Invest with a discount brokerage firm. Another reason to consider index funds when beginning to invest is that they have low fees. Because you’ll be investing for the long-term, don’t buy and sell regularly in response to market ups and downs. This saves you commission expenses and management fees and may prevent cash losses when the price of your stock declines.

Discipline and Regular Investing

Make sure that you put money into your investments on a regular, disciplined basis. This may not be possible if you lose your job, but once you find new employment, continue to put money into your portfolio.

Asset Allocation and Re-Balancing

Assign a certain percentage of your portfolio to growth stocks, dividend paying stocks, index funds, and stocks with higher risk but better returns.

When your asset allocation changes (i.e., market fluctuations change the percentage of your portfolio allocated to each category), re-balance your portfolio by adjusting your monetary stake in each category to reflect your original percentage.

Tax Considerations

A portfolio of holdings in a tax-deferred account—a 401(k), for example—builds wealth faster than a portfolio with tax liability. But remember, you pay taxes on the amount of money withdrawn from a tax deferred retirement account.

A Roth IRA also accumulates tax free savings, but the account owner doesn’t have to pay taxes on the amount withdrawn. To qualify for a Roth IRA, your modified adjusted gross income must meet IRS limits and other regulations. Earnings are federally tax free if you’ve owned your Roth IRA for at least five years and you’re older than 59.5, or if you’re younger than 59.5, have owned your Roth IRA for at least five years, and the withdrawal is due to your death or disability—or for a first time home purchase.

The Bottom Line

Disciplined, regular, diversified investments in a tax deferred employer provided, IRA or a potentially tax-free Roth IRA, and smart portfolio management can build a significant nest egg for retirement. A portfolio with tax liability, dividends, and the sale of profitable stock can provide cash to supplement employment or business income.

Managing your assets by re-allocation and keeping costs (such as commissions and management fees) low, can produce maximum returns. If you start investing as early as possible, your stocks will have more time to build value.

Finally, keep learning about investments throughout your life, both before and after retirement. The more you know, the more your potential portfolio returns—with proper management, of course.

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What is the Difference between an ETF and a Mutual Fund?

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In the last 10 years, the exchange-traded fund (ETF) has become one of the most popular investment vehicles. An ETF is a type of security that tracks an index, bonds, commodities, currencies, or a mix of various asset classes.

Because it is a type of fund, the ETF is often compared to the mutual fund when weighing the pros and cons of various investment vehicles. Both an ETF and a mutual fund hold a portfolio of investments whether they are stocks, bonds, or other assets.

Furthermore, both fall under the same regulations, depending on the assets that they hold in their portfolios.

Despite some similarities, however, both also have their differences. Below are some key differences between ETFs and mutual funds.

More Dynamic and Cost Efficient

The ETF owns underlying assets and divides ownership of those assets into shares. As such, these shares can be bought and sold on a major exchange.

Furthermore, because of this flexibility, they can be traded intraday. This allows investors to trade them through online or traditional brokers.

Mutual funds shares are bought and sold directly through the mutual fund company, so the actions of other fund investors can affect an individual investor’s tax liability.

An ETF shareholder is also entitled to income earned through dividends. In the event the fund is liquidated, ETF shareholders may also receive a portion of its residual value, which is the value determined at the end of an asset’s useful life.

Because an ETF can track an index, it can be passively-managed. This translates to lower costs to investors when compared to mutual funds, which are typically actively-managed.

Actively-managed mutual funds carry greater operating costs because they have to pay analysts and other research specialists. The lower costs of ETFs show in their expense ratio, which is the cost to run the fund.

Different Creation Process

The process of creation and redemption is what regulates the supply of ETFs. This process will involve an authorized participant (AP) who can redeem shares of an ETF via sale to the fund’s sponsor.

Market demand will be the primary determinant for the amount of redemption and creation activity. Demand for the ETF will also drive the price of its shares, which in turn, determines whether the ETF is trading at a discount or premium relative to the value of its underlying assets.

Less Taxable Events

The ETF is often praised for their tax efficiency since they use an in-kind exchange with an authorized participant. This means an ETF manager uses an exchange to sell the basket of stocks in a fund.

This allows the authorized participant to shoulder the impact of capital gains taxes. As mentioned, a mutual fund that must sell stocks in order to cover redemptions. This creates a scenario where the fund pays capital gains taxes that are passed on to the investor.

Certain ETF products could be subject to capital gains taxes, such as actively-managed funds. For these funds, a higher degree of buying or selling could result in more capital gains taxes incurred.

Still, most ETFs sell holdings only when the factors affecting their underlying index change. This results in a lower turnover ratio that creates taxable events.

As per investor data, some actively-managed mutual funds have a turnover rate of 100 percent. In contrast, the majority of ETFs have a turnover rate that is less than 10 percent.

Phantom gains consist of capital gains that an investor owes taxes even if the actual return realized on the investment results in a negative return. In the world of mutual funds, phantom gains can occur when an investor purchases shares of a mutual fund before a fund manager sells a large portion of holdings.

The fund manager’s sale of the holdings creates a taxable event. As such, any capital gains realized on the sale are then passed on to mutual fund investors.

Because of the way ETFs are structured, they do not expose themselves to these phantom gains. Securities within an ETF portfolio are exchanged and created through an in-kind exchange.

This results in the securities returned on a low-cost basis and received at a higher cost basis, which limits tax liability. This results in lower capital gains taxes as opposed to a mutual fund engaging in a similar transaction.

Different Legal Structure

The tax efficiency of ETFs is inherent in their legal structure as opposed to a mutual fund. Most ETFs are structured as open-end funds, which fall under the regulatory measures of the Investment Company Act of 1940.

In essence, an individual tax investor doesn’t have control of the actions of his or her fellow mutual fund investors. In addition, a mutual fund manager must sell a portion of the fund’s holdings for shares redeemed, which could result in capital gains.

Those capital gains realized are then passed on to mutual fund investors. ETFs are not exposed to this type of taxable event.

The tax implications for ETFs can also vary according to their legal structure. A tax professional can help an investor navigate through the tax ramifications for each type of ETF structure.

Seven Types of ETF Structures:

  1. Open-end funds: this structure is typically used for stock and bond asset classes.
  2. Unit investment trusts: typically used to track broad asset classes.
  3. Grantor trusts: typically used for physical commodities and currencies.
  4. Exchange-traded notes: don’t hold underlying assets, but contain prepaid forward contracts.
  5. Partnerships: unincorporated business entities that elect for taxation as a partnership.
  6. C Corporations: used to access specific types of partnerships as well as other special purpose vehicles (SPVs).
  7. Exchange-traded managed funds: meld the active component of mutual funds with the intraday trading flexibility of an ETF.

The majority of ETFs are structured as open-end funds, which fall under the regulatory measures of the Investment Company Act of 1940. These types of ETFs typically provide investor’s exposure to the most common assets, which are stocks and bonds.

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Investing 101: Part 2

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Investing is a tool for building wealth, but it is not only for the wealthy. Anyone can get started on an investing program, and various vehicles make it easy to begin with small amounts and add to a portfolio periodically. In fact, what differentiates investing from gambling is that it takes time—it is not a get-rich-quick scheme.

This tutorial will help you to understand what investing is, what it means and how the “miracle” of compounding works. It will also cover some of the building blocks of the investing world and the markets and provide some insights into techniques with the goal of helping you think about which investing strategies and vehicles are right for you.

When you are finished with Investing 101, you can continue your financial education with some of our specialized tutorials such as the Stock Basics or Mutual Fund Basics. You can also visit our website to ask one of our participating financial advisors any specific questions you may have.

Investing 101: Portfolios And Diversification

An investment portfolio is a collection of investments. Ideally these investments were chosen to work in harmony to help the investor achieve their goals and also to provide a certain degree of diversification so that you are not putting all your eggs in one basket.

An investment portfolio is a combination of asset classes such as stocks, bonds and cash. The portfolio might be further divided into sub-asset classes like large cap stocks, mid-cap stocks, small cap stocks and international stocks. On the bond side you might have some short-term bonds, intermediate-term, tax-exempt municipal bonds and foreign bonds.

Each asset class and sub-asset class can be further sub-divided.

Investment vehicles used might include mutual funds, ETFs, individual stocks and bonds and others.

You might view all of your investment holdings across various types of accounts as a single overall portfolio, or you might segment certain portions of your holdings as separate portfolios. For example your account for college savings might be one portfolio and the money earmarked for retirement might be managed as another.

Ideally a portfolio consists of a variety of investments, not all of which are highly correlated to each other.

Let’s look at a simple example using three Vanguard index mutual funds:

Vanguard Total Stock Market Index – A market cap weighted fund replicating the total U.S. stock market.

Vanguard Total Intl Stock Index – A market cap weighted index fund covering non-U.S. developed and emerging market stocks.

Vanguard Total Bond Market Index – A market cap weighted fund largely replicating the U.S bond market.

Over the five years ending February 28, 2017, these funds were correlated to each other as follows:

Vanguard Total Stock Vanguard Total International Stock Market Vanguard Total Bond Market
Vanguard Total Stock 0.79 -0.12
Vanguard Total International Stock Market 0.79 0.08
Vanguard Total Bond Market -0.12 0.08

A correlation of 1.00 between two investment vehicles mean that their performance is perfectly tied to each other, while a correlation of zero means there is no relationship between the two investment vehicles being compared. At 0.79, the Vanguard Total Stock Market fund and the Vanguard Total International Stock Market fund are highly, but not perfectly, correlated.

But a correlation of 0.08 between the Vanguard Total Bond Market Fund and the Vanguard Total International Stock Market fund means that there is very little relationship in the performance of these two funds.

The correlation of -0.12 between the Vanguard Total Bond Market Fund and the Vanguard Total Stock Market Fund means that there is actually an inverse relationship.

Here is a look at the risk and return of three portfolios using combinations of these three funds. These results are provided by a hypothetical portfolio tool.

The simulation assumes:

  •         Investments were purchased on 4/29/1996 with results through 2/28/2017.
  •         The portfolio was rebalanced back to the original allocation semi-annually.
  •         An initial investment of $50,000.

Conservative 40/60

  •         Vanguard Total Stock Market 30%
  •         Vanguard Total International Stock Market 10%
  •         Vanguard Total Bond Market 60%

Moderate 60/40

  •         Vanguard Total Stock Market 45%
  •         Vanguard Total International Stock Market 15%
  •         Vanguard Total Bond Market 40%

Aggressive 80/20

  •         Vanguard Total Stock Market 60%
  •         Vanguard Total International Stock Market 20%
  •         Vanguard Total Bond Market 20%

Here are the comparative results for these model portfolios:


Growth of $50,000 Cumulative % return Loss in Value 2008 (%) Loss in Value 2002 (%) % of variability in return compared to S&P 500 (last 10 years) % of modeled return compared to S&P 500 (last 10 years)
Conservative 40/60 $193,435 286.87% -14.03% -2.26% 44.25% 72.80%
Moderate 60/40 $211,527 323.05% -22.78% -7.81 63.86% 78.19%
Aggressive 80/20 $222,267 344.53% -31.02 -13.56 84.84% 80.81%

As you would, expect, the conservative portfolio had the smallest loss in 2008 of 14.03%. This compares to a loss for the S&P 500 Index of 37.00% that year. As you would also expect, this portfolio had the smallest rate of growth over the time period with an ending value of $193,435.

The aggressive portfolio had the largest decline of the three in 2008 with a loss of 31.02% for the year. This portfolio had the largest increase in value over the period with an ending value of $222,267.

The point is that combining different investments in various allocations will have an impact on both the growth of your portfolio and the downside risk over time.

Investing 101: Conclusion

Through the various sections of this tutorial, we’ve introduced and discussed a number of investing concepts and investing vehicles. Among them are:

  •         Stocks
  •         Bonds
  •         Mutual Funds
  •         Passive index mutual funds and ETFs
  •         Active management
  •         ETFs
  •         Real estate and alternative investing
  •         The importance of diversification
  •         Compounding and the benefit of starting early
  •         The concept of building a diversified portfolio
  •         Correlation between different investments
  •         Investing expenses
  •         The impact of technology on investing
  •         Robo advisors

Moreover, we stressed the idea that investing is not one size fits all. Different strategies work for different investors and different situations. Additionally, an investor might employ more than one strategy, or choose a variety of investment vehicles depending upon their goals.

Have a plan and a strategy

Just like going on trip in your car, it is important that investors have a plan and a destination in mind before investing their money. Your goals—whether planning for retirement or buying a home—dictate your time horizon, which dictates your tolerance for risk. Additionally, you want to make sure that you diversify your investments so that some do well when the rest of your portfolio might not. This approach allows an investor to construct a portfolio that is in line with their risk tolerance and that balances potential return with some downside risk protection.

Hopefully our tutorial has provided some insights and good ideas as you invest for your future.

Your journey is just beginning, however. Your challenge is to keep learning and stay informed.

Investing 101: Part I

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Investing is a tool for building wealth, but it is not only for the wealthy. Anyone can get started on an investing program, and various vehicles make it easy to begin with small amounts and add to a portfolio periodically. In fact, what differentiates investing from gambling is that it takes time—it is not a get-rich-quick scheme.

This tutorial will help you to understand what investing is, what it means and how the “miracle” of compounding works. It will also cover some of the building blocks of the investing world and the markets and provide some insights into techniques with the goal of helping you think about which investing strategies and vehicles are right for you.

When you are finished with Investing 101, you can continue your financial education with some of our specialized tutorials such as the Stock Basics or Mutual Fund Basics. You can also visit our website to ask one of our participating financial advisors any specific questions you may have.

Investing 101 – What is investing?

Investing: The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.

Legendary investor Warren Buffett defines investing as “… the process of laying out money now to receive more money in the future.” The goal of investing is to put your money to work in one or more types of investment vehicles in the hopes of growing your money over time.

What is investing?

Investing is really about “working smarter and not harder.” Most of us work hard at our jobs, whether for a company or our own business. We often work long hours, which requires sacrifice and adds stress. Taking some of our hard-earned money and investing for our future needs is a way to make the most of what we earn.

Investing is also about making priorities for your money. Spending is easy and gives instant gratification—whether the splurge is on a new outfit, a vacation to some exotic spot or dinner in a fancy restaurant. All of these are wonderful and make life more enjoyable. But investing requires prioritizing our financial futures over our present desires.

Investing is a way to set aside money while you are busy with life and have that money work for you so that you can fully reap the rewards of your labor in the future. Investing is a means to a happier ending.

Investing Vehicles

There are many different ways you can go about investing, including putting money into stocks, bonds, mutual funds, ETFs, real estate (and other alternative investment vehicles), or even starting your own business.

Every investment vehicle has its positives and negatives, which we’ll discuss in a later section of this tutorial. Understanding how different types of investment vehicles work is critical to your success. For example, what does a mutual fund invest in? Who is managing the fund? What are the fees and expenses? Are there any costs or penalties for accessing your money? These are all questions that should be answered before making an investment. While it is true there are no guarantees of making money, some work on your part can increase your odds of being a successful investor. Analysis, research and even just reading up on investing can all help.

Now that you have a general idea of what investing is and why you should do it, it’s time to learn about how investing lets you take advantage of one of the miracles of mathematics: compound interest.

Investing 101: The Concept Of Compounding

Compounding is the process of generating more return on an asset’s reinvested earnings. To work, it requires two things: the reinvestment of earnings and time. Compound interest can help your initial investment grow exponentially. For younger investors, it is the greatest investing tool possible, and the #1 argument for starting as early as possible. Below we give a couple of examples of compound interest.

Example #1: Apple stock

An investment of $10,000 in the stock of Apple (AAPL) that was made on December 31, 1980 would have grown to $2,709,248 as of the market’s close on February 28, 2017. This translates to an annual return of 16.75%, including the reinvestment of all dividends from the stock.

Apple started paying dividends in 2012. Even so, if those dividends hadn’t been reinvested the ending balance of this investment would have been $2,247,949 or 83% of the amount that you would have had by reinvesting.

While Apple is one of the most successful companies, and their stock is a winner year-in and year-out, compound interest also works for index funds, which are managed to replicate the performance of a major market index such as the S&P 500.

Example #2: Vanguard 500 Index

Another example of the benefits of compounding is the popular Vanguard 500 Index fund (VFINX) held for the 20 years ending February 28, 2017.

A $10,000 investment into the fund made on February 28, 1997 would have grown to a value of $42,650 at the end of the 20-year period. This assumes the reinvestment of all fund distributions for dividends, interest or capital gains back into the fund.

Without reinvesting the distributions, the value of the initial $10,000 investment would have grown to $29,548 or 69% of the amount with reinvestment.

In this and the Apple example, current year taxes would have been due on any fund distributions or stock dividends if the investment was held in a taxable account.

Starting Early

Another way to look at the power of compounding is to compare how much less initial investment you need if you start early to reach the same goal.

A 25-year-old who wishes to accumulate $1 million by age 60 would need to invest $880.21 each month assuming a constant return of 5%.

A 35-year-old wishing to accumulate $1 million by age 60 would need to invest $1,679.23 each month using the same assumptions.

A 45-year-old would need to invest $3,741.27 each month to accumulate the same $1 million by age 60. That’s almost 4 times the amount that the 25-year old needs. Starting early is especially helpful when saving for retirement, when putting aside a little bit early in your career can reap great benefits.

Investing 101: Knowing Yourself

No one investing strategy or approach fits all. Every investor has different reasons for investing, different goals, different time horizons and varying degrees of comfort with investing. It’s important to define and articulate your own parameters.


What are your objectives for the money that you will be investing? Is safety of principal with some level of return sufficient? Are you trying to accumulate money for a longer-term goal such as a college education for your kids or perhaps a comfortable retirement for yourself?

You might even have different investments for different goals. The point is that before you decide to invest any money it is important to understand why you are investing and the end result that you are seeking.

Goals and objectives should not be created in a vacuum. You also need to know your risk tolerance and time horizon as part of the goal-setting process.

Risk tolerance

Risk can mean a lot of things, but in the context of investing it means the risk of losing money. In other words, the risk that the amount of money invested will decrease in value, possibly to zero.

All investing involves risk in one way or another. Stocks can and often do go down in value over certain periods of time—in 2008, the S&P 500 dropped by 37%. While this decline in the stock market was one of the worst in history, less severe market corrections are not uncommon.

How much of a drop in value for your investments can you stomach? Your risk tolerance will likely be in part a function of when you need the money—known as your time horizon—which is usually a function of age. Someone in their 20s or 30s who is saving for retirement shouldn’t give too much thought to fluctuations in the value—known as the volatility—of their investments.

In contrast, someone in their 60s likely will and should have a lower risk tolerance if for no other reason than they don’t have the time to fully recoup a major loss in the value of their investments.

Your investments should be aligned with the time horizon in which you will need the money, especially if some or all of your investments are targeted for a specific goal.

For example, if you are young parents investing for your newborn’s college education, your long time horizon allows you to take a bit more risk in the initial years. When your kid gets to high school, you might adjust the investment mix to help ensure that you don’t suffer any major losses in the years leading up to the start of college.

Trading Frequency

How long will you stay in one particular investment? Legendary investor Warren Buffett rarely sells a stock he owns and doesn’t get rattled by market fluctuations. This is generally known as a “buy-and-hold” strategy.

At the other extreme are traders who buy and sell stocks on a daily basis. This is fine for professionals, but rarely a good idea for the average investor.

Nobody is advocating that your need to hold an investment forever, and in fact things change and you should be reviewing your individual holdings periodically to ensure they are still appropriate for your situation.

Knowledge and comfort

Some investment vehicles require sophisticated knowledge and monitoring, while others are more set-and-forget. Your investment decisions should be based on your comfort level and your willingness to devote time to researching your choices.

An easy route is to choose a variety of low-cost index funds that cover various parts of the markets such as bonds, domestic stocks and foreign stocks. Another alternative to consider are professionally managed vehicles such as target date mutual funds, where the manager allocates portfolio over time. These funds are designed to gradually reduce their exposure to equities as the target date of the fund gets closer

Investors with more knowledge and experience might consider actively managed mutual funds, individual stocks, real estate or other alternative investments.

Understand what you don’t know

It is important that investors understand what they do and don’t know. They should never be talked into investing in something that they don’t understand or are uncomfortable with.

Investing 101: How Technology Has Changed Investing

Technology has had a profound impact on most every aspect of our lives. Investing is certainly no exception. In fact, technology has democratized investing in the last several decades and also exerted significant downward pressure on fees.

Buying and selling securities

Years ago, if you wanted to make a trade you would need to call your stockbroker and place an order. The commission rates to buy or sell stocks was pretty much fixed and high due to a lack of information and alternatives. Investors wouldn’t know how their investments were faring until they received their account statements in the mail.

Today investors can search the web to see which brokerage firm has the lowest transaction fees and buy and sell securities themselves at the click of a mouse.

Many brokerage firms and other custodians offer apps to allow investors to track their investments using their phones. Alerts can be established on various holdings and so much more.

Technology has also armed both individual investors and investment advisors with the tools to perform cutting edge research and analysis on investments and to help manage portfolios.

Robo advisors

One of the biggest innovations of the past ten years has been the advent of the robo advisor. Most robo advisors invest in low cost ETFs. Taking the human element out of the investing equation can drastically lower the cost of investing.

Robo advisors have been adding additional services as well.

Investing 101: Types Of Investments

There are many types of investments and investing styles to choose from. Mutual funds, ETFs, individual stocks and bonds, closed-end mutual funds, real estate, various alternative investments and owning all or part of a business are just a few examples.


Buying shares of stock gives the buyer the opportunity to participate in the company’s success via increases in the stock’s price and dividends that the company might declare. Shareholders have a claim on the company’s assets in the event of liquidation, but do not own the assets.

Holders of common stock have voting rights at shareholders’ meetings and the right to receive dividends if they are declared. Holders of preferred stock don’t have voting rights, but do receive preference in terms of the payment of any dividends over common shareholders. They also have a higher claim on company assets than holders of common stock.


Bonds are debt instruments whereby an investor effectively is loaning money to a company or agency (the issuer) in exchange for periodic interest payments plus the return of the bond’s face amount when the bond matures. Bonds are issued by corporations, the federal government plus many states, municipalities and governmental agencies.

A typical corporate bond might have a face value of $1,000 and pay interest semi-annually. Interest on these bonds are fully taxable, but interest on municipal bonds is exempt from federal taxes and may be exempt from state taxes for residents of the issuing state. Interest on Treasuries are taxed at the federal level only.

Bonds can be purchased as new offerings or on the secondary market, just like stocks. A bond’s value can rise and fall based on a number of factors, the most important being the direction of interest rates. Bond prices move inversely with the direction of interest rates.

Mutual funds

A mutual fund is a pooled investment vehicle managed by an investment manager that allows investors to have their money invested in stocks, bonds or other investment vehicles as stated in the fund’s prospectus.

Mutual funds are valued at the end of trading day and any transactions to buy or sell shares are executed after the market close as well.

Mutual funds can passively track stock or bond market indexes such as the S&P 500, the Barclay’s Aggregate Bond Index and many others. Other mutual funds are actively managed where the manager actively selects the stocks, bonds or other investments held by the fund. Actively managed mutual funds are generally more costly to own. A fund’s underlying expenses serve to reduce the net investment returns to the mutual fund shareholders.

Mutual funds can make distributions in the form of dividends, interest and capital gains. These distributions will be taxable if held in a non-retirement account. Selling a mutual fund can result in a gain or loss on the investment, just as with individual stocks or bonds.

Mutual funds allow small investors to instantly buy diversified exposure to a number of investment holdings within the fund’s investment objective. For instance, a foreign stock mutual might hold 50 or 100 or more different foreign stocks in the portfolio. An initial investment as low as $1,000 (or less in some cases) might allow an investor to own all the underlying holdings of the fund. Mutual funds are a great way for investors large and small to achieve a level of instant diversification.


ETFs or exchange-traded funds are like mutual funds in many respects, but are traded on the stock exchange during the trading day just like shares of stock. Unlike mutual funds which are valued at the end of each trading day, ETFs are valued constantly while the markets are open.

Many ETFs track passive market indexes like the S&P 500, the Barclay’s Aggregate Bond Index, and the Russell 2000 index of small cap stocks and many others.

In recent years, actively managed ETFs have come into being, as have so-called smart beta ETFs which create indexes based on “factors” such as quality, low volatility and momentum.

Alternative investments

Beyond stocks, bonds, mutual funds and ETFs, there are many other ways to invest. We will discuss a few of these here.

Real estate investments can be made by buying a commercial or residential property directly. Real estate investment trusts (REITs) pool investor’s money and purchase properties. REITS are traded like stocks. There are mutual funds and ETFs that invest in REITs as well.

Hedge funds and private equity also fall into the category of alternative investments, although they are only open to those who meet the income and net worth requirements of being an accredited investor. Hedge funds may invest almost anywhere and may hold up better than conventional investment vehicles in turbulent markets.

Private equity allows companies to raise capital without going public. There are also private real estate funds that offer shares to investors in a pool of properties. Often alternatives have restrictions in terms of how often investors can have access to their money.

In recent years, alternative strategies have been introduced in mutual fund and ETF formats, allowing for lower minimum investments and great liquidity for investors. These vehicles are known as liquid alternatives.

Bonds 101: Inside Bonds and Whether They’re a Good Investment for You

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When it comes to creating your diversified financial portfolio, you know it’s important to figure out how stocks and bonds fit into your overall investment plans. But honestly, do you know the difference between a stock and a bond? And specifically, are you aware of the various types of bonds that exist, and how they can help or hinder your overall portfolio growth?

You’re probably more familiar with stocks–shares or equity in a corporation. Even if you don’t invest in stocks, you probably read and hear news regularly from Wall Street about the rising or falling stock market on any given day.

Stocks even have an impact on our culture–they are often influenced by societal trends and they even have starring roles in the storylines of many great films, including Wall Street, The Wolf of Wall Street, and Trading Places.

Bonds, on the other hand, represent debt obligations, allowing corporations and governments (at the local, state, and federal levels) to borrow money. They are less ingrained in our day-to-day culture.

The truth is, most people don’t understand bond markets like they do stock markets. We’re going to help right now to get you up-to-speed on some important bond basics, or maybe refresh your memory if you’re already familiar with them.

Before we get started, we promise not to overwhelm you with too many details filled with financial jargon. Instead, we’ll provide you with just enough information to help you determine if bonds may be a good choice for your investment needs.

What are Bonds, and Can an Analogy About Pizza Help Me to Understand Them?

Bonds are loans that corporations use to raise money from investors, upfront. Bonds are used most often to grow a business.

Corporations hire banks or investment banks to issue bonds to the public. By issuing bonds, the corporation is actually borrowing money from investors, which is different than buying the stock of a company where you own a “piece-of-the-pie.”

Speaking of pie, at Reliance Trading Co. Limited, we use what we call the Pizza Analogy to put some clarity around bonds:

Imagine that you own a small pizza shop in your town. You’ve established your business and of course, you have the best pizza around.

You’ve reached the point where you want to–or actually need to–expand your business, whether it’s adding more seating, moving to larger space, or opening more locations. There’s no doubt that you’ll need financing for your growth and you know you have a few options, but you are unsure of which one is best.

First, you could simply save your cash. Not the best option since you need the cash to grow immediately.

Second, you could bring in a partner to work with you. By doing this, you’ll most likely need to give up some ownership (read-equity) in your business. You probably opened your shop to be your own boss, so it’s a big decision whether you’re willing to give away some of your ownership.

Third, you can go to your banker for a loan. This option would allow you to keep your equity ownership but would increase your overall debt burden.

Any of these three options can work for a small, growing business. Even after you decide on which works best for your needs, these options continue to be available to you as you to expand.

Now let’s say you have really grown and you are thinking of franchising or going public. Down the road, you may consider issuing stock to the public in the form of shares. Like taking on a partner, this would decrease your overall ownership. However, you’d be able to infuse your business with the cash you need to accelerate your growth today.

Once your company reaches a large enough size (for example, Domino’s pizza valued at $12.4 billion) you may decide to issue your own debt rather than going to a bank for a loan.

In this scenario, you would issue a bond with an interest rate that is required to be paid to the bondholders over a specific amount of time. The interest rate required would be determined by a number of factors. Some of these include:

  • Current interest rate environment when issuing the bonds
  • The size of your company
  • The size of outstanding loans/debt on your company’s balance sheet
  • The amount of cash flow generated from your company to service the annual interest expense and pay back the bondholders
  • The rating received by the third-party agencies (Moody’s and S&P)

Traditionally, large companies with strong balance sheets pay less in interest than weaker competitors. As your pizza business grows and improves its financial footing, your borrowing cost decreases.

Think of it this way, when an individual is looking to borrow, a bank looks at their credit score. Typically, a higher credit score and income coincides with a bank lending more money at better (lower) rates. The same holds true with corporations in the public markets.

Using the analogy of a pizza shop to explain how bonds work focuses on the benefit to the business while looking at various options to ensure growth.

But how does this work if you’ve been a long-time fan of this fast-growing pizza shop and you want to invest in their future by purchasing the bonds they decide to issue? By purchasing the pizza shop’s bond, you need to realize that they are actually borrowing money from you and other bondholders. Since you’ve purchased a bond, you receive no equity in the business. However, there is a legal obligation for the pizza shop to pay you back at the end of the bond term, along with interest owed to you that was paid along the way.

How Much Can You Safely Withdraw From Savings Each Year?

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Nearly everyone looks forward to retirement— that time in your life when you have more time for the things you enjoy, and you don’t need to devote hours every day working for someone else. It’s no wonder that retirement is considered the “golden years” of your life.

What’s less clear, however, is how to pay for it.

Paying for Your Retirement

If you’ve been steadily squirreling away money for retirement, you might think that you don’t have much to worry about. After all, the lump sum on your retirement account statements looks like more than enough money to get you through the rest of your life.

But is it really?

Lifespans globally continue to increase, which means many workers are living longer into their retirements.

And even if you plan to work into your 70s, chances are that you’ll remain active and ready to tackle all those things you couldn’t take advantage of when working 40+ hours a week. Traveling, purchasing a second home, and fully immersing yourself in your hobbies are a few common retirement aspirations.

Determining how much to withdraw from savings in order to enjoy your new found activities while having enough to pay for all the things you want to accomplish is not an easy equation. The withdrawal amount depends partly on how much money you saved, along with how much money you’ll need, and for how long.

Most retirees want to maintain their current lifestyle during retirement. Some will opt to trade commuting costs and work wardrobe expenses for hobby equipment and travel. And you can always manage your variable costs, like how much you want to spend on your next trip, or if you are going to purchase that new stand up paddle board. Often people will spend less if they are worried about how long the money needs to last.

That “how long” can certainly make the math tricky. If your portfolio isn’t allocated correctly the market value can fluctuate too much; and all of a sudden, your monthly or annual withdrawal amount has a much bigger impact on the “how long” will the money last.

Influences on the Amount You Can Withdraw

If there’s one thing that can be said about investments, it’s that they always seem to change. While it can be difficult to predict how much money you’re actually able to withdraw from savings, there are some definite things that can influence it.

Fixed Income to Equities Proportion

As always, the ratio of fixed income (or bonds) to equities is based on several factors. Keep the following in mind: including equities in your portfolio can provide a growth element that helps the market value keep up with inflation, allowing the account value to support your annual withdrawal. You should aim to have at least some larger portion of your retirement portfolio in equities. However there is such a thing as “too much” in equities, so it’s best to work with an advisor to determine what the right amount is for your portfolio.

Conversely, tying up too much money in low-yielding fixed income investment vehicles (bonds) leaves you open to running out of money. This is because your portfolio may not keep up with inflation and therefore fail to support your annual withdrawal.

Diversification is Key

A well-managed retirement portfolio has a diverse mix of stocks, bonds, and other assets. The exact mix will depend on a number of factors, including your reaction to risk, the amount of money you started with, and the amount you need to live comfortably each year.

Analyzing the performance of your retirement portfolio and rebalancing it to meet your needs is necessary on a regular basis.

Flexibility Must Be Built In

Just as in your working life, there are going to be times when your expenses will be higher than anticipated. Even the best plans need to include options for life’s surprises— whether those are market corrections or personal needs. During those years when your portfolio experiences growth, you can potentially withdraw more. And adopting a spending policy early in your retirement can help when surprises occur.

What is the “4% Rule”?

During the early 1990s, a financial advisor by the name of Bill Bengen devised the “4% rule.” This rule states that if you withdraw 4.5% of your retirement income (from all sources) every year, then you should have enough money to pay for 30 years of living expenses (as long as that 4.5% is adjusted for inflation).

This simple rule makes it seem like calculating the withdrawal from your retirement account is easy and automatic, but a one-size-fits-all approach likely won’t work for everyone all the time.

It’s best to use the 4% rule as a guide when creating your own spending policy. Several factors go into creating a spending policy, like expected rates of return of your asset allocation, your life expectancy (that “how long” mentioned above), as well as how much you need to meet your needs.

Know the Difference: Passive vs. Active Investing

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Investing is a complex process involving many terms and techniques that need to be mastered for the most successful results. Your investment advisor is there to help you along the way with this. But it can also help to get a better grasp on some of the terminology.

One set of terms–passive investing and active investing–warrant further exploration so you can really understand the differences. Armed with that understanding, you and your advisor can make the right choice for you.

Passive Investing Characteristics

The overarching characteristic of passive investing is a buy-and-hold philosophy. Passive investors buy a basket of stocks, and buy more or less regularly, regardless of how the market is faring. This approach requires a long-term mindset that disregards the market’s daily fluctuations.

This strategy can be advantageous because many investors have a tendency to sell their stocks during market weakness. Eventually, this weakness rights itself. Portfolio returns that follow passive strategies do not generally out-perform the index they mimic, and they can result in lower after-tax returns.

Active Investing Characteristics

Active investing takes a much more hands-on approach. This strategy has the goal of beating the average returns over time and it can manage after-tax returns more efficiently.

Active investors research and follow companies closely, and buy and sell stocks based on their view of the future. This is a typical approach for professionals or those who can devote a lot of time to research and trading.

Because active investing requires a deeper analysis and expertise than most investors possess, the services of a portfolio manager are necessary. Only with the extensive experience and knowledge of a professional investment advisor will it become evident when the time is right to buy, sell, or hold a particular bond, stock, or other asset.

With their analytical acumen, an investment advisor is able to take a shrewd look at the quantitative and qualitative factors of each investment to determine the best course of action for their clients.

The Pros and Cons of Each

Not surprisingly, both passive and active investing have their pros and cons. Passive investing sometimes has lower fees because no one is overseeing the portfolio or picking stocks. They simply follow the buying and selling patterns of the index fund that’s used as their benchmark. This sense of transparency is another advantage of passive investing.

However, passive investing also has some disadvantages. Passive funds have predetermined holdings (index fund) or set of investments and investors are locked into them– regardless of how the market might be acting.

It’s also important to note that passive investments won’t beat the market with huge returns. In-stead, investors will potentially just see market-like gains over time. Passive investment strate-gies usually do not allow for personalized tax strategies and may result in an unexpected tax.

Active investing, on the other hand, is a more interactive approach that offers flexibility, versatility, and customization.

Using this strategy, investment advisors are free to choose stocks in different weights than those included in an index. Because of this, they can purchase stocks and other assets that might be up-and-coming or that have more earning potential.

Another advantage of using active investing is that your investment advisor can implement a range of techniques that are designed to protect your investments as well as make them grow.

In addition to being able to invest in any stocks or other assets that have substantial growth potential, following an active investment strategy means that your investment advisor could take advantage of put or call options, and can exit from assets if the risks become too great.

Capital gains (or losses) are a result of any investment strategy— be it passive or active. While a capital gains tax could be triggered by using active investing as a strategy, your investment advisor can customize tax management techniques to help offset the liability when it occurs. Investors who use passive investment strategies can fall victim to higher than expected gains or losses when other passive investors buy or sell during periods of market volatility.

How an Investment Advisor Can Help You Choose

Today, the best investment advisors are those who possess a few core characteristics.

In addition to being a fiduciary and not receiving any incentives for recommending certain investment vehicles to their clients, your investment advisors should listen carefully to your goals and understand your level of risk aversion.

Only by learning about these can an investment advisor develop the other characteristic that makes a good financial guide: a unique investment plan.

Whether you have little aversion to risk and plenty of time to ride the ups and downs of the stock market, or you need a more conservative approach to investing, your financial advisor will likely recommend a mix of stocks, bonds, and other assets.

This combination–which is customized to meet your financial goals–is one that can be easily changed and adjusted at any time since it’s an active investing strategy.

Sometimes a portfolio manager will recommend that a portion of your portfolio be invested in a passive strategy. Oftentimes, passive investments are used to provide diversification of different asset classes or to help manage overall risk. Including both passive indexing and active investment strategies can provide investors with the best of both worlds.

Passive and active investing provide investors with the types of advantages that can lead to a diverse and stable portfolio. It’s important to discuss these options with a professional investment advisor who can create a customized investment plan that’s designed to meet your goals.

If you’d like to learn more about which strategy is best for you or other ways an investment advisor can assist with your finances, we’d love to help. Get in touch with us and see how we can help you meet your financial goals.

Why ESG Principles Improve Your Responsible Investment Goals

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As we discussed why we consider Reliance Trading Co. Limited to be an “emerging manager” and why it’s a benefit to the institutions we work with.

Along these lines, Reliance Trading Co. Limited attended the TRS Emerging Managers Conference in Austin, Texas a few months ago. A number of relevant topics for emerging managers were covered during the conference that we think are critical to share with you.

The more prevalent conference discussions included which asset classes were worthy of consideration, how each overall portfolio is allocated, and what investors are considering as they think about the future of their allocations.

Primarily, these conferences look at overall trends in the emerging managers space. They also provide insight into the trends in institutional investment management.

At the moment, using Environmental, Social, Governance (ESG) criteria for investing is an incredibly hot topic, and it’s one that we don’t see going away.

So, let’s dive a little deeper into that, cover why ESG is so popular, and how Reliance Trading Co. Limited is currently on top of this trend to help guide your responsible investment decisions to benefit your own personal financial goals.

The Evolution from SRI to ESG

Before we dig into how ESG principles can guide your investments, we feel it’s important to review how ESG criteria have evolved and are now driving long-term, sustainable investment decisions today.

Prior to the emergence of ESG focused investing, you’d often hear about Socially Responsible Investing (SRI). Still an investment strategy today, SRI tends to be driven primarily by social and political influences and takes a values-based approach to investing.

An interesting case-study tied to SRI’s impact was with the creation of the Sullivan Principles during the Apartheid era.

Leon Sullivan was a member of the Board of Directors of General Motors in the 1970s. Sullivan knew that GM was the largest employer of black people in South Africa at the time, and he saw all the turmoil that was happening there with apartheid.

Sullivan used his position as a member of the GM Board to influence other corporations to adopt social change and work to end apartheid. His guidelines became known as the Sullivan Principles.

In short, the Sullivan Principles stated that institutions couldn’t invest in companies that were doing business with the apartheid government in South Africa. It also excluded working with companies that lacked good policies with respect to race relations and diversity within their organizations.

Over time, it became common for the majority of larger corporations, like public funds that live under the scrutiny of the public eye, to adopt the Sullivan Principles as investment decisions. These decisions are, more often than not, based on socially focused norms.

It’s important to note that one defining factor of SRI is that it determines investment opportunities on specific issues. And they often focus on what are referred to as ‘sin stocks’. These include–but are not limited to—companies tied to products or services that are considered unethical or immoral, such as alcohol, tobacco, and gambling.

Over time, these ideas and general principles of societal consciousness as investment considerations expanded into the broader category of ESG.

ESG principles drive responsible investing and allow companies to obtain an overall sustainability score versus being evaluated strictly on specific social issues that evolve over time.

The Importance of ESG Rank

Today, we’ve expanded beyond SRI to ESG principles that are critical to responsible investing. These principles provide investors with guidelines to determine which companies will offer the most sustainable return on investments.

With ESG we look specifically at environment, social, and governance attributes and focuses of the company we’re considering investing in. With respect to each of these categories, a company is then assigned a ranking that is based on their overall performance across all three of these areas.

For example, when evaluating environmental attributes of a company, the specific attributes examined include resource use, emissions, and innovation. Social attributes review the company’s workforce, human rights, community, and product responsibility. And governance includes a thorough review of the company’s management, shareholders, and overall Corporate Social Responsibility (CSR) strategy.

Based on this, as investment advisors considering an investment through the lens of ESG, we look at different aspects that could influence a company’s score.

We may consider whether they’re involved in controversial environment practices such as pesticides or coal. Or perhaps they align with what we referred to earlier as ‘sin stock’, such as tobacco products or alcohol. Basically, we review any number of environmental issues that might impact an ESG score negatively.

Then, we examine if there are any governance concerns with the management team itself. We ask, “Do they have a reputable board of directors? Do they have any issues with accounting or financial reporting? Are there any pending lawsuits against the company?”

There are many different categories within ESG that are considered when evaluating rank, and we have to consider all of them before deciding if a company is a good fit for sustainable investing.

ESG looks at factors that make a company a positive or negative impact in society, so it’s important to look for investment advisors who adhere to those ESG principles to be aware of a company’s rank, and what is factored into that rank.

While there are a couple different online services that offer the rank of companies based on their ESG focus, even when leveraging those services it can be overwhelming to understand all of the criteria that need to be considered when making a long-term, sustainable investment decision.