Safe Havens Explained

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A safe haven is an investment that is expected to retain or increase in value during times of market turbulence. Safe havens are sought by investors to limit their exposure to losses in the event of market downturns. However, what appears to be a safe investment in one down market could be a disastrous investment in another down market, and so the evaluation of safe haven investments varies, and investors must perform ample due diligence.

In the days of dotcom mania, investors could throw money into an IPO and be almost guaranteed killer returns. Many companies like VA Linux and experienced huge first-day gains, but ended up disappointing investors in the long-run.

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Risk to Reward – Why it’s so Important

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Many investors use a risk/reward ratio to compare the expected returns of an investment with the amount of risk they must undertake to earn these returns. Traders often use this approach to plan which trades to take, and the ratio is calculated by dividing the amount a trader stands to lose if the price of an asset moves in an unexpected direction (the risk) by the amount of profit the trader expects to have made when the position is closed (the reward).

In the days of dotcom mania, investors could throw money into an IPO and be almost guaranteed killer returns. Many companies like VA Linux and experienced huge first-day gains, but ended up disappointing investors in the long-run.

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Importance of Diversification

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Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries, and other categories. It aims to maximize returns by investing in different areas that would each react differently to the same event.

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Dividend Paying Stock

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A dividend is the distribution of reward from a portion of the company’s earnings and is paid to a class of its shareholders. Dividends are decided and managed by the company’s board of directors, though they must be approved by the shareholders through their voting rights.

In the days of dotcom mania, investors could throw money into an IPO and be almost guaranteed killer returns. Many companies like VA Linux and experienced huge first-day gains, but ended up disappointing investors in the long-run.

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Retirement Planning

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Retirement is when a person chooses to leave the workforce. The concept of full retirement – being able to permanently leave the workforce later in life – is relatively new, and for the most part only culturally widespread in first-world countries.

In the days of dotcom mania, investors could throw money into an IPO and be almost guaranteed killer returns. Many companies like VA Linux and experienced huge first-day gains, but ended up disappointing investors in the long-run.

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Investing in IPOs

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An initial public offering (IPO) is the first time that the stock of a private company is offered to the public.

In the days of dotcom mania, investors could throw money into an IPO and be almost guaranteed killer returns. Many companies like VA Linux and experienced huge first-day gains, but ended up disappointing investors in the long-run.

Read More

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.