 Definition
Philanthropy is the desire to promote the welfare of others, typically in the form of monetary gifts and donations. Why It's Important Yesterday was Giving Tuesday! If you don't know what that is, it is a national holiday the Tuesday after Thanksgiving to promote giving back to the community. Thanksgiving is typically enjoyed with families and friends eating until your heart is content. Black Friday is usually spent spending (see what I did there) until your heart is content. Now, it is time to give until your heart is content! I want to stress the importance of making sure you give back to your community. But, giving doesn't always have to be monetary (money). You can give time, skills, ideas, etc. Even though I don't have a lot of money to spend, I consider myself very philanthropic. I donate a lot of time to causes and initiatives that I am passionate about. The exciting thing is what you give out comes back tenfold in many cases. Not having money is not an excuse! Get out there and be a philanthropist! The world is waiting for you!
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 Definition
A portfolio's turnover rate measures the level of buying and selling of investments. You will typically see a turnover ratio when analyzing mutual and index funds. They are the same thing. Why It's Important High turnover rates can lead to higher portfolio expenses. Not only that, but usually, if a portfolio has a high turnover rate or ratio, the more taxes you will potentially have to pay. Once a position is sold out of the portfolio, you will either have a capital gain or a capital loss. A good advisor will attempt to make sure your gains and losses offset so that you will not have additional tax implications. But this is not always possible. Paying attention to the turnover rate is super important to avoid a tax headache later. If you are investing in a taxable account, it is best to look for tax-advantaged funds or ones with low turnover. Tax-deferred or tax-free accounts (such as IRAs and 401ks) do not matter quite as much since you are not being taxed on the capital gains anyway.  Definition
A transaction fee is a fee charged by a brokerage firm for every trade that takes place. These fees can range from $0 to $9.95, depending on the firm. Why It's Important Transaction fees are significant because anytime you make a buy or sell trade in your account, you're charged that fee. So, let's say you need to sell out of investments and invest in something different. You will have to pay that fee not once but twice for each investment. Let's say the fee is $4.95 per transaction; you would have to pay $9.90 per investment to sell then subsequently buy a new security. Multiply that by how many investments you are trying to get rid of, and it could be quite expensive. I have seen situations where an investor paid hundreds of dollars just in fees to get out of bad investments! Transaction fees are becoming a little less important because most of the brokerage firms have moved to $0 fees this year. Among the firms that have made the change are Ally Invest, Charles Schwab, TD Ameritrade, and Fidelity. Of course, Robinhood has always been $0 fees since they started. With that said, there are plenty of options out there, and I don't think anyone needs to be charged a transaction fee unless you choose to go through an institution.  Definition
A mutual fund is a pool of managed investments. These funds are usually managed by a portfolio manager to keep them in line with their investment objectives. Why It's Important The best way to think of mutual funds is as a basket. When you purchase shares of mutual funds, you are purchasing a basket of different stocks or bonds. I love mutual funds, and that's typically all I invest in. Mutual fund benefits include professional management, diversification, liquidity, and brokerage commission savings. You are pretty much paying a mutual fund company to create a basket of stocks that meet your investing needs. For instance, you can find mutual funds of marijuana companies, international companies, and even companies that focus on sustainability. There were over 9,600 mutual funds available on the market as of 2018. So, there is plenty to choose from! You save on brokerage commissions because if you were buying individual stocks, it would be way more expensive. Some mutual funds have upwards of 3,000 stocks within them. If you were going to recreate that yourself, you would have to make at least 3,000 trades at whatever the commission rate is for the brokerage firm (currently ranging between free and $10) versus making one trade for the whole basket. The only downside to mutual funds is that they carry fees. Of course, you would have to pay the company/investment manager for their work, putting the mutual fund together and keeping it updated. My rule of thumb is never to purchase a mutual fund above 60 basis points. To me, anything above that is excessive with so many options available.  Definition
An accredited investor is a person or business that is authorized to buy and sell securities without being registered through the Security and Exchange Commission (SEC) Why It's Important An accredited investor can invest in a variety of unregistered investments such as hedge funds, venture capital, and private equity opportunities. But, of course, this status is not open to everyone. In order to gain the status of accredited investor, you have to meet two different criteria:
Now, as I said before, it doesn't have to be individuals. It could be a trust or any entity that meets the requirements. Eventually, I want to become an accredited investor! All in due time!  Definition
A prospectus is a formal document required and filed by the Securities and Exchange Commission (SEC) that describes an investment offering to potential investors. Why It's Important The prospectus contains information about the company, it's management team, and the latest financial performance. It also states other information that the investor should know to make an informed decision like how the proceeds are used and risk factors. Every investment available on the exchange market has a prospectus, even mutual funds. The mutual fund prospectus is slightly different as it describes the obejectives of the fund and what philosophy is being used to pick the underlying stocks and bonds. The investment can't be sold until the prospectus is approved by the SEC.  Definition
Market Capitalization or "Market Cap" is the value the market puts on a publicly-traded company. You can find market cap by multiplying the total shares outstanding by the purchase price. Why It's Important Market Cap is used to value and gauge the public opinion of a company. Amazon's market cap is currently about $856 billion (as of 10/11/19). That's huge! Their stock price is $1,731.92. You would think that the higher the stock price, the higher the market cap, but that is not always the case. In comparison, Apple's market cap is $1 trillion, but its stock price is $236.21 (as of 10/11/19). This information tells me that Apple has more stocks outstanding than Amazon. Keep in mind that the market determines the market price, and every share a company sells is some ownership of the company. When you are researching what stocks to invest in, be sure to take a look at their market cap as part of your valuation.  Definition
A mortgage-backed security is a security backed by a collection of mortgages held by an organization. Why It's Important Mortgage-backed securities are a pretty complex topic to understand, so let me give an analogy. Let's pretend one of the organizations (Ginnie Mae) goes grocery shopping. In the grocery store are hundreds of thousands of mortgages on the shelf. My mortgage is somewhere on those shelves, as is yours. Ginnie Mae goes down the aisles and groups the mortgages in their cart based on creditworthiness and chances of getting their money back. The ones with the highest rate of default are called sub-prime mortgages. When they check out at the register, they put hundreds if not thousands in each bag and then resell the bags to investors. The best mortgages have a lower return because they are not as risky. The subprime mortgage bags have a higher return because they are the riskiest. As I pay on my mortgage, the principal and interest gets paid back to the investors who bought a portion of the bag my mortgage is in. Here is where it gets interesting. Remember the 2008-2009 financial crisis? Of course, you do! One of the reasons it happened was due in part to the subprime mortgage-backed securities. Investors were making a lot of money from them, so they kept investing more and more. Mortgage lenders were giving loans to people that really couldn't afford them so that they can keep up with demand. Well, once individuals started defaulting on their mortgages, the whole structure collapsed. People were losing their homes, and investors were losing money. This is why mortgage-backed securities are so important to understand! Definition
Target date funds are mutual funds that change allocation automatically based on your target (goal) date Why It’s Important Target date funds are a great option for those that do not want to be involved with picking different mutual funds, stocks, and bonds to get the allocation appropriate for their situation. Think of funds as big baskets. In those baskets, there are other little baskets of stocks. So, you become diversified by holding just one target-date fund. They also typically have low expense ratios. You may be saying well this seems like a no-brainer. Why doesn’t everyone just pick target-date funds and invest? Well, not so fast! Target date funds assume that every one that is going to retire in a certain year have the same situation. What if you have a different situation than the average? That doesn’t make a difference to the fund managers that are making the determination on what to invest in. I started with target-date funds when I first started investing but as I learned more, I started picking my own funds to get my desired allocation. It is a good place to start! Honestly, if you never picked what to invest in your 401(k), chances are you are in a target-date fund. Definition
A benchmark portfolio is a portfolio in which the asset mix attempts to duplicate the investment performance of a broadly diversified index (i.e. S&P 500). They are only meant to match the performance of the corresponding index, not beat it. Why It's Important When you were in school, didn't you have benchmark exams and tests? What were they used for? Typically, they are used to see how you are performing against the "norm". That is exactly what a benchmark portfolio is for! You use a benchmark to make sure your portfolio is performing adequately and make adjustments as needed. My benchmark portfolio is 90/10 (90% stocks/10% bonds). That is what works for my goals, risk tolerance, and time horizon. When you are doing your research into what you want to invest in (because you should), make sure you match it up against a benchmark to make sure it is at least performing at that level or, preferably, better. *This is not investment advice and is only provided for educational purposes* |
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