 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!
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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* Definition
Consumer debt is any debt used to purchase goods that are consumable and do not appreciate in value. Why It's Important This type of debt includes credit cards, payday loans, and the like. They generally have higher interest rates than secured debt (i.e. home loan or car loan) because it poses more risk to the creditor. If you default on consumer debt, the creditor is unable to take away anything that you bought with it. Also, it is important to note that consumer debt is not incurred by businesses or the government only individuals. So how much consumer debt are we in as Americans? Brace yourself! In June 2019, U.S. consumer debt was a whopping $4.1 trillion! That's crazy! Remember, that doesn't include houses or cars. We are in trouble! Definition
Term life insurance provides coverage for a certain amount of time, typically between 5 and 30 years. If you die within the term, the life insurance will pay out the death benefit. Why It's Important I love term life insurance because it is generally cheaper than whole life insurance and covers me for a significant period of time. Life insurance, in general, is important and should be part of most people's financial wellness plan. Life insurance is specifically important when you have a family and/or kids that depend on your income. As a single mom, I have two term life insurance policies. One is a 25-year term and one is a 30-year term. I prefer term life insurance because the premiums are cheaper than whole life and I figure by the time I am in my 50s, no one will be depending on my money. My kids will be grown and out the house, I will be debt free, and all I would have to cover are my burial costs which average about $10,000 on the high end so term life fits my financial plan. Do you have life insurance? I highly recommend purchasing some to be sure your loved ones are taken care of when you are gone. Definition An inverted yield curve (negative yield curve) will slope down to the right to show that the yield is higher for short-term maturities than for longer maturities.  Why It's Important You may have heard all of the talk about the inverted yield curve and an upcoming recession. An inverted yield curve typically occurs when the Federal Reserve has raised short-term interest rates to restrain inflation and to cool down an overstimulated economy. Therefore, people have associated the inverted yield curve with a peak in the business cycle and since the peak has been reached, there is no where left to go but down. This is why it is commonly used to predict an upcoming recession. To put the talks about a recession in perspective, here is a graph of all the past recessions and their relations to the inverted yield curve:  As you can see, there were times when an inverted yield curve did not signal a recession so, only time will tell if we are currently in one! My best piece of advice if we are, STAY INVESTED!
Definition
The ask price is the price at which a dealer of a particular security is willing to sell the security to interested investors. A bid price is the price at which a dealer in a particular security is willing to purchase the security from investors. Why It's Important The New York Stock Exchange (NYSE) is an auction market. Sellers are naming ask prices and buyers are naming bid prices. So, for instance, look at it like a flea market. Apple (AAPL) has a table and you approach because you are interested in purchasing a piece of their table. AAPL says I think this piece of table is worth $10.00 (ask price). You say it's a mighty fine table but I think a piece is worth $9.50 (bid price). Let's say for illustration purposes that AAPL says ok, I will take your $9.50. Here is a piece of the table and the transaction is done. Another person, just saw that you got a piece of their table at $9.50 and comes over to purchase as well. The negotiation process starts all over. This is what happens on the back end of the stock market. As investors, when we see that a stock has closed for the day at a certain price, that is just the last agreed upon price in the market. When the bid price and ask price are in agreement, we have a transaction. The market is made up of thousands, if not millions, of little transactions every day. *This is a very simplified version of how the market works. It is a lot more complicated than that but for the scope of this lesson, I kept it simple.* Definition
Any investment that is not cash, equities, and bonds Why It's Important The list of alternative investments is very broad and includes real estate-backed securities, mortgage-backed securities, limited partnership interests, hedge funds (explained here), private equity, collectibles, natural resources, cryptocurrency, precious metals, and even options and futures contracts. Whew! Alternative investments can play an important role in the development of a diversified portfolio (explained here). Most financial assets are positively correlated (when one moves up the other moves up) but with alternative investments there is typically a low correlation, no correlation, or even a negative correlation (when one moves up the other moves down) making it a good way to hedge (protect yourself) in the event of a lost. *Beware* They are typically higher in risk than other investments so tread lightly unless you know what you are doing! Definition
A basis point is equal to one hundredth of one percent Why It's Important You have probably heard the talking heads on your favorite financial shows or news site mentioning basis points. They may have said something like "interest rates have gone down 25 basis points". 25 basis points is equal to 0.25% or a quarter of a percent. You may be thinking why use basis points? Well, usually the differences in interest rates are so small, it takes a smaller unit of measurement to describe the change. Definition Cash flow is how money flows in and out of your account and/or business Why It's Important Cash flow is crucial to financial freedom. If you aren't sure how money is coming in and going out, it is virtually impossible to get your financial footing. You will always blow in the wind without making any headway on goals. A budget is an absolute necessity to help you figure out cash flow. Let me give you an example... I was speaking with a client not to long ago and they did not have a budget. We sat down and put all of their numbers in black and white. Not only were they making more than they thought, they were also spending more than they thought! We found that they were spending a TON on insurance policies and the cash flow wasn't there to cover it. My recommendation: Get rid of some insurance policies to free up monthly cash flow. Once they did that, they immediately had more money to pay off debt and/or save. It's that simple! So, your homework for this week is to create a budget so you can see your cash flow in real life! It is much different than trying to do it in your head. If you already have a budget, I challenge you to cut out a non-necessity and put that amount every month towards debt. If you don't have debt, I challenge you to put it towards savings. Here is a whole video to get you started! |
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