 Definition
A Keogh plan (also called HR10 plans) is a tax-deferred retirement plan for self-employed individuals or unincorporated businesses. Why It's Important It's important to note that contributions to these plans are tax-deductible up to a certain amount. There are two types of Keogh plans. One type is a qualified defined-contribution plan. This type of plan is typically in the form of a profit-sharing plan. The beauty is that a business doesn't have to generate profits to participate in this type of plan. As of 2019, a business can put 100% of their income or up to $56,000 of funds into this plan. Profit-sharing plans are only contributed to by the employer (yourself if you are self employed) not the employee. It's a good way to squirrel away money when your company is doing well. The other type of Keogh plan is a qualified defined-benefit plan. These types of plans are similar to pensions in that you get paid out annually after retirement. Payouts are typically determined based on the salary while working and the length of service. Keogh plans have more administrative burdens and higher upkeep costs than Simplified Employee Pension (SEP) or 401(k) plans, but the contribution limits are higher, making Keogh plans a popular option for many high-income business owners.
0 Comments
 Definition
The geometric mean is the average of a set of numbers. Why It's Important This is not to be confused with arithmetic mean. Arithmetic mean is what you learned in school when your teacher taught you about "mean". As a refresher, let's look at the following set of numbers: 3%,7%,10%,6%,4%. You find the mean by adding all the numbers together (3+7+10+6+4=30%) then dividing by the total number of records (5). The arithmetic mean in this scenario would be 6%. In contrast, a geometric mean would be calculated as (1.03x1.07x1.10x1.06x1.04)^(1/5)=~5.5015%. Now that you have the concept, let's apply it to personal finance and investing. The geometric mean is typically used to calculate the average return on investments. You would look at the past annual rates and calculate the mean to find out what your overall return was over the time period. For example, let's say one year you enjoyed 10%, the next 15%, and the next 8%. Your average return over the three years would be (1.10x1.15x1.08)^(1/3)=~10.627%!  Definition The head and shoulders pattern in technical stock analysis is used to predict what the support level (lowest price it will potentially go before traders make it rise again) of a stock is. Why It's Important You probably saw this and wondered why I would be talking about a shampoo. LOL! This is one of many charting patterns that technical analysts use to make stock price predictions. I will warn that this is an advanced investing topic so if it does not make sense, do not worry! As you can see from the chart below, the trend looks like a head and two shoulders. The "neckline" is a support level. The stock price hit that level then bounced up. Then, it hit it one more time and bounced up before breaking through the support and trending downwards.  This same charting pattern can also happen in the opposite way as shown below. In this scenario, the neckline shows the price ceiling instead of the support. It is the same concept just reversed.   Definition
A fiduciary is a person or organization that acts on behalf of another person or persons to manage assets. Why It's Important The term fiduciary has been thrown around a lot lately but do you really know what it is? A fiduciaries' responsibilities and duties are both ethical and legal. Once the advisor or organization says that they are a fiduciary, they have to act in your best interest. This means that they are not supposed to do things just to pad their pockets (make money). What does an advisor not acting like a fiduciary look like? They may try to sell you products you don’t need to make a commission. They may initiate trades unnecessarily just to get commission (also called churning). It is important to stay educated and ask questions.  Definition In economic terms, expansion is an increase in the level of economic activity. It is a period of economic growth as measured by a rise in real GDP (Gross Domestic Product). Why It's Important An expansion means that the economy is doing good. This typically coincides with the stock market. Think about it. If the economy is doing good, that means companies are generally doing good which means they are profitable. It directly effects the stock market. This is only one phase of the economic cycle.  Are we currently in an expansion? You can tell by figuring out if:
 Definition
A durable power of attorney is a designation that is given to someone in order to handle financial transactions if another person becomes incapacitated and can't make decisions on their own. Why It's Important This is one of the main documents needed when you start thinking about estate planning. It is important to have a person in place as a durable power of attorney in case an accident happens tomorrow. Who could you trust to take over your financial matters? What is the difference between a durable power of attorney and a general power of attorney? With a durable power of attorney, the document remains in effect if you are unable to think for yourself. With a general power of attorney, it is only in effect while you are alive and competent. If you have a general power of attorney, once you become incompetent, it loses its enforcement. I highly recommend going for a durable power of attorney from the beginning so you don't have to worry about it!  Definition
A put is a type of option contract that gives the owner the right to sell a stock at a certain fixed price within a specified timeframe. Why It's Important Puts are the opposite of the word we discussed last week, Call Options. Take a look at the example in that post to get a good idea of how options work. I won't belabor the point here. But, I do want you to understand that a put option becomes more valuable as the price of the underlying stock depreciates relative to the strike price. Put options are a short position that lets you take advantage of price drops in the market. Calls are more commonly used but Puts can be another way to hedge. There are pros and cons to trading options. As always, do your research!  Definition
A call is a type of option contract that gives the owner the right to buy a stock at a certain fixed price within a specified timeframe. Why It's Important As I discussed in last week's word, Options, they are a good way to hedge against a downturn in the market if used correctly. Let's take an example: Let's say a stock trades at $100 per share, and I think it's going to go up pretty soon. I could potentially buy 100 shares of stock, paying $10,000 OR I could buy a call option that would give you the right to pay $110 per share for stock any time in the next two months. My buy in for the option is typically $1-$2 per share. So, I would pay $200 for that right at the high end. This is a sunk cost (I'm not getting it back regardless of what happens). If I'm right and the stock goes up to $130 per share by the time the option expires, then I can excercise my option and purchase the stock at $110 therefore making a profit of $20 per share even if I sold them right after purchase. The weakness of the call option is that if the stock only goes up a little, the option's value can go down. For instance, if the stock goes up to $105 per share, I wouldn't excerise my option and take the loss of my $175 buy in (sunk cost, remember). On the flip side, this could work out great if I am completely wrong! Let's say the same stock now trades at $90 per share. Instead of taking a loss of $2,000 (110 - 90 x 100), I can just take my $175 loss and be on my way. There are pros and cons to trading options. As always, do your research!  Definition
An option is a contract that gives the buyer the right, not the obligation, to buy or sell an asset at a certain price in the future. Why It's Important Options play an important part in some portfolios as a way to hedge (arbitrage) against loss. Although you can purchase options on bonds, stocks, and futures, stocks are typically the go-to. So, how does it work? Let's use a simplified example. Let's say I think Apple is going to go up. I pay a fee (or premium) to purchase a call (buy) option for the current price. This means as Apple climbs in value I can exercise my call option to get the stock for a lower price. But, let's say the stock goes down, I can opt to not exercise my option and just let it expire. If that's the case, I only lose the premium that I paid for it. On the other side of the table, if I were the person selling the contract, I would lose money as the price went up and gain money if the buyer decided not to exercise it. Beware! If you are the person selling the contracts, you have to make sure you have enough shares to cover the order in case it gets exercised otherwise it could spell trouble. Options are pretty risky and I don't recommend trading them unless you have a full understanding of what's going on. This topic will be discussed at my Investing: DIY - Advanced Topics event this weekend.  Definition
Adjusted Gross Income or AGI is gross income minus adjustments to income for tax purposes Why It's Important AGI is the portion of your income that you are taxed on. I think the best way to explain this term is to provide an example. Let's say your salary is $50,000 a year. Because you are awesome, you contribute 5% of your salary to a 401k. To keep is simple, we will leave the salary deductions there (in real life, you will probably also deduct medical, dental, and vision benefits as well). 5% of $50,000 = $2,500 so instead of being taxed on your full (gross) salary of $50,000, you would only be taxed on $47,500 of it. $47,500 is your Adjusted Gross Income. This is why participating in company sponsored benefits plans (like medical, 401k, HSAs, etc.) are so important. It effectively lowers your tax bill. It is important to note that in order for your gross income to get adjusted, the benefit has to come out PRE-TAX. Otherwise, it will not have an effect. Once you arrive at your AGI, you multiply by the tax rates to get your tax liability. We will discuss that next week! |
RSS Feed
