Personal Finance 3
intermediate corporate bond funds
-invest in investment-grade corporate debt with maturities between 5 and 10 years
110 rule
% to invest in equities is 110 minus your age multiplied by 1.25
I20 rule
% to invest in equities is found by subtracting your age by 120
three rules of thumb to guide the stock and bond allocation
- 110 rule - 120 rule - new portfolio thinking rules
four safe and effective strategies for long term investors:
- Buy and Hold - Portfolio Diversification - Dollar Cost - Asset Allocation
how long will my retirement nest egg last? depends on:
- amount accumulated - amount withdrawn - inflation rate - return
long term investors avoid making mistakes when making investing decisions, and there are many ways people mess up:
- being overconfident - setting unrealistic goals - trading too much - buying high and selling low - borrowing to invest to recover losses - taking on too much risk
disadvantages of real estate investing:
- business risk - illiquidity - large initial investment - foreclosures - complex assumptions - lack of diversification - dealing with rental applicants and tenants - time consuming management demands - low current income - unpredictable costs - interest rate risk - legal fees - high transfer costs
retirement accounts are made up of 2 parts:
- contributions made by you and your employer - investment earnings in the account
two types of employer sponsored retirement plans:
- defined contribution - defined benefit
the irs imposes no penalty for early withdrawals in 5 situations:
- expenses for medical, college, and homebuying - penalty free withdrawals from retirement for birth/adoption - retirement account loans - hardship withdrawals - early retirement
most financial advisors are considered brokers, and they only adhere to what is known as a suitability standard
- free to sell investments generating the neftiest profits and commissions, as long as they are judged "suitable" for client - suitability standard requires that they act in the best interest of employer, not clients
the SSA recognizes 4 statuses of eligibility:
- fully insured - currently insured - 6 credits - transitionally insured - not insured
Three types of advance directives
- health care proxy - living will - durable power of attorney
mutual funds can be classified into one of three categories:
- income - growth - growth and income
2 advantages of dollar cost averaging
- it reduces the average cost of shares of stock purchased over a relatively long period - dictates investor discipline
when changing employers or retiring, you have 3 choices with your 401k:
- leave it - transfer it - take it
invest in two ways
- lending (IOU & interest) - owning
ways to find money to save for retirement
- pay yourself first - write check to yourself - automatic payroll deduction savings - save bonus - after paying credit, make some payment to retirement - overtime pay - spending diet
qualities that make collectibles valuable
- rarity - age - condition - authenticity
to protect yourself from bad decisions:
- set up LLC because it protects personal asset - set aside $10,000 for emergency funds
to find money to invest, consider:
- set up a pay yourself first plan to accumulate savings - save your net raise after income taxes - invest any found money - when debt is paid continue debt payments to yourself - go on a budget diet - take a second job
two major mistakes sometimes occur:
- singles often list their mothers as the beneficiary and then fail to change it to their spouse when they get married - others keep spouse as beneficiary even after they divorce or remarry
retirement plans for self employed:
- solo individual 401k plan - simplified employee pension/ individual retirement account - keogh
stock market facts
- stock market returns averaged 9.6% over 100 years - worst 20 years performance for stocks since 1927 was a gain of 3% annually - over past 80 years, the chance of making money during any one year in the stock market has been 66% - over 5 years up 81% - over 10 years up 89%
to achieve an appropriate mix of growth, income, and stability in your portfolio, you need a combination of three investments
- stocks and/or stock mutual funds (equity) - bonds (debt) - cash
advantages of investing in real estate:
- tax deductible depreciation expense - low capital gains tax upon sale of investment - 1031 exchange (tax free) - tax deductible interest expense on mortgage loan
aggressive investors profit in two ways with options:
- the investor can hope for an increase in value - the investor can exercise the option at the striking price, take ownership of securities, and sell for a profit
three ways to transfer assets by contract:
- transfers by beneficiary designation - transfers by property ownership designation - transfers by payable on death designation
lending investments ex
- treasury note - government bond - corp bond - life insurance
when you withdraw from a tax sheltered retirement account before rules permit:
- you must prepay taxes that will be due to the gov. - penalties are assessed - income taxes must be paid on the withdrawn funds - the investment does not grow by compounding
STEPS
1. review your investment philosophy 2. review your investment goals 3. eliminate funds inappropriate for your investment goals 4. choose low load or no load funds 5. determine if investment advice is needed 6. screen and compare funds that meet investment criteria
contingent
2nd beneficary
total risk in investment
= random risk + market risk
medicare tax
A 1.45 percent tax paid by both the worker and employer on all the worker's employment income
rental yield
A computation of how much income the investor might pocket from rent each year (before mortgage payments) as a percentage of the purchase price; divide the annual rent by 2 and then divide by the purchase price.
hardship withdrawal
A distribution from a 401(k) plan to be made on account of an immediate and heavy financial need of the employee, and the amount must be necessary to satisfy the financial need.
replacement ratio
A person's gross income after retirement, divided by his or her gross income before retirement
market correction
A short term price decline in the stock markets of at least 10 percent in a stock, bond, commodity or index to adjust for a recent price rises
full-benefit retirement age
Age at which a retiree is entitled to full Social Security benefits; 67 for those born in 1960 or later.
basic retirement benefit
Amount of Social Security benefits a worker would receive at his or her full-benefit retirement age, which is 67 for those born after 1960.
Automatic Escalation
An employment clause that allows employees to save more for retirement by agreeing to raise their contribution amounts each year.
tax free exchange
Arises when a real estate investor trades equity in one property for equity in a similar property and no other forms of property or money change hands
target date retirement funds
Asset allocation funds that offer investors premixed portfolios of stocks, bonds, and cash that investors of a certain age and risk tolerance might prefer, and they are often named for the year one plans to retire
average share price
Calculated by dividing the share price by the number of investment periods
probate
Court-supervised process that allows creditors to present claims against an estate and ensures the transfer of a decedent's assets to the rightful beneficiaries according to a properly executed and valid will or, when no will exists, to the people, agencies, or organizations required by state law.
grantor
Creator of a trust—the person who makes a grant of assets to establish a trust. Also called the settler, donor, or trustor.
capital gains distributions
Distributions representing the net gains (capital gains minus capital losses) that a fund realizes when it sells securities that were held in the fund's portfolio
ordinary income dividend distributions
Distributions that occur when the fund pays out dividends from the stock and interest from the bonds it hold in its portfolio; these are passed onto the investor quarterly
discounted cash flow method
Effective way to estimate the value or asking price of a real estate investment based on after-tax cashflow and the return on the invested dollars discounted over time to reflect a discounted yield
Aggressive Growth Funds
Funds that invest in speculative stocks with volatile price swings, seeking the greatest long-term capital appreciation possible. Also known as maximum capital gains funds and capital appreciation funds
tax-exempt money market funds
Funds that limit their investments to tax-exempt municipal securities with maturities of 60 days or less
growth funds
Funds that seek long-term capital appreciation by investing in common stocks of companies with higher-than-average revenue and earnings growth, often the larger and well-established firms
socially responsible funds
Invest in companies with strong ethical and socially responsible practices.
investment philosophy
Investor's general approach to tolerance for risk in investments, whether it is conservative, moderate, or aggressive, given the investor's financial goals
beneficiary designation
Legal form signed by the owner of an asset providing that the property goes to a certain person or organization in the event of the owner's death
sales loads
Mutual funds have charged front-end loads of up to 8.5%. Many low end funds charge between 2 and 5%
social security estimate
Online information that the Social Security Administration makes available to all workers, which includes earnings history, Social Security taxes paid, and an estimated benefit amount
portfolio diversification
Practice of selecting a collection of different asset classes of investments (such as stocks, bonds, mutual funds, real estate, and cash) that are chosen not only for their potential returns but also for their dissimilar risk-return characteristics.
profile prospectus
Publication that describes the mutual fund, its investment objectives, and how it tries to achieve its objectives in lay terms rather than the legal language used in a regular prospectus.
random risk
Risk associated with owning only one investment of a particular type which could do poorly.
standardized expense table
SEC-required information that describes and illustrates mutual fund charges in an identical manner so that investors can accurately compare the effects of all of a fund's fees and other expenses relative to other funds
back end load
Sales commission that is imposed only when shares are sold; often charges are on a sliding scale, with the fee dropping 1 percentage point per year that the investor stays in the fund
Required Minimum Distribution
The amount that most qualified plan participants must begin distributing from their tax retirement accounts by April 1 following the year they reach 70.5
contributory plan
The most common type of employee-sponsored defined-contribution retirement plan; accepts employee as well as employer contributions.
liquidity risk
The risk that an asset cannot be sold on short notice without incurring a loss
rate of return
The total return on an investment expressed as a percentage of its price - usually stated on an annualized basis and it includes dividends and capital gains
repairs
Usually tax-deductible expenses necessary to maintain property value
early withdrawal penalty
a 10% penalty over and above the taxes owed when money is withdrawn early from a qualified retirement account
FICA taxes
a 6.2 percent tax paid by both the worker and employer on the worker's employment income up to the maximum taxable yearly earnings
a mutual fund that has combined growth and income objective seeks
a balanced return made up of current income and cap gains
Monte Carlo Simulation
a computerized mathematical technique that allows people to account for risk in quantitative analysis and decision making. The technique is used by professionals in such widely disparate fields as finance, project management, energy, manufacturing, engineering, research and development, insurance, oil and gas, transportation, and the environment
option
a contract to buy or sell an asset at some point in the future at a specified price - most common
bonds
a debt instrument issued by an organization that promises repayment at a specific time and the right to receive regular interest payments during the life of the loan
fiduciary standard
a financial advisor must always act in the best interest of the client regardless of how it might affect the advisor
t bill
a government IOU of less than one year - risk free, low rate of return
turnover rate
a measure of the level of a fund's trading activity, indicating what percentage of the fund's investments are turned over during the year
Traditional Individual Retirement Account (IRA)
a personal retirement account in which a person can make one or more annual contributions - holds investments - tax deferred growth
gold bullion
a refined and stamped weight of precious metal
front end load
a sales charge paid when an individual buys an investment, reducing the amount available to purchase fund shares
inheritance tax
a tax imposed on someone who inherits property or money.
spousal IRA
account set up for spouse who does not work for wages; offers tax-deferred growth and tax deductibility
social security credits
accumulated quarterly credits to qualify for social security benefits obtained by paying FICA taxes
rollover
action of moving assets from one tax sheltered account to another within 60 days of a distribution
average share cost
actual cost basis of the investment used for income tax purposes, calculated by dividing the total amount invested by the total shares purchased
probate property
all assets other than non probate property
lending investments
almost never include capital gains
cash flow
amount of rental income you have left after paying all operating expenses
one-rollover rule
an IRS rule that says investors can make only one rollover form one IRA to another in any 12 month period, although there is no limit on trustee to trustee transfers
employer-sponsored retirement plan
an IRS-approved retirement plan offered by an employer (also called qualified plans)
Rebalancing
an account management feature that automatically keeps your 401k asset allocation in balance with your most recent asset allocation investment elections
Annual Exclusion Amount
an annual amount of $14,000 that can be given to a relative or friend to reduce ones total taxable estate
Partnership Theory of Marriage Rights
an assumption in state law that presumes that wedded couples share their fortunes equally
investment plan
an explanation of your investment philosophy and your logic on investing to reach specific goals
derivative
an instrument used by people to trade or manage more easily the asset upon which these instruments are based
zero sum game
an investment in which the wealth of all buyers remains the same as the trading simply redistributes the wealth among those traders
speculator
an investor who buys in hope that someone else will pay more for an asset in the not too distant future
risk tolerance
an investors willingness to weather changes in the value of your investments, that is, to weather investment risk
12b-1 fees
annual fees that some "no-load" fund companies deduct from a fund's assets to compensate salespeople and pay other expenses
low current income
annual revenues may be barely more than expenses
survivor benefit
annuity whose payments contribute to a surviving spouse after the participants death; often equals at least 50% of participants benefit
variable annuity
annuity whose value rises and falls like mutual funds and pays a limited death benefit via an insurance contract
immediate annuity
annuity, often funded by a lump sum from the death benefit of a life insurance policy or lump sum from a defined-contribution plan, that begins payments one month after purchase
high transfer costs
as high as 6-7% of sale price, seller may incur these costs simply because ownership changes hands
lifestyle creep
as income goes up, an individual spends more as a reward for working hard
federal estate tax
assessed against a deceased person's estate before property is transferred to heirs or assigned according to terms of a will or state intestacy laws
below-average costs
average costs of an investment if more shares are purchased when the price is down and fewer shares are purchased when the price is high
long term investing
be more aggressive - growth is the value of their investment that exceeds the rate of inflation and income taxes
short term investing
be more conservative
testamentary trusts
become effective upon the death of the grantor according to the terms of the grantor's will or a revocable living trust.
employee stock ownership plan
benefit plan in which employers make tax-deductible gifts of company stock into trusts, which are then allocated into employee accounts
(total sale price - transaction costs) - (total share price + transaction costs) =
capital gain
Iliquidity
cash flow problems may occur due to a poor selling environment
deflation risk
chance that the value of an investment will decline when overall prices decline
portfolio
collection of investments assembled to meet your investment goals
trailing commissions
compensation paid to sales people for months or years in the future
Sector Funds
concentrate their investment holdings in one or more industries that make up a targeted part of the economy that is expected to grow, perhaps very rapidly, such as energy, biotechnology, healthcare, and financial services
capital improvement
costs incurred in making value- enhancing changes in real property
ongoing expenses of a mutual fund
cover portfolio management, fund administration, daily fund accounting and pricing, and shareholder services
a final step in estate planning is to
create a durable power of attorney that appoints someone to handle legal matters and make decisions
living trusts
created during the property owners lifetime
exchange traded fund
cross between a stock and a mutual fund, which holds a basket of securities, such as stocks, bonds, currencies, and commodities but they trade like stocks
number of shares of stock x dividend per share=
current income
long term investors are often willing to forgo
current income in favor of possibly earning substantial future capital gains
capital losses
decrease in paper value of an initial investment, only realized if sold
401k plan
defined-contribution plan designed for employees of private corporations
beneficiary designation form
determines who will inherit the funds in that retirement account in case you die before the funds are distributed
nonprobate property
does not go through probate; includes assets transferred to survivors by contract (such as beneficiaries listed on retirement accounts and bank accounts held with another person)
matching contribution
employer benefit that offers a full or partial matching contribution to a participating employee's account in proportion to each dollar of contributions made by the participant
profit sharing plan
employer-sponsored plan that allocates some of the employer profits to employees in the form of end-of-year cash or common stock contributions to employees' 401(k) accounts
defined benefit retirement plan
employer-sponsored retirement plan that pays lifetime monthly annuity payments to retirees based on a predetermined formula
vesting
ensures that a retirement plan participant has the right to take full possession of all employer contributions and earnings
expense ratio
expense per dollar of assets under management
the financial advisor you need is one who adheres to a
fiduciary standard
bonds funds
fixed income funds that aim to earn current income higher than a money market fund without incurring undue risk by investing in a portfolio of funds and other low risk investments that pay high dividends and other capital appreciation
asset allocation
form of diversification in which the investor decides on the proportions of an investment portfolio that will be devoted to various categories of assets
low loaded funds
funds carrying sales charges of perhaps 1 to 3%; sold by brokers, via mail, and sometimes through mutual fund retailers located in shopping centers
after-tax money
funds put into regular investment accounts after paying income taxes
value funds
funds specializing in stocks that are fundamentally sound whose prices appear to be low based on the logic that such stocks are currently out of favor and undervalued by the market
no load fund
funds that allow investors to purchase shares directly at the net asset value without the addition of sales charges
balanced funds
funds that keep a set mix of stocks and bonds, often 60 percent stocks and 40 percent bonds, in order to earn a well-balanced return of income and long-term capital gains
index mutual funds
funds whose investment objective is to achieve the same return as a particular market index by buying and holding all or a representative selection of securities - unmanaged funds because their managers do not evaluate or actively select individual securities that might perform well
call option
gives the option holder the right to buy the optioned asset from the option writer at the striking price
put option
gives the option holder the right to sell the optioned asset to the option writer at the striking price
revocable living trust
grantor maintains the right to change the trust's terms or cancel it at any time, for any reason, during his or her lifetime
irrevocable living trust
grantor permanently gives up control over the property to the trustee
market efficiency
has to do with the speed at which new information is reflected in investment prices - the theory is that security prices are reflective of their true value at all times because publicly available information has driven market prices to the correct level
greater risk
higher return
self directed plan
in defined contribution plans, employees control the assets in their account - how often to make contributions to the account, how much to contribute, how much risk to take, and how to invest
total return
income an investment generates from current income and capital gains
mutual fund dividend income
income paid to investors out of profits earned by the mutual fund from its investments
short term US government bond funds
invest in U.S. Treasury securities with maturities of 1-5 years
growth and income funds
invest in companies expected to show average or better growth and pay steadily or rising dividends
growth and income funds
invest in companies that have a high likelihood of both dividend income and price appreciation
midcap funds
invest in companies with total capitalization of $2 to $10 billion whose stocks offer more than small-cap funds and more growth potential than funds that invest in large corporations
Single-State Municipal Funds
invest in debt issues of only one state
World Bonus Funds
invest in debt securities offered by foreign corporations and governments
international funds
invest in foreign stocks sold in securities markets throughout the world
global funds
invest in growth stocks of companies listed on foreign exchanges as well as in the US
microcap funds
invest in high risk companies with a market capitalization of $50 to $300 million
junk bond funds
invest in high yield, high risk corporate bonds
mortgage backed funds
invest in mortgage backed securities issued by agencies of the US government
municipal bond funds
invest in municipal bonds that provide investors tax-free interest income
regional funds
invest in securities associated with gold, silver, and other precious metals
Short-term corporate bond funds
invest in securities maturing in one to five years
small cap funds
invest in smaller, lesser-known companies wih a total capilization of less than $2 billion
large cap funds
invest in the stocks of companies with total capitalization of $10 billion or more
intermediate government bond funds
invest in treasuries with 5- 10 year maturities
Long-term (U.S.) government bond funds
invest in treasury and zero coupon bonds with maturities of 10 years or longer
equity income funds
invest in well known companies with a long history of paying high dividends as they emphasize income and capital preservation
pretax money
investing before income taxes are calculated, thus gaining an immediate elimination of part of your income tax liability for the current year
mutual fund
investment company that pools funds by selling shares to investors and makes diversified investments to achieve financial goals of income or growth, or both
mutual fund family
investment management company that offers a number of different funds to the investing public, each with its own investment objectives or philosophies of investing
buy and hold
investment strategy in which investors buy a widely diversified mix of stocks and/or mutual funds, reinvest the dividends by buying more stocks and mutual funds, and hold onto those investments almost indefinitely
open end mutual fund
investment that issues redeemable shares that investors purchase directly from the fund (or through a broker for the fund)
asset allocation funds
investments in a mix of assets; they buy and sell regularly to reduce risk while trying to outperform the market
automatic reinvestment
investor's option to choose to automatically reinvest any interest, dividends, and capital gains payments to purchase additional fund shares - smart way to accumulate wealth overtime
market timers
investors who attempt to predict the short-term movements of various markets (or market segments) and, based on those predictions, move capital from one segment to another in order to capture market gains and avoid market losses
conservative investment philosophy
investors with this philosophy accept very little risk and are generally rewarded with relatively low rates of return for seeking the twin goals of a moderate amount of current income and preservation of capital
aggressive investment philosophy
investors with this philosophy primarily seek capital gains, often with a short time horizon - 6% of investors - invest in new or fast growing companies
speculative risk
involves the potential for either gain or loss; equity investments might do either - investments are subject to this
advance directives
legal documents that explain the type of end of life health care you do or dont want when you cant make your own decisions
codicil
legal instrument with which one can make minor changes to a will
debts
lending investments that typically offer both a fixed maturity and a fixed income
two types of trusts:
living trusts & testamentary trusts
bear market
market in which securities prices have declined in value by 20% or more from previous highs, often over the course of several weeks or months - 5 occurred since 1980, average 17 months
bull market
market in which securities prices have risen 20% or more
loan to value ratio
measures the amount of leverage in a real estate investment project by dividing the total amount of debt by the market price of the investment = mortgage amount / appraised value of the property
Class C Mutual Fund Shares
might have a 12b-1 fee and redemption charge
the most common ways that people invest are by putting
money into assets and buying real estate
current income
money received while you own an investment; usually received regularly as interest, rent, or dividends
positive cash flow
monthly rent is at least 1% of purchase price
roth IRA
non deductible after tax IRA that offers significant tax and retiring planning advantages
Letter of Last Instruction
nonlegal instrument that may contain preferences regarding funeral and burial, material to be included in the obituary, and other information useful to the survivors, such as the location of important documents
capital gain
occurs only when you actually sell an investment that has increased in value - calculated by subtracting the total amount paid for the investment from the higher price at which it is sold
covered option
occurs when an option writer who owns the covered option sells the call
seller financing
occurs whenever the seller is willing to self finance a loan by accepting a promissory note from the buyer who makes monthly mortgage payments
target risk funds
offer an easy way to diversify one's portfolio based on risk tolerance
basis point
one-hundredth of a percentage point
equities
ownership equities such as common or preferred stocks, equity mutual funds, real estate, and so on that focus on capital gains more than on income
investments with potential for high capital gains often
pay little current income
Net Asset Value
per share value of a mutual fund market value of assets - market value of liabilities divided by number of shares
fund screener
permits investors to screen all of the mutual funds in the market to gauge performance
trustee
person who carries out trust
securities markets
places where stocks and bonds are traded
dividend
portion of a company's earnings that the firm pays out to its shareholders
business failure risk
possibility that an investment will fail to pay a return to the investor
early withdrawals
premature distribution before 59 1/2 and are taxed as ordinary income
capital gain earned in real estate comes from
price appreciation
mutual fund ask price
price at which an investor can purchase a mutual fund's shares; current NAV per share plus sales charges
real estate
property consisting of land, all structures permantly attached to that land, such as crops and mineral rights
sweat equity property
property that needs repairs but that has good underlying value; an investor buys the property at a favorable price and fixes it up to rent or sell at a profit
Investing
putting saved money to work so that it makes you even more money
a mutual fund with an income objective invests in securities that pay
regular income in dividends or interest
Employee Retirement Income Security Act
regulates employer-sponsored plans by calling for proper plan reporting and disclosure to participants in defined-contribution, defined-benefit, and cash-balance plans
tax free withdrawal
removal of assets from a retirement account with no taxes assessed
fully insured
requires 40 credits and provides workers and their families with benefits under the retirement, survivors, and disability programs; one status is earned it cannot be taken away even if eligible worker never works again
complexity
requires that buyer make financial predictions about future income and expenses
averaging down
requires you throw good money after bad in hopes that the stock will perform well
regulatory risk
results from changes in the income tax or legal environments imposed by a government
transitionally insured
retired workers without 40 credits
tax sheltered retirement account
retirement account for which all earnings from the invested funds are not subject to income taxes
real rate of return
return on an investment after subtracting the effects of inflation and income taxes
reinvestment risk
risk that the return on a future investment will not be the same as the return earned by the original investment
graduated vesting
schedule under which employees must be at least 20 percent vested after two years of service and gain an additional 20 percent of vesting for each subsequent year until, at the end of year six, the account is fully vested
emerging market funds
seek out stocks in countries whose economies are small but growing
a mutual fund that has a growth objective
seeks capital appreciation
do-it-yourself
selecting no load mutual funds in which to invest is relatively easy to do
mutual fund bid price
shareholders receive this amount per share when they redeem their shares, which is the same dollar amount as the NAV
stocks
shares of ownership in a business corps assets and earnings
Redemption charge
similar to a deferred load but often much lower; used to reduce excessive trading of fund shares
long term ROR on investments
small comp. 11.4% large comp. 9.4% corp bonds 5.7% gov bonds 5.2% 30 day treas 3.4% inflation 3.1%
long term corporate bond funds
specialized in investment grade securities maturing in 10-30 years
fixed maturity
specific date on which a borrower agrees to repay the principal to the investor
fixed income
specific rate of return that a borrower agrees to pay the investor for use of the principal
death taxes
state estate and inheritance taxes; they result because of someone dying
payable-on-death designation
status granted to individuals who are not joint tenants and who might need to access accounts without going through probate; the deceased signs the designation before death, and the designee simply presents a death certificate to access the accounts
penny stocks
stocks that trade for less than $5 per share
dollar cost averaging
systematic program of investing equal sums of money at regular intervals, regardless of the price of the investment
withdrawal rate
tapping the nest egg; it is the equal and opposite force to the savings rate during the accumulation stage
depreciation and interest are
tax reduction
keogh
tax-deferred retirement account designed for high-income self-employed and small-business owners
most mutual funds are managed funds, meaning
that professional managers are constantly evaluating and choosing securities using a specific investment approach
20% withholding rule
the IRS requires plan sponsors to withhold 20% of an early withdrawal that is then sent to government to repay taxes
legal fees
the cost of reviewing a purchase and sale agreement
inflation risk
the danger that your money will not grow as fast as inflation and therefore not be worth as much in the future as it is today
estate planning
the definite arrangements you make during your lifetime that are consistent with your wishes for the administration and distribution of your estate when you die
risk premium
the difference between a riskier investments expected return and the totally safe return on the Tbill
market volatility risk
the fact that all investments are subject to occasional sharp changes in price as a result of events affecting a particular company or the overall market for similar investments
business cycle risk
the fact that economic growth usually does not occur in a smooth and steady manner, and this impacts profits as well as investment returns
price appreciation
the increased value of the underlying securities is reflected in the NAV of fund shares
tax deferred
the individual does not have to pay current income taxes on the earnings (interest, dividends, and capital gains) reinvested in a retirement account
business risk
the investment may not be profitable
market votatility
the likelihood of large price swings in securities due to a company's success and various market conditions
maximum taxable yearly earnings
the maximum amount to which the FICA tax is applied
time horizon risk
the more time your money is invested the more it is at risk
futures contract
the obligation to make or take delivery of a certain amount of a commodity by a set date
market risk
the possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets in which he is involved
investment risk
the possibility that the yield on an investment will deviate from its expected return
diversification
the process of spreading your assets among several different types of investments to reduce risk - manages random risk - doesnt mean you wont lose money - averages high and low returns
price to rent ratio
the ratio of median residential real estate prices to the median annual rents that can be earned from the real estate = home price/ annual rent
stated commission
the sales charge as a percentage of the amount invested
management demands
the time needed to maintain proper records
distribution phase
the time period during which you hope that your assets will last through retirement
federal estate tax exemption amount
the treshold where estate taxes start; the amount an individual may pass to heirs during his or her lifetime without estate tax consequences
accumulation phase
the years during which you need to save for retirement
Money Market Funds (MMFs)
they invest in highly liquid, relatively safe securities with very short maturities such as CDs, treasury bills, and commercial paper - MMFs must keep 10% of their assets in cash or investments
If NAV is higher than that paid when they purchased the shares - after transaction costs-
they will have a capital gain
aggressive investment philosophy: moderate: conservative:
top of pyramid middle bottom
retirement savings goal
total amount of accumulated savings and investments needed to support a desired retirement lifestyle
total current income + total capital gains =
total return
Class A Mutual Fund Shares
typically charge a front end sales charge and a portion of the dollars you pay is not invested
Class B Mutual Fund Shares
typically do not charge a front end sales charge but they do impose asset based sales charges that may be higher than those you would incurit you purchased class a shares
portability
upon termination of employment, employees with portable benefits can keep their savings in tax-sheltered accounts, transferring retirement funds from employer's account directly to another account without penalty
foreclosures
value declines due to failure of neighbors with similar properties to pay their mortgages
gold bullion coins
various world mints issue these coins, which contain 1 troy ounce (31.15 grams) of pure gold
annual 12b-1 charges are
very costly over the long run
defined contribution retirement plan
voluntarily offered by an employer is designed to provide a retiring employee a lump sum at retirement
hope and hold strategy
waiting for stock to return to your purchase price
inestate
when a person dies without a legal will
herd behavior
when emotion, not logic, rules investing decisions and investors decide to copy the observed decisions of other investors or movements in the markets rather than follow their own beliefs and information - market prices increase, people think its safe for more risk - results in stock market bubble - surge in equity prices, often more than warranted by the fundamentals and usually in a particular sector, following by a drastic drop in prices as a massive sell off occurs
cross over point
when the annual investment gains an individuals yearly contributions
marketability risk
when you have to sell a certain asset quickly, it may not sell at or near the market price
preservation of capital
you don't want to lose any of the money you have invested
