This is the site to use for your financial education. I am a student of "Bob Brinker" who retired from his national radio show, "Money Talk", and more recently retired his investment news letter, "Marketimer". I hold to Mr. Brinker's philosophy on financial matters, from dollar cost averaging to the risk factor when you are investing for retirement. He always stressed that you can be your own financial investor through educating yourself on all issues financial. Having an understanding of risk and reward is essential to success in investing. One book he recommends is "Against the Gods" by "Peter Bernstein", "The Remarkable Story of Risk" and how those who try to beat the market rarely do. To understand Bob Brinker's philosophy on investing, here is a snippet of Bob Brinker on one of his past shows that summarizes his investment strategy to retirement:
If you are interested, I have a link to many of Bob Brinker's archived radio shows on everything finance. You will find many a gem in these shows. Just remember; these are older shows and do not reflect today's world. Bob spoke to current events at the time he was broadcasting. He took callers that did asked financial questions that still do apply today.
**********************QUOTES BY THE BEST IN THE FINANCIAL WORLD*********
Billionaire Investor Howard Marks:
"First and foremost, investors need to be students of history - only then can they 'engage in pattern recognition' and begin to take advantage of the often predictable nature of business cycles by 'taking the temperature of the market'."
"All business cycles stem from 'excesses and corrections'. Markets are mainly driven by investors' emotions, rather than mechanical processes, which means that there are times of excess when people become so optimistic that they seek to justify the dangerous view that there's no price too high. But these overly bullish periods are typically followed by a correction as investor psychology turns to fear. Strong movement in one direction is more likely to be followed - sooner or later - by a correction in the opposite direction than by a trend that grows to the sky."
"During times of market excess or bearish corrections, investors need to be able to control their emotions and avoid falling victim to peer pressure. Illogical narratives will often form during these periods, such as, there's no price too high, or stocks have fallen so far that no one will be interested in them."
Warren Buffett:
"Be fearful when others are greedy, and greedy when others are fearful."
Bob Brinker:
"Stock market timing is a very difficult exercise. Perfection in the business of market forecasting remains an elusive goal in an always challenging task of working to anticipate future market direction."
"Forecasting stock market trends has always been a very difficult task. We do not pretend to know all the answers, and infallibility is not part of the equation. Regardless of how much dedication and discipline one uses, or how much one attempts to avoid surprises, or how long a methodology has worked historically, the market always reserves the right to stage an unprecedented event."
Charles Mackay, 1852:
"Men, it has been well said, think in herds. They go mad in herds, while they only recover their senses one by one."
Jesse Livermore:
"There is nothing new on Wall Street or in stock speculation. What has happened in the past will happen again and again. This is because human nature does not change, and it is human nature that always gets in the way of human intelligence."
__________________________________________________________________________________________________________________________________________________________________
*******************************************MONETARY POLICY**************
Monetary Policy Tools and What the Fed Watches
1. Monetary Base (The raw material for monetary growth):This number is important if you're looking to see how much money is being printed into circulation. If that number grows, that means that the federal government is printing money above and beyond what is needed to replace old paper currency. The importance of this is; if done to an extreme for a long period of time, can be one cause within an inflation scenario. This can be too much money chasing too few goods. As in anything, the more you have of something, makes whatever it is, worth less; in this case the dollar. Money, is at times printed to replace the old beleaguered dollar, and then, where care needs to take place, is when the Federal Government prints additional money to help pay down the U.S. debt, sometimes pouring too much unearned currency into the economic system.
2. Inflation The PCE price index is the fed's favorite price gauge, and shows a more moderate inflation rate than the consumer price index (CPI). Core inflation is closely monitored by the Federal Reserve. The core inflation numbers strip out food and energy from the numbers because of their volatility, thus we get a more accurate reading in regard to whether or not we are developing a real inflation problem going forward. A "real inflation problem" would be prices across the board rising above what is normal. To give an illustration; in August of 2008, the core prices (everything except food and energy) were contained by the taxing effect that high oil prices (energy) had on consumers. Discretionary spending power had been drained by the high cost of necessities such as gasoline and energy. Because energy was taken out of the equation, we could see clearly what the actual numbers were telling us, and that was, we did not have an overall inflation issue except within the energy sector.__
3. Gross Domestic Product (GDP):
Gross domestic product is the "U.S. economy". If you have a 3% growth in gross domestic product, you have a growing economy. if you have a 3% decline in growth, you have a shrinking economy. Rule of thumb is: 2 consecutive negative quarters, you are technically in a recession. The retails sales category excluding sales at auto dealers, building material stores, and service stations are used to calculate GDP. Generally slow to moderate real GDP growth has the best possible outcome for investors. Growth within a range of 2% to 3% provides corporations with the ability to grow their earnings and gradually bring new employees aboard as demand increases. Furthermore, slow to moderate growth tends to maintain the output gap and restrain the forces of either demand-pull or cost push inflation. The high level of labor slack produces favorable unit labor cost conditions as workers have very limited salary leverage when the labor pool is plentiful.
4. Output Gap:
The output gap is one of the major weapons in the Federal Reserve's anti-inflation arsenal, as it restrains the forces of both demand-pull and cost-push inflation. Large negative output gap measures the difference between actual GDP and the level of output that could be achieved if the economy operated at full capacity.
***The typical lag time for monetary policy, such as the raising of interest rates to get inflation down, is in the six-to-twelve month range.***
__________________________________________________________________________________________________________________________________________________________________
**********************************************MEDIA LINKS*******************************************
__________________________________________________________________________________________________________________________________________________________________
********************************************MONEY SAVINGS***************************************
Promo Codes
Online stores send out discount codes to SELECT groups of customers, leaving the rest of us to pay full price! To that we say, NO! When making an online purchase, use a promo code by entering it where prompted.
__________________________________________________________________________________________________________________________________________________________________
*************************KEY ECONOMIC AND FINANCIAL POINTS AND FACTS***********
1. "The stock Market tends to climb a wall of worry": During some bull market cycles, there at times tends to be factors that create fear amongst some investors. These fears are head-winds caused by factors such as; negative world events, rising inflation, rising interest rates, rising fuel prices, or any number of such things that can bring fear into the minds of the investor; yet the stock market plows through, gaining ground piece by piece into positive territory. The opposite would be; very little in the way of fears amongst investors (very little negative occurrence in the world), where the market then makes even greater strides into positive territory.
2. The 50 year average price/earnings (P/E) ratio is 16 times earnings. Stock market valuation levels benefit from low levels of inflation and low interest rates.
3. A strong dollar restrains the prices of imported goods and is a headwind against inflation. (Bob Brinker)
4. Employment costs are a key factor in the inflation outlook as they represent a significant portion of the costs of doing business. (Bob Brinker)
5. Wage growth of 6%-7% can be bad for economic outlook. With excessive wage growth comes inflation above what is normal.
6. Repatriated Profits: when a company increases their profits by, let's say, a lowering of corporate taxes by the government, almost all companies do not increase employee wages, but they instead repurchase shares of their stock, increase dividend payouts to shareholders, and use it for mergers and acquisitions.
7. Quantitative Easing (QE): the purchase by the government of trillions of dollars of U.S. treasuries and mortgage-backed securities, designed to lower interest rates and provide liquidity to the financial system.
8. Quantitative Tightening (QT): Reduce the size of the balance sheet by selling off U.S. treasuries and mortgaged backed securities in order to normalize interest rates.
9. A low unemployment rate is indicative of a tightening labor market. This can lead to wage pressures, forcing up wages, which has been in part a driver of inflation.
10. Rapid economic growth: Rapid economic growth is defined as a rate of real GDP growth above the historical average of 3% - 3.5% over several quarters.
11. The strongest historical stock market returns have occurred with a Democrat in the White House and either Republican control or divided control of Congress.
12. The stock market has always served as a discounting mechanism, as investors anticipate future earnings prospects. This is the reason that stocks respond more to forward quarterly earnings guidance than to the reported figures for the previous quarter. (Bob Brinker)
13. If one wants to buy individual stocks, then it is important to understand a company's financials such as, business plan, debt to cash ratio, earnings, and other important information. I prefer to buy the market within a mutual fund such as the S&P 500 index. Also, a part of that portfolio could be the Russell 2000 which would include small-cap stocks. Also a fund of mid-caps could be included. Vanguard does have a fund called the "Total Stock Market" which includes all of that in one fund; this fund is well balance within a small, mid and large-cap ratio. I find that my gains are significantly better with an index fund than to try to figure out which individual stocks I should buy and how long to hold them and when to sell them or short them. Timing in this fashion is hard to do consistently. (Dave Pierce)
14. Exports vs. Imports:The strong dollar tends to increase the cost of U.S. exports in overseas markets, thereby making them less price competitive. (Bob Brinker)
A) Stronger Dollar: More expensive U.S. exports therefore less competitive.
B) Weaker Dollar: Less expensive U.S. exports therefore more competitive.
15. Recession: False-positive recession of 2022;
In 2022, the U.S. economy had two consecutive quarters of negative GDP (Gross Domestic Product) numbers. This was thought to be by some to be the beginning of a recession.
But no recession occurred. There were other numbers that had to come into play in order to signal a recession. There are other numbers that are worthy of looking at in determining whether or not we are headed into a recession. Rising levels of unemployment is an important one to look at, and that did not happen in 2022. Unemployment was at a steady 3.4% - 3.6%. Falling retail sales also has to be present and that did not occur as well. To some extent, a contraction in the over-all numbers, in regard to income and manufacturing, develops before a recession. So if you hear that we are headed for a recession because of only two consecutive quarters of negative GDP numbers, you may want to check the other numbers mentioned, to see if there is a basis for the concern.
16. Treasuries:Rising treasury interest rates have a tightening effect on the economy, similar to the Fed raising interest rates.
17.Small and Mid-Cap Stocks:These stocks are less adaptive to rising interest rates. As the Fed raises interest rates to battle inflation, small companies are less able to handle more debt due to rising rates. This can be reflected in the price of these company stocks.
__________________________________________________________________________________________________________________________________________________________________
**************MY TOOLS IN DETERMINING FUTURE STOCK MARKET ACTIVITY
These economic indicators below are watched to determine future stock market activity. Things such as earnings affect stock holders confidence in the market. In other words, the stock market is a reflection of economic activity; good or bad.
1. History of the stock market: I have a whole section on stock market history, below, in the stock market section of this site: Section 4-C - in (grey font - next section in green font). There are many things that rarely change due to human nature, and history shows this.
2. U.S. Retail Sales:3. Procter and Gamble earnings:When Procter and Gamble doesn't make earnings expectations, then it is time to take notice about what is going on in the economy. Procter and Gamble carry many of the essentials that all of America uses, such as, food product, toilet paper and so on. When people cut back on their household essentials, there must be a reason for that.
4. Oil Prices:High oil prices act as a de facto tax on the consumption of gasoline and other energy products. This taxing effect reduces consumer discretionary income. On the other end of the spectrum, lower oil prices increase consumer discretionary income by reducing the cost of energy products. In other words, when energy prices are high, that extra money going into the tank of your car was previously used to buy certain essential or nonessential items. This can become difficult for those whom have a one hundred percent propensity to spend; those who live paycheck to paycheck. this scenario can lead families to have to decide what they specifically need to cut back on in order to make ends meet. This eventually works its way into the economy often as a recession and then can be reflected in the stock market prices.
People often think that the rising oil prices should be part of the inflation picture, and to some extent that is true.
But rising oil prices can also have the opposite effect by the taxing effect on people's income. By money being pulled out of their paycheck and going into the tank, then the consumer pulls back on much of their other purchases which can lead to economic deflation or a slowing of consumer prices.
5. Interest Rates:Lower interest rates tend to be good for the stock market over the long term. Higher rates can mean a more difficult time when it comes to purchasing a home. A healthy housing market is key to a healthy economy and therefore the stock market. Businesses when need to borrow money to expand their businesses or to replace their equipment or whatever the case may be, will then have to pay more to borrow money and is especially true for the small business that would find it harder to absorb the costs. This isn't more apparent than the companies in the Russell 2000. The Russell 2000 are small cap companies that have less wriggle room when it comes to debt.
6. Michigan Consumer Sentiment Index:A survey of consumer confidence conducted by the University of Michigan. The Michigan Consumer Sentiment Index uses telephone surveys to gather information on consumer expectations regarding the overall economy. The index is becoming more and more useful for investors because it gives a snapshot of whether consumers feel like they can spend money, reflecting consumer confidence in the economy.
7. Bears vs. Bulls Sentiment:__This indicator is a contrary indicator. If the gauge goes heavily bearish, then it is time to watch for a possible bull market on the horizon. High levels of bearish sentiment is favorable for the market, since those who are out of the market can decide to reinvest, thereby representing future demand for shares.
__________________________________________________________________________________________________________________________________________________________________
*******************************ECONOMIC INDICATORS******************************
1. Leading Economic Index (LEI):The LEI historical average is 2.5%
This is an indicator that is intended to estimate future economic activity (measures input into the economy). This indicator has a history of turning positive one to two quarters before real economic improvement surfaces. The Index is made up of 10 indicators:
__1. Vendor Performance (Supplier Deliveries),
__2. Interest Rate Spread,
__3. Stock Prices,
__4. Real Money Supply,
__5. The Index of Consumer Expectations,
__6. Building Permits,
__7. Manufacturers' New Orders for Nondefense Capital Goods,
__8. Average Weekly Unemployment Insurance Claims,
__9. U.S. ISM Manufacturing New Orders Index,
__10. New Orders for Consumer Goods and materials.As more of these indicators go positive over a longer period of time; means an improving economy down the road.
2. Real Gross Domestic Product (GDP): This number represents either growth or lack of growth in the economy. Around 3% growth in the GDP is positive. A GDP number that is too high can mean the economy could be overheating, and along with other factors can lead to an unstable economy such as inflationary pressures. On the other hand a number too low can indicate a slowing economy, or going forward, a possible recession.
__A. Employment trends:__The general direction in the numbers of those unemployed (reflected in unemployment compensation numbers), allowing one to see an economic direction develop ahead of time. Unemployment claims at close to 500,000 would be indicative of elevated recession risk. When it comes to an economic recovery, unemployment is in the lagging indicator group, and new job figures are not to be expected to return to positive territory until a recession ends.
__B. Under-Employment:__The under employment rate includes those without work seeking full-time employment, those working part-time for economic reasons, and marginally attached workers including those who have become discouraged and have stopped looking for work, but still want to work.
6. Online Job Demand: The "Help Wanted On Line" Index (HWOL) measures the change in advertised online job vacancies over time, reflecting monthly trends in employment opportunities across the U.S. If this number rises, it points to job increased demand in the market place.
7. Consumer Confidence:This shows us the consumer(You and I) how much confidence there is going forward in whether or not people are going to hold on to their money, due to no confidence that they will have a job down the road or spend their money. Spending indicates a strong economy going forward.
8. Capacity Utilization:The capacity utilization long term average rate is 80.9%. A reading of 80% is normal. The all-time low was set in June of 2009 at 68.3%. The previous all-time low was set in December of 1982 at 70.9%. The U.S. economy operates inefficiently at the low number of 68.3%
Capacity Utilization measures three sectors of the economy; manufacturing (most important, measuring the amount of factory space in use), mining and utilities. Low capacity utilization and a large labor pool will help hold down inflation. The long term average is 80.9%. Below this number bodes well in keeping inflation low, but too low a number does not bode well for the economy. Idle factories damage the profitability of companies due to the ongoing fixed-costs that are associated with maintaining facilities.
9. Output Gap:Large negative output gap measures the difference between actual GDP and the level of output that could be achieved if the economy operated at full capacity. A positive output gap means the economy is approaching full capacity, such as full employment. If not watched closely by the federal reserve in regard to interest rates, can lead to upward pressure on prices (inflation). Part of this number is capacity utilization; the long term average which is around 81%, and let's say that the capacity utilization right now is 79%, then the out put gap is the difference between the two, or 2 %. This gap is valuable due to the fact it holds down inflation by providing excess capacity which prevents demand-pull inflation from developing. Inflation is also restrained by the high level of labor slack which results from high unemployment and slow economic growth.
VIX Index__D. Bullish Percent Index (BPI)
__E. Margin Debt: Money investors borrow from their brokers to invest.
Investors may use market sentiment indicators to analyze trends and assets, as well as to judge the overall state of the economy.
__A. Put/Call Ratio:__The 60-day put/call ratio is a contrary indicator. This means that if the reading or sentiment is bearish, then that can be good for the market going forward and that we may be looking at a bull market soon or a possible buying opportunity. Human nature as it is, is often wrong and these readings often reflect that point. When the market is experiencing a bear market, people often think it will never get any better and when those numbers get so bearish at that point, it had driven many of the nervousness out of the market, allowing for the real investor to come in and buy up bargain shares, thus beginning a bull run over time on the market. Also the opposite is true, that if we are in a bull run and people are making a lot of money, they tend to think that it will go on for ever, until it doesn't. In this scenario, eventually the market hits a ceiling it can't break through due to other economic factors such as a stock multiples getting too high in relation to a company's earnings. A decent put/call number is 1.0. This number shows a high level of skepticism about the stock market. High levels of bearish sentiment is favorable for the market, since those who are out of the market can reinvest, thereby representing future demand for shares. Below are 3 links to explain the put/call.
__B. Bears vs. Bulls Sentiment:__This indicator is a contrary indicator. If the gauge goes heavily bearish, then it is time to watch for a possible bull market on the horizon. High levels of bearish sentiment is favorable for the market, since those who are out of the market can decide to reinvest, thereby representing future demand for shares.
14. ISM Manufacturing Index: The ISM manufacturing index, also known as the purchasing managers' index (PMI), is a monthly indicator of U.S. economic activity based on a survey of purchasing managers at more than 300 manufacturing firms. It is considered to be a key indicator of the state of the U.S. economy.
15. Payroll: The quit rate: The rate at which people are quitting their jobs and looking for a better job. A sign of a tight labor market.
Job creation or job growth is a big deal when it comes to the stock market. New jobs means a growing economy which bodes well for the stock market. This number is at the top of the list of importance.
16. The National Association of Home Builders/Wells Fargo housing Market Index (HMI):Measures the level of builder confidence in the market for newly built, single family homes over a six-month period of time. Any number over 50 is seen as positive. Building conditions are rated as poor when the index is below 50. In January of 2009 the index hit bottom with a reading of 8.
Measurements that are positive over 50:
A. HMI index: measuring sales expectations for the next 6 months.
B. The HMI index: that measures current sales conditions
C. The HMI Index: Which tracks buyer traffic.
__1) Housing starts
__2) New Home Sales
Real wages or those adjusted to inflation - if begin to rise, can increase household purchasing power and help bolster readings like strong "U.S. retail sales" data.
20. Small Business Optimism Index:21. S&P 500 Operating Earnings:22. U.S. Retail Sales:This indicator shows what retail sales are doing in the U.S. and how strong retail sales or weak sales may affect the stock market. On the other hand, an over-heating economy which would include hot retail sales could then lead us to a probable inflation problem which could be bad for the stock market in regard to the fed raising interest rates in order to get inflation down.
__________________________________________________________________________________________________________________________________________________________________
*********************************CURRENT ECONOMIC ACTIVITY*********************************
The Coincident Economic Index (CEI): The CEI is a measure of current economic activity. there are four indicators in this category listed below. This key index tracks:
1) Industrial Production
2) Personal Income
3) Manufacturing and Trade Sales
4) Nonagricultural Payrolls
Key Indicators Measuring Recession Risk
1) Accelerating Inflation: the potential for Hyper inflation.
2) Payroll Growth: reflects a strong or a weak jobs market. A weak jobs market can be an indicator to a possible recession.
3) Rising Unemployment Claims: rising unemployement numbers.
4) Yield Curve Inversion: federal funds rate vs. 10 year treasury yield.
5) Trends in the Leading Economic Index: ten components make up the (LEI). Are watched for downward or upward trends in the economy.
__________________________________________________________________________________________________________________________________________________________________
***************************************INVESTMENT CHOICES**************************************
1. Money Market
A "Money Market Fund" is a safe place to put your money, but doesn't produce the gains that the stock market could potentially produce. It stays at a constant dollar per share. The stock market has a higher beta which means more risk but higher potential for gains over the long term of the investment. The risk involved within the stock market would be volatility at times. There are also tax-exempt Money Market funds. Vanguard has such a fund.
2. Certificate of Deposits (CD's)
CD's or Certificate of Deposits are bank issued and you can deposit your money into these for a specific length of time. They come in 3 month, 6 month, 1 year or longer. The longer you go out with a CD, the rates can be higher or lower, often depending on whether rates are trending up or trending down. The caveat is, if you need your money sooner than the due date, you will get penalized, although the penalties aren't enormous. You may have a 1 year CD at 2% and while you are locked into the CD, Interest may go up on the new CD's being offered. Many people ladder them in a way that they don't have all their money tied up for a long period of time. Example: You can buy 3 month, 6 month and so on. That way, in 3 months, the 3 month CD's come due and then you can purchase new CD's at the new interest rate. The 6 month CD's are now 3 months from being due, and so on. This way you catch an average interest rate between the different CD rates over time.
3. Bonds
Duration: bond duration is the weighted-average of the times that interest payments and the final return of principal are received. Bonds behave differently than other interest-bearing vehicles such as Money market funds. If interest rates go up, bond principle goes down. So, you continue to receive your bond interest, but your initial principal you hold goes down. In other words, if one thinks the interest rates are going up, then you would want to hold very short duration bonds. If you think rates are going to go down, then you would want to hold longer duration bonds for higher interest payments on those bonds. I don't go out much further than about a 3.5 year bond. Let's say that you go out twenty years on a bond for example; we don't know what interest rates are going to be that far out, and you could get stuck at a time that rates are starting to go up. The direction of interest rates is very important to what kinds of bonds you would want to hold. Let's say that you hold a bond fund with a weighted-average of 3.9 which implies that a 1% increase in corresponding interest rates would result in a 3.9% decline in portfolio net asset value. Click the link below to better understand bonds.
A. High-yield corporate bonds: These bonds can be part of ones portfolio. These bonds pay higher interest but have higher risk. They are also known as junk bonds in some cases. These should be purchased as interest rates are going down in order to protect the value of your bond. Vanguard has such a fund called, "Vanguard High-Yield Corporate".
B. Inflation Protected Securities: These bonds do just that, protect you from inflationary pressures. You don't want to buy these bonds if inflation is on the decline. These bonds pay interest and on top of that, it pays when inflation is on the increase. You can loose bond principle if inflation is on the move down. Vanguard has such a fund called, "Vanguard Inflation Protected Securities Fund".
__________________________________________________________________________________________________________________________________________________________________
*******************************Everything about the Stock Market*********************************
4. Stocks
Individual Stocks: an individual stock is the purchase of shares in one single company.
Stock Mutual Funds: a stock mutual fund is a family/fund of many stocks, giving a person wide diversification. The most common would be a fund such as the S&P 500 Index Fund which when purchased, gives you this diversification over 500 different companies, or stocks. The S&P 500 held companies are known to be top quality that represent the large cap stock market. When buying the S&P 500, you are buying the market, as opposed to buying a sector fund, such as the tech sector or the medical sector.
Small and Mid Cap Funds: These funds have only small cap (capitalization) and medium cap companies. You can purchase one of the Russell funds which are funds comprised of small and mid cap companies.
Some fund companies such as "Vanguard hold funds such as the "Total Stock Market Fund" that are combined with the S&P 500 and some of the Russell funds stocks. The mix is usually 70% S&P and 30% small and mid cap stocks. This gives one an even broader market and more diversification.
International Mutual Funds: these funds hold companies outside the U.S. and possibly some U.S. companies as well.
THE BASIC FUNDAMENTALS OF INVESTING IN RISKY ASSETS SUCH AS STOCKS
1. In all cases, a balanced investment approach in the years leading up to and including retirement, including substantial quality bond holdings in order to provide underlying portfolio stability and reduce overall portfolio volatility.
2. Avoidance of speculation, with investments diversified over many quality companies that possess future earnings potential. One way to do this would be to invest in a mutual fund such as the S and P 500.
3. Outright ownership of shares in order to allow one to weather a period of adversity. This means no margin or other loans on stock market positions.
4. Patience and perseverance, and a recognition that owners of profitable businesses have historically earned the highest rate of return over time.
Key Underpinnings for a Positive Stock Market
1. Gradual economic growth
2. Accommodative Federal Reserve monetary policy
3. Valuation that is similar historically to the long-term stock market (valuation) numbers
A. ACTIVE/PASSIVE PORTFOLIO
This portfolio invests for long-term growth and features broad diversification, high tax-efficiency and very low expenses. This portfolio would for example hold, 90% in Vanguard total Stock Market Index, and a 10% weighting in Vanguard Global Equity. The Vanguard Total Stock Market consists of S&P 500 and Russell small and mid cap stocks, where the global fund is international stocks. It could be any fund family that offers such funds.
The "Vanguard Total Stock Market" is divided up as 70% S&P 500 (large caps) and 30% Russell (small and mid caps)
S&P 500 index (large caps) - 70% of the 90%
Russell 2000 - 30% of the 90% (small and mid caps)
International Stock Fund - 10% of total portfolio
B. Russell Stock Funds
The Russell funds, which includes the Russell 2000, are comprised of mid and small cap stocks. Small and mid-cap companies, because they are smaller than the large cap companies, carry more debt as a larger percentage of their company size. Therefore interest added to debt becomes a larger part of their total debt yield or a bigger percentage of their total financial picture, which investors tend not to like - that of taking on significantly more debt. Their debt will grow more rapidly as a percentage of earnings than a larger company who is more likely to be able to absorb that larger cost. In the bear market of 2022, the S&P 500 declined 25%, while the Russell 2000 declined 32% at a time that inflation was on the rise and the prospects of the Fed raising interest rates were significantly looming. The S&P 500 hit its low in 9 months of the beginning of the bear market and hit its new record highs in 2 years of the beginning of the bull market. The Russell 2000 hit its record low in 1 year and 10 months and has not made any new market highs as of August of 2024. The smaller cap company stocks tend to be more volatile than the large cap stocks on top of being interest rate sensitive.
The Vanguard total stock market fund is comprised of 70% S&P 500 stocks and 30% Russell stocks. If it is possible to determine the interest rate environment and to predict rising interest rates, one could possibly make a sideways move from the Vanguard Total Stock Market to the "straight" S&P 500 fund ahead of the market volatility in order to avoid the interest rate risk that comes with the Russell funds.
C. STOCK MARKET HISTORY
Part of stock market analysis and managing one's stocks is to look at stock market history.
Weather
Poor weather (especially in the East) can affect first quarter GDP. The numbers for this quarter can show a pull-back in economic growth and begin to recover and normalize in the second quarter.
Divided Congress
Best returns are generated in years when there is a Democratic President and the congress is either divided between the two parties, or both houses of congress are Republican. As the President sets the tone within the government, Congress has control of the purse and policy can't get passed without a vote of both houses of Congress.
Two Year Bull
The S&P 500 typically makes on average 11% in the second year of a bull market.
January Market Watch
Since the end of World War II, there have been thirty one years prior to 2023 in which the S&P 500 closed the month of January with a negative return. During those 31 years dating back to 1945, the medium and average decline for the 31 Januarys was a -3.7%. During the period from February through December in those 31 years, the average gain was 2.7% while the medium gain was 4%. Many of these Januarys led to mid-term volatility.
January - July
Over the years, whenever the stock market is up for the period between January - July, the return for the balance of the year has been 8% on average.
When including only those years when the January - July returns were 10% or more, of 21 instances going back to 1960, these years returned on average 4.8% from August - December (the only negative return was 1987).
August Blues
August tends to be a somewhat volatile month in the stock market and has been such over the years since 1986. So, when August rolls around, expect it to be one of the toughest months for stocks.
September
September is historically the worst month of the year. Since 1945, stocks have declined more than half the time. When the stock market is up over 10% for the year going into the normally troublesome month of September, the return for the balance of the year has been 8% on average.
When including only those years when the January - July returns were 10% or more, of 21 instances going back to 1960, these years returned on average 4.8% from August - December (the only negative return was 1987, famous for its Black Monday crash in October).
Presidential Election Years
There have been 20 presidential election years since 1925, and in every case the stock market has either made progress or experienced only minor weakness during the period between the end of the first-half and election day. The largest post-June 30 decline in a presidential election year was a -3.2% pullback leading up to the election of JFK in 1960. Eight decades of presidential election year history suggest that concern over significant stock market weakness in the months leading to election day is not justified based on past experience.
Since the end of World War II, the S &P 500 Index has registered double-digit gains between June 30 and presidential election day on just two occasions; in 1980 and 1984.
In all other cases, gains and losses were small and within a range of +6.5% and -3.2%. This suggests that during the four-month period leading up to the election there tends to be relatively little change in the broad stock market indexes as investors assess the candidates and their policy positions.
Stock Market Corrections or Bear Markets - 16 Mid-Term Off Presidential Election Years
Election history can help determine the outcomes that have produced the best annual rates of stock market return in the past. (Bob Brinker)
__Bear Market - December 12, 1961 - June 26, 1962 (-28%)
__Bear Market - February 9, 1966 - October 7, 1966 (-22.2%)
__Bear Market Bottom - May 26, 1970 (-36%)
__Bear Market - January 11, 1973 - October 3, 1974 (-48.2%)
__Correction Bottom - February 28, 1978 (-19.3%)
__Bear Market - March 25, 1981 - August 12, 1982 (-25.3%)
__Correction Bottom - September 29, 1986 (-9.4%)
__Correction Bottom - October 11, 1990 (-19.9%)
__Correction Bottom - April 4, 1994 (-8.9%)
__Correction Bottom - August 31, 1998 (-19.3%)
__Bear Market Bottom - October 9, 2002 (-33.6%)
__Correction Bottom - June 13, 2006 (-7.6%)
__Correction Bottom - July 2, 2010 (-16%)
__Correction Bottom - October 15, 2014 (-7.4%)
__Correction Bottom - December 21, 2018 (-15.8%)
__Bear Market - January 3, 2022 - September 30, 2022 (-25.24%)
As you can see that the last sixteen Mid-term off presidential year elections has had some sort of correction or has led into a bear market.
The history of mid-term election year corrections is weighted toward the second-half of the calendar year with 11 of the mid-term bottoms occurring during the second-half. October dominates the data with 5 mid-term election year bottoms.
In December, before the beginning of the new year of the "Mid Terms" may be a good time to rebalance your portfolio if you have become heavy in stocks according to your asset allocation. Your allocation would depend on your age, how close to retirement, risk tolerance and possibly others that are personal to you. A person at thirty for instance could be 100% in the stock market because that person has more of a long term outlook in order to accumulate wealth with the risk involved, and a person who is sixty has less of a long term horizon, would allocate a possible 50-60% in stocks and the rest in fixed income such as bonds, treasuries or CD's.
Stock Market Crash of 1987
Establishing a major stock market bottom is a process that unfolds over a period of time. The experience that followed the 1987 crash, which included a single-day decline of 22.6% in the Dow Jones Industrial Average on October 19, provides an historical example of stock market activity following a market collapse.
Although the Dow Jones Industrial Average registered its absolute 1987 closing low of 1738.24 on October 19, 1987, the process of testing out the bottom area took an additional seven weeks to complete. Shortly after the October 1987 collapse, the market staged a short-term rally that failed. This led to, the fulfillment of the testing process, as the major indexes returned to the vicinity of the initial closing lows on much lower selling pressure. This process unfolded over a period of several weeks, and on the final test the DJIA closed slightly above its October 19 closing low, while the S&P 500 index closed at 223.92 on December 4, 1987, just one point below its closing low on October 19. The market turned up on the following day and these price levels were never seen again.
Stories like this shows us that the stock market reserves the right to have moments like this. While one looks at the history of the market and pays attention to patterns, these drops in the market will and do happen. Patience is the key, and over time the markets will recover.
Bear Market of 2000 - 2002 (-36.8%) - year 2000 Presidential Election
This particular bear market is what I would call a technical bear. The fundamentals that drive a bull market upwards, began to erode within the economy. A recession ensued, taking the stock market down with it. In most cases, there is a direct correlation between a recession and a technical bear market.
Bear Market of 2007-2008 (-50%) - year 2008 presidential election
Cause of 2007-2008 bear market: High oil prices and Industry collapses.
Industry collapses: Insurance (AIG), Banking (Bear Stearns), Auto Industry.
The oil price issue and the three industry collapses caused four separate bottoms to occur in the stock market. This is similar to what happened in 1994 which took eight months to complete. These three bottoms are known as an extended bottoming process.
This bear market in 2007-2008 lasted twelve months when it hit its fourth and final bottom, closing at 899.22 on the S &P 500 on October 10, 2008.
The initial closing S &P 500 index low of 1310.50 occurred on January 22, 2008. This was followed by a 2.8% lower closing S & P 500 index level of 1273.37 on March 10, 2008 in the midst of the Bear Stearns collapse. The third closing low in 2008 was 4.6% lower with a reading of 1214.91 on July 15, 2008, with oil approaching the $150 level and Fannie Mae and Freddie Mac requiring direct federal assistance in order to remain a viable force in the mortgage financing business. The fourth and final closing low of 899.22 on the S & P 500 occurred on October 10, 2008.
Bear Market of JAN. 3, 2022 - Sept. 30, 2022 (-25%) - year 2022 mid-term off presidential election
This bear market behaved more like a correction than an apparent bear market. I would call it a deep correction which began in January and eventually the S & P 500 hit a June low of 23% and then began to recover, coming within about 400 points of the all time high of 4796. The market then began a declined back down to the June lows and fell below that point to 25% below the all time high. Then the market began to recover, and then began testing the bottom. On September 30, 2022 the S&P 500 hit the final bottom on low selling pressure and offering a buying opportunity, and these numbers haven't been seen again. Additionally, stock market sentiment reached high levels of bearishness at over 60%. This is a contrary indicator and positive for stocks.........Another focus of the bottoming process is related to market sentiment (American Association of Individual Investors, which is a contrary indicator [AAII] survey). When bearishness reaches below 60%; this can be a signal to outright buy the market as opposed to dollar cost averaging.
Following the Path of the "2022" Bear Market
Leading up to the 2022 bear market: 2019 - 2021 we had three years of double digit returns for a combine return over those three years of 98%.
With a spectacular run in the stock market for that long of a period of time, I knew that more than likely there would be some degree of stock market correction, considering that it was combined with the fact that this country was entering into a mid-term off presidential election year cycle, which in most cases the market has a negative year base on the history of the stock market during the "mid terms".
January of 2022 (mid-term off presidential election year): By the end of January we had already seen a volatile month which in most cases can signal how the rest of the year is going to go in the stock market.
September 30, 2022: The S&P 500 develops a bottom. The stock market finds its bottom at this time, ten months after the bear market begins. The Bears vs. Bulls sentiment indicator shows 61% bearishness in the market. This measurement of bearishness is a contrary indicator. At this point most of the jittery investors had left the stock market, many never to return, leaving a lot of room for the solid investor to come in and buy bargain priced stocks. Less nervousness means less volatility and an eventual move upward in stock prices. September 30, 2022 was the bottom of the bear market, and on October 3, 2023 began the rally upwards and by the end of 2023, the S&P 500 was up 26% for the year 2022.
D. Stock Market Timing Model Indicators
Economic Outlook:1.
Leading Economic Index (LEI): The LEI historical average is 2.5%
This is an indicator that is intended to estimate future economic activity (measures input into the economy). Every recession since the 1970s has been preceded by negative readings in the LEI. This indicator has ten components listed below
*Average weekly hours, manufacturing
*Average weekly initial claims for unemployment insurance
*Manufacturers’ new orders, consumer goods and materials
*ISM® Index of New Orders
*Manufacturers' new orders, non-defense capital goods excluding aircraft orders
*Building permits, new private housing units
*Stock prices, 500 common stocks
*Leading Credit Index™
*Interest rate spread, 10-year Treasury bonds less federal funds
*Average consumer expectations for business conditions
2.
Housing Recession3.
High Cost of Gasoline
E. WATCHING FOR A BEAR OR A BULL MARKET
Economic Cycle Pre-Recession Indicators/Pre-Bear Market
Internal market indicators: advance/decline metrics, selling pressure gauges, and sentiment indicators.
Helps gauge the risk of a recession going forward. The development of a bearish stock market is associated with recessionary economic activity. Two key pre-recession indicators are the Leading Economic Index (LEI) and the yield curve. Every recession since the 1970's has been preceded by a negative reading in the LEI. Every recession over the past 60-years has seen short-term treasury rates rise above long-term treasury rates, establishing an inversion of the yield curve. The federal funds rate and the 10-year treasury rate are used to measure the yield curve. The current 10-year U.S. treasury yield minus the federal funds rate shows the gap between these two yields. The lead time between an inversion and the start of a recession is 7 to 24 months. The preference is to have the inverted yield curve last at least 6 months before we can determine whether or not we are going into a recession.
1.
Accelerating Inflation: The year-over-year rate of inflation is measured by the consumer price index (CPI). The other inflation number is the (core) year-over-year CPI. The core CPI excludes the volatile food and energy sector. Also used is the average annual rate of CPI inflation over the past ten years, the six month annualized inflation rate and the six month annualized CPI core inflation rate. The favorite inflation gauge of the Federal Reserve is the personal consumption expenditure (PCE) price index. Employment costs are a key factor in the inflation outlook as they represent a significant cost of doing business.
2.
Payroll Growth: Payroll growth and inflation go hand in hand. You can see what's going on in the economy in regard to inflation by watching whether wages are increasing at a slow or rapid rate.3.
Rising Unemployment Claims: A rising trend for new filers suggests deterioration in labor market conditions.4.
Inverted Yield Curve: The yield curve measures the relationship between the level of short-term interest rates and long-term rates based on U.S. treasury yields. An inverted yield curve develops when short-term rates exceed long term rates and this has historically been associated with the development of recessionary conditions.
A.
Recessionary: Short term rates are higher than long term rates
B.
Non-recessionary: Long term rates are higher than short term rates.
Since every recession during the past half-century has been preceded by an inverted yield curve, interest rate analysis remains a central part of forward economic modeling. An inverted yield curve occurs when short term rates exceed long term rates. In normal times, short term rates are lower than long term rates. Since 1966, every extended yield curve inversion has led to a bear market within two years. This excludes yield curve inversions that occured only for short periods of time. (Bob Brinker)
Yield Curve
5. Leading Economic Indicators (LEI): The LEI historical average is 2.5%
This is an indicator that is intended to estimate future economic activity (measures input into the economy). Every recession since the 1970s has been preceded by negative readings in the LEI. This indicator has ten components listed below
*Average weekly hours, manufacturing
*Average weekly initial claims for unemployment insurance
*Manufacturers’ new orders, consumer goods and materials
*ISM® Index of New Orders
*Manufacturers' new orders, non-defense capital goods excluding aircraft orders
*Building permits, new private housing units
*Stock prices, 500 common stocks
*Leading Credit Index™
*Interest rate spread, 10-year Treasury bonds less federal funds
*Average consumer expectations for business conditions
Core Stock Market Risk Factors
1. Recession Risk:The historical definition of a recession is two consecutive quarters of negative real gross domestic product (GDP) growth. Do remember that we had one of those in 2022, but the recession did not materialize. One reason would be that we did not experience an increase in unemployment which also accompanies the negative (GDP) growth when there is a looming recession. Housing also was not heading towards a recession in 2022. One generally sees some housing market issues when things start looking like a possible recession is on its way.2. Inflation Risk:Out of control inflation can become a problem for the economy. When prices rise too rapidly, these extra costs do act as a tax on each and every consumer. The Fed's favorite inflation gauge is the (PCE) "Personal Consumption Expenditure Index". The fed's goal is a 2.0 inflation number. The other number that is also used by others is the (CPI) "Consumer Price Index".
A critical factor for future inflation is a trend of "low unit labor costs". Unit Labor costs is how much a business pays its workers to produce one unit of output. Businesses pay workers compensation that can include both wages and benefits, such as health insurance and retirement contributions. Increases in hourly compensation tend to increase unit labor costs, and increases in output per hour worked (labor productivity) tend to reduce them. Thus, labor productivity increases can offset the effect of wage increases on unit labor cost.3. Interest Rate Risk:The Feds raising interest rates at the wrong time can be damaging to economic growth. "The wrong time" would be raising rates when the economy is struggling, causing even more downside in the economy, and then causing a recession. Interest rates are generally raised during a time that economic growth is there to the point of having an over-heated economy which at times can lead to inflationary issues. The intent of raising interest rates at a time such as this, is to slow the economic growth in order to slow down inflation which can get out of control like it did in the 1970's.4. Valuation risk:"Valuation" also called a "multiple" or "P/E Ratio", tells us to some extent if a stock is over-valued. It is the price of the stock to the earnings a company has. One of the key factors in the P/E ratio equation is inflation expectations. P/E levels can improve as the rate of inflation moderates. Another key P/E variable is interest rates. A healthy P/E ratio is considered to be "16 times" estimated operating earnings of a company, and can go much higher in a healthy economy and the momentum of the stock market going forward.
Bull Market Corrections
While it is true that cyclical bull market corrections can occur at any time, I would regard any pullback during such a bull market as a health restoring event. Cyclical bull market corrections are usually contained with a range of five to ten percent, and are followed by significant rallies to new cyclical bull market highs.
Two Primary Reasons for a Bear Market (a decline of 20% or more)
Economic contraction penalizes corporate earnings, dividends, and stock prices, and can produce major drawdowns in portfolio values. History shows that the primary cause of recessions is an overly zealous approach to monetary policy tightening by the Federal Reserve (the over-raising of interest rates to a level not acceptable to borrowers). Over tightening can lay the groundwork for a recession. (Bob Brinker)
1.
As a general rule, bear market declines in excess of 20% begin in advance of the development of recessionary conditions. Recessions are accompanied by rising unemployment, which creates stress on the ability of consumers to generate the income necessary to support discretionary spending. Corporate earning power recedes along with cash dividends as the economy contracts. Investors respond by selling stocks, and in a severe recession declines can far exceed the 20% bear threshold. The size of the decline is usually correlated to the severity of the recession. (Bob Brinker)
2.
The other type of bear market is caused by a series of bad economic events such as, insurance companies, banks, and car companies collapsing as did happen in 2008, of which should have been a correction (less than 20% decline in the stock market). These series of events kept driving down the markets as one company after another reported bad news. These occurrences are almost impossible to predict unless you are on the inside of each of the companies affected. This particular decline in the market is due to the mood of the investor. No one can predict the extent of emotion in the market.
Primary Causes of a Bear Market
1. Tight Money Policy - The Federal Reserve operates under a dual mandate which calls for maximizing the level of employment consistent with a reasonable level of inflation. Tight Money or Quantitative Tightening (QT) is the raising of interest rates by the Federal Reserve in order, for example, to slow rising inflation. This slows barrowing of money through the increased rates, thus can lead to slowing economic growth, which then leads over time
to a slowing of the rate of inflation. On the other end of the spectrum, Quantitative Easing (QE) is the lowering of interest rates to bring in more borrowers, which is good over time for the economy.
2. Rising Rates -Lower interest rates are good for the economy and therefore the stock market. On the other hand, rising rates brings fear to the investor of a potential slowing of the economy. These investors react to this possibility, often selling shares of their stock to protect their investments forcing prices down.
3. High Inflation -The principle driver of inflation is wages and salaries. But many things can be a catalyst for inflation. (1) Relatively low capacity utilization below the 40-year average of 81% can help hold down inflation. This low number can affect then, the output gap which is tied to inflation. (2) high levels of labor slack which is a product of the unemployment rate and underemployment rate which includes those working part-time for economic reasons and those classified as discouraged workers.
4. Rapid Growth - Rapid economic growth can be a legitimate concern for stock market investors during periods of economic expansion.
5. Overvaluation - Valuation is also considered to be the "PE Ratio" or a "Multiple". Here is an example, looking at FedEx Corporation (FDX). We can calculate the P/E ratio for FDX as of Feb. 9, 2024, when the company's stock price closed at $242.62. The company's earnings per share (EPS) for the trailing 12 months was $16.85.
Therefore, FDX's P/E ratio was as follows:
$242.62 / $16.85 = 14.40. The PE Ratio is 14.40. "Overvaluation" would be if the PE Ratio rose to ridiculous levels and the price of the stock didn't support the company's earnings. A PE Ratio of 14.40 is generally considered to be an excellent multiple.
Possible Factors Leading to a Down Stock Market
1. Oil Prices:
High oil prices act as a de facto tax on the consumption of gasoline and other energy products. This taxing effect reduces consumer discretionary income, which delays the start of an economic recovery. Lower prices increase consumer discretionary income by reducing the cost of energy products, and this opens the door to an economic recovery.
On July 15, 2008, oil prices per barrel were approaching the $150.00 level, creating a headwind in the economic recovery process. These oil prices began noticeably climbing in 2007, and in my opinion was the beginning of what was to be called the great recession. Compare those gas prices to the 2023 gas prices fifteen years later of around $70.00 a barrel. Although, without those underlying factors such as industry failures and Fannie Mae and Freddy Mac, more than likely a much lesser recession would have occurred. Needless to say, when oil prices go up, money normally spent on necessities, then gets poured into the gas tank. Those with a 100% propensity to spend with their tight budgets, have little leeway within their spending and have to make a choice where they are going to have to spend their money. This can often lead to a recession when enough families have to pull back on their spending habits.
2. Housing Recession:
A collapse in the housing sector can adversely affect the economy and therefore the stock market.
3. Monetary Policy:
This comes down to the Federal Reserve and the raising or the lowering of interest rates.
Over-tightening of the money supply affects how businesses borrow money to grow their business or consumers borrow money, to lets say buy a home or to buy rental property.
NUMBERS 1- 3 CAN LEAD TO NUMBER 4 (RECESSION), MORE THAN LIKELY IN COMBINATION OF SOME SORT.
4. Recession:
A recession often affects negatively stock market gains. Just how deep the stock market pull back will be will depend on how deep the recession. If a recession eventually leads the stock market into a bear market, this type of bear market is called a technical bear. A technical bear is caused by a break down in the fundamentals that drive positive stock market numbers. What we had going on in the 2007-2008 bear market began with important industry collapses. This kind of a bear market is event caused. The recession and stock market bear of 2020 was caused by a government economic lockdown, and investors did not like that occurrence at all. Numbers such as the "Leading Economic Index, Yield Curve, and a myriad of other numbers tied to economic growth can reveal what is going on in the economy and, therefore how the stock market may be doing into the future.
_______________________________________________________________________________
*********************************Stock Market Recovery Process**********************************
Historically, the stock market begins to discount future economic recovery approximately six months in advance of the economic evidence.
The Key Elements of an Economic Recovery
Economic recovery revolves around the top three elements below, #'s
(1, 2, 3)1.
Price stability in the housing market going forward
2.
Improvement in the export account (this is the reason the treasury tolerates the weak dollar)
3.
Improving Retail Sales and Industrial Production: "Industrial production" indicates a growing economy. The key to sustainable "retail sales growth" is new monthly average jobs growth of at least 100,000 in order to absorb new entrants into the labor force. Private sector new jobs growth produces increased payrolls which translate into organic spending growth which is the key to sustainable economic growth. Solid monthly new jobs growth would indicate that a key economic recovery building block is in place. New jobs growth is usually one of the last factors to fall into place during an economic recovery.
4.
Productivity
5.
Leading Economic Index: A key aspect of the process of transitioning from recession to economic recovery is the development of an improving trend in the conference board's "Leading Economic Index" (LEI). This Index has an excellent record of forecasting economic recoveries. During the months of May through July of 2009, the index had risen for those three consecutive months for the first time in five years.
Stock Market Correction Bottoming Process
A classic stock market bottoming process consists of three elements:
1.
the establishment of an initial stock market bottom.
2.
a short term rally which runs out of steam and then begins its decline to the area of the initial low.
3.
then the successful test of the initial bottom area, which can include visits to the bottom area and reduced selling pressure as well. Another aspect of the bottoming process is related to stock market sentiment. One market survey that serves as a contrary indicator is the American Association of Individual Investor (AAII) survey. Bearish sentiment higher than 60% can mean that there may be a stock buying opportunity.
During the bottoming process, you will see a period of stock market price stability develop, accompanied by backing and filling activity as part of the process of establishing a meaningful market bottom. The final chapter in the bottoming process should include a test of the bottom area on reduced selling pressure and lower trading volume.
_________________________________________________________________________________________________________________________________________________________________
***********************************************GLOSSERY*********************************************
Accrued Interest:
The amount Credited to a bond or other fixed-income security between the last payment and when the security is sold, or any intermediate date. The buyer usually pays the seller the securities price plus the acrued interest
Annuity:
A contract by which an insurance company agrees to make regular payments to someone for life or for a fixed period.
Appreciation:
Increase in the value of an investment over time.
Ask Price:
The price a seller is willing to accept for a security; also called the offer price. This price is usually higher than the bid price.
Asset:
A resource that has economic value to its owner.
Examples of an asset are cash, accounts receivable, inventory, real estate, and securities.
Asset Allocation:
Dividing your investment portfolio among the major asset categories. The most important decision you will make. For example: Asset allocation depends on your risk tolerance, age, and date you intend to retire. At a young age your mix could be all stocks or heavy on stocks. Closer to retirement you could have stocks, bonds, and money market mix. Your tolerance for risk has to be factored into your decision to invest. You want to be able to sleep at night. Remember, risk and reward. Less risk, less reward, but too much risk, such as speculating on a particular stock can mean bigger losses. I have a high tolerance for risk, but I keep it simple with stock mutual funds (mainly the S&P500, small and medium cap stocks, something like treasuries or a money market fund, and at the appropriate time, bonds.
Asset Allocation Fund:
A common trust fund or mutual fund that spreads its portfolio among a wide variety of investments, including domestic and foreign stocks and bonds, government securities, and real estate stocks. This gives small investors far more diversification than they could get allocating money on their own. Some of these funds keep the proportions allocated between different sectors relatively constant, while others alter the mix as market conditions change.
Balance Sheet:
The firm's financial statement that provides a picture of its assets, debts, and net worth at a specific point in time.
Balanced Fund:
A common trust fund or mutual fund that maintains a balanced portfolio, generally 50% bonds or preferred stocks and 50% common stocks, but this percentage can and does vary.
Beta:
A measure of a stock's risk relative to the market, usually the Standard & Poors 500 Index. The market's beta is always 1.0; a beta higher than 1.0 indicates that, on average, when the market rises, the stock will rise to a greater extent and when the market falls, the stock will fall to a greater extent. A beta lower than 1.0 indicates that, on average, the stock will move to a lesser extent than the market. The higher the beta, the greater the risk.
Bid Price:
The price a buyer is willing to pay for a security. This price is usually lower than the ask price.
Bond:
A certificate of debt issued by a company or the government. Bonds generally pay a specific rate of interest and pay back the original investment after a specified period of time.
Book Value Per Share:
The accounting value of a share of common stock. It is determined by dividing the net worth of the company (common stock plus retained earnings) by the number of shares outstanding.
Business and Industry Risk:
Uncertainty of an investment's return due to fall off in business that is firm-related or industry-wide.
Buy-and-Hold:
A strategy in which the stock portion of your portfolio is fully invested in the stock market at all times.
Call Option:
The right to purchase stock at a specified (exercise) price within a specified time period.
Callable Bond:
A bond that can be redeemed by the issuer prior to its maturity.
Usually a premium is paid to the bond owner when the bond is called.
Cash Balance Plan:
A defined benefit plan in which each participant has an account that is credited with a dollar amount that resembles an employer contribution, generally determined as a percentage of pay. Each participant's account is credited with earned interest. The plan provides the benefits in the form of a lump-sum distribution or annuity.
Capital Gain:
An increase in the value of a capital asset such as common stock. If the asset is sold, the gain is a "realized" capital gain. A capital gain may be short-term (one year or less) or long-term (more than one year).
Certificate of Deposit (CD):
A bank deposit that pays a specified rate of interest for a certain period of time.
Collective Trust Fund:
Work and act much like a mutual fund. Collective trust (also known as a common trust fund) funds offer investors many of the same benefits as mutual funds, such as portfolio diversification, professional management and investment flexibility. But since collective funds do not impose the same administrative fees and do not have some of the regulatory requirements that mutual funds do, they generally have lower operating expenses.
Commision:
Broker's fee for buying or selling securities
Common Stock:
An investment representing ownership interest in a corporation.
Compliance Testing:
Testing required by the IRS to make sure
that the 401(k) plan is fair to both highly compensated and ordinary employees.
Compounding:
The ability of an asset to generate earnings that are then reinvested and generate their own earnings (earnings on earnings).
Conversion Premium:
The amount, expressed as a dollar value or as a percentage, by which the price of the convertible security exceeds the current market value of the common stock into which it may be converted.
Critical Mass:
A state of freedom from worry and anxiety about money due to the accumulation of assets which make it possible to live your life as you choose without working if you prefer not to work or just working because you enjoy your work but don't need the income. Plainly stated, the Land of Critical Mass is a place in which individuals enjoy their own personal financial nirvana. Differentiation between earned income and assets is a fundamental lesson to learn when thinking in terms of critical mass. Earned income does not produce critical mass.....critical mass is strictly a function of assets.
Current Ratio:
Current assets, including cash, accounts receivable, and inventory, dividend by current liabilities, including all short-term debt. A rough measure of financial risk: the smaller current assets relative to current liabilities, the greater risk of credit failure.
Current Yield:
Annual income (interest or dividends) divided by the current price of the security. For stocks, this is the same as the dividend yield.
Custodian:
The bank or trust company that maintains a retirement plan's assets, including its portfolio of securities or some record of them. provides safekeeping of securities, but has no role in portfolio management.
Cyclical Industry:
An industry, such as automobiles, whose performance is closely tied to the condition of the general economy.
Debt-to-Equity Ratio:
Long term debt divided by stockholders' equity. The ratio identifies the relationship of debt to ownership interest in the firm's financial structure.
A measure of financial risk.
Deep Discount Bond:
A bond that has a coupon rate far below rates currently available on investments and whose value is at a significant discount from par value.
Default Risk:
The risk that a company will be unable to pay the contractual interest or principal on its debt obligations.
Defined Benefit:
A defined benefit plan is an employer maintained plan that pays out a specific, pre-determined amount to retirees. Defined benefit plans are guaranteed by PBGC.
Defined Contribution:
A defined contribution plan does not promise a specific benefit at retirement, but does provide regular, set contributions to a pension fund. Defined contribution plans tend to be less expensive than defined benefit plans.
Deflation:
The increase of purchasing power due to a general decrease in the prices of goods and services.
Depreciation:
Decrease in the value of an investment over time.
Discount Bond:
A bond that is valued at less than its face amount.
Discount Broker:
A stockbroker who charges a reduced commission and provides no investment advice.
Discount Rate:
The interest rate used in discounting future cash flows; also called the "capitalization rate".
Distributions and Withdrawals:
When money is withdrawn from a 401 (k) or IRA plan, the withdrawal is referred to as a distribution.
401 (k) plan assets can be withdrawn without penalty after age 59 1/2. Employees are required to begin taking distributions after age 72.
Diversification:
The practice of spreading risk by investing in a number of securities that have different return patterns over time. When one investment is yielding a low or negative rate of return in a diversified portfolio, another investment may be enjoying positive or above-normal returns.
Dividend:
Payments by a company to its stockholders. A dividend is usually a portion of profits. Payment of dividends on common stock is generally discretionary. Dividends to common-stock shareholders may be withheld if business is poor or if the corporation's directors decide to retain earnings to invest in business operations.
Dividend Payout Ratio:
Annual dividends per share divided by annual earnings per share.
Dividend Yield:
Annual Dividends per share divided by price per share. An indication of the income generated by a share of stock. The dividend yield plus capital gains percentage equals total return.
Dollar Cost Averaging:
A process of buying securities at regular intervals and at a fixed dollar amount. When prices are lower, the investor buys more shares or units; when prices are higher, the investor purchases fewer shares or units. Over time, this typically results in a better average price for all shares or units purchased
Dow Jones Industrial Average (DJIA):
Price-weighted average of 30 actively traded blue chip stocks, traditionally of industrial companies
Earnings Multiplier:
An estimated price-earnings ratio adjusted for the current level of interest rates. Used to determine the value of a stock, based on Graham's formula relating value to recent earnings and expected earnings growth rates.
Earnings per Share:
The net income of the firm divided by the number of common stock shares outstanding.
Earnings Yield:
Earnings per share for the most recent 12 months divided by market price per share. Relates the generation of earnings to share price. It is the inverse of the price-earnings ratio.
Employer Matching Contribution:
The amount, if any, that the employer contributes to the employee's 401 (k) account.
Matching contributions are usually configured to provide a set percentage of an employee's contribution up to a fixed limit.
Equity Risk Premium:
An extra return that the stock market must provide over the rate on Treasury Bills to compensate for market risk.
Equities:
Investments in which the investors obtain a portion of ownership. Real estate and common stocks represent equity instruments. Usually, their chief benefit is potential growth in value. It is another word for stock.
ERISA:
Employee Retirement Income Act. ERISA, passed in 1974, is a comprehensive package dealing with all areas of pensions and employee benefits. ERISA includes requirements on pension disclosure, participation standards, vesting rules, funding, and administration. ERISA also mandated the creation of PBGC.
Excess Returns:
Returns in excess of the risk-free rate or in excess of a market measure such as the S&P 500 index.
Expected Return:
The average of a probability distribution of possible returns.
Expense Ratio:
The ratio of total expenses to net assets of a mutual fund. Expenses include management fees, 12(b)1 charges, if any, the cost of shareholder mailings and other administrative expenses. The ratio is listed in a fund's prospectus. Expense ratios may be a function of the fund's size rather than of its success in controlling expenses.
Face Value:
The stated principal amount of a debt instrument.
Fiduciary:
An individual or a trust institution charged with the duty of acting for the benefit of another party as to matters coming within the scope of the relationship between them. The relationship between a guardian and his ward, an agent and his principal, an attorney and his client, one partner and another partner, a trustee and a beneficiary, each is an example of fiduciary relationship.
Fiscal Year:
An accounting period consisting of 12 consecutive months.
Fixed Income Securities:
Investments that represent an IOU from the government or a corporation to the investor and offer specific payments at predetermined times.
Public and private bonds, government securities, and the 401(k)'s guaranteed accounts, are fixed income investments. Guaranteed fixed-income accounts offer investors a guarantee against the loss of both principal and the interest earned on that principal.
401(k) Plan:
A tax-deferred retirement plan that can be offered by businesses of any kind. A company's 401(k) plan can be a "cash election" profit-sharing or stock bonus plan, or a salary reduction plan. A 401(k) plan carries many unique advantages for both employer and employee, such as matching contributions.
403(b) Plan:
SECTION 403(b) of the Internal Revenue Code allows employees of public school systems and certain charitable and non-profit organizations to establish tax-deferred retirement plans which can be funded with mutual fund shares.
Fundamental Analysis:
This valuation of stocks based on fundamental factors, such as company earnings, growth prospects, and so forth, to determine a company's underlying worth and potential for growth.
General Obligation Bond (GO):
A municipal bond backed by the full faith, credit, and "taxing power" of the issuing unit rather than the revenue from a given project
GNMA (Ginnie Mae):
Fixed-income securities that represent an undivided interest in a pool of federally insured mortgages put together by GNMA, the government National Mortgage Association.
Going Public:
Selling privately held shares to investors for the first time.
Gross Domestic Product (GDP):
A measure of output from United States factories and related consumption in the United States. It does not include products made by U.S. companies in foreign markets. In-other-words, "total output of goods and services."
Holding Period Return/yield:
Income plus price appreciation during a specified time period divided by the cost of the investment.
Income Dividend:
Payment of interest and dividends earned on a fund's portfolio of securities after operating expenses are deducted.
Income Fund:
A common trust fund or mutual fund that primarily seeks current income rather than growth of capital. It will tend to invest in stocks and bonds that normally pay high dividends and interest.
Income Statement:
The financial statement of a firm that summarizes revenues and expenses over a specified time period; a statement of profit and loss.
Index:
A statistical measure of the changes in a portfolio representing a market. The Standard & poor's 500 is the most well-known index, which measures the overall change in the value of the 500 stocks of the largest firms in the U.S.
Index Fund:
A common trust fund or mutual fund that seeks to mirror general stock-market performance by matching its portfolio to a broad-based index, most often the Standard and Poor's 500-stock index.
Individual Retirement Account (IRA):
A personal, tax sheltered retirement account available to wage earners not covered by a company retirement plan or, if covered, meet certain income limitations
Individual Retirement Account (IRA) Rollover:
A provision in the IRA law allowing individuals who receive lump-sum payments from pension or profit-sharing plans to "roll over" into or invest that sum in, an IRA.
IRA funds can be "rolled-over" from one investment to another.
Inflation:
The loss of purchasing power due to general rise in the prices of goods and services.
Inflation Risk:
Uncertainty over the future real (after-inflation) value of your investment.
Insider Trading:
Trading by management or others who have special access to unpublished information. If the information is used to illegally make a profit, there may be large fines and possible jail sentences.
Integration:
A pension design tool in which contributions reflect the existence of Social security benefits.
In this process, FICA taxes are considered part of the contribution to the pension fund. Since Social Security provides a greater percentage benefit to lower paid employees, integration allows the company to increase contributions to higher paid employees.
Interest:
What a borrower pays a lender for the use of money. This is the income you receive from a bond, note, certificate of deposit, or other form of IOU.
Investment Adviser:
A person who manages assets, making portfolio composition and individual security selection decisions, for a fee, usually a percentage of assets invested.
Junk Bond:
Bond purchased for speculative purposes. They are usually rated BB and lower, and they have a higher default risk.
Keogh Plan:
A tax-deferred retirement account for self-employed individuals or employees of unincorporated businesses. Keogh plans can be funded with mutual fund shares. (Also known as H.R. 10 plans.)
Ladder Strategy:
A strategy in which a bond portfolio is constructed to have approximately equal amounts invested in each maturity within a given range, to reduce interest rate risk.
Lagging Indicator:
Economic indicator that changes directions after business conditions have turned around.
Leading Indicator:
Economic indicator that changes direction in advance of general business conditions.
Limit Order:
An order placed with a broker to buy or sell at a price as good or better than the specified limit price.
Liquidity:
The degree of ease and certainty of value with which a security can be converted into cash.
Margin:
The use of borrowed money to purchase securities (buying on margin).
Market Capitalization:
Number of common stock shares outstanding times share price. Provides a measure of firm size.
Market Order:
An order placed with a broker to buy or sell a security at whatever the price may be when the order is executed.
Market Risk:
The volatility of a stock price relative to the overall market or index as indicated by beta.
Market Timing:
The effort to base investment decisions on the anticipated direction of the market. If equities are expected to decline in price, the market timer may elect to hold a percentage of the portfolio in cash reserves or other fixed-income obligations. Timing may be based on fundamental or technical conditions, or a combination of these factors.
Maturity:
The length of time until the principal amount of a bond must be repaid.
MOABO:
Mother Of All Buying Opportunities.
Money Market Fund:
A common trust fund or mutual fund that aims to pay money market interest rates. This is accomplished by investing in safe, highly liquid securities, including bank certificates of deposit, commercial paper, U.S. government securities and repurchase agreements. Money funds make these high interest securities available to the average investor seeking immediate income and high investment safety.
Money Purchase Pension Plan (MPPP):
A defined contribution plan in which employer contributions are usually determined as a percentage of pay. Forfeitures resulting from separation of service prior to full vesting can be used to reduce the employer's contributions or be reallocated among remaining employees.
Mutual Fund:
An open end investment company that buys back or redeems its shares at current net asset value.
Most mutual funds continuously offer new shares to investors
NASDAQ:
National Association of Securities Dealers Automated Quotations System. This is a computerized system that provides up-to-the-minute price quotations on about 5,000 of the more actively traded over-the-counter stocks.
Net Asset Value (NAV):
The current market worth of a mutual fund share. Calculated daily by taking the fund's total assets securities, cash and any accrued earnings deducting liabilities, and dividing the remainder by the number of shares outstanding.
Nonqualified Plan:
A pension plan that does not meet the requirements for preferential tax treatment. This type of plan allows an employer more flexibility and freedom with coverage requirements, benefit structures, and financing methods.
Odd Lot:
A transaction involving fewer shares than in a "round" lot, which for most stocks is 100 shares.
Over-the-counter market:
A communications network through which trades of bonds, non-listed stocks, and other securities take place. Trading activity is overseen by the National Association of Securities Dealers (NASD).
Par Value (bond):
The face value of a bond, generally $1,000 for corporate issues, with higher denominations for many government issues.
Participant Contributions:
The dollars that employees contribute to their 401k plans.
Participant-Directed Investing:
In this case, the employee decides how to invest his or her funds.
It is the company's responsibility to offer a variety of investment opportunities so that the employee can make investments according to his or her long term goals and risk.
Payout Ratio:
Dividends per share divided by earnings per share. Provides an indication on how well earnings support the dividend payments. The lower the ratio, the more secure the dividend.
PBGC:
Pension Benefit Guarantee Corp.
The PBGC is a guarantee fund, established by ERISA, which covers all defined benefit pension plans. Companies with a defined benefit plan must pay premiums into this fund according to the number of employees in the plan and the current ratio of assets to liabilities in the plan.
Portfolio:
The group of individual securities held by a person or an institution.
Preferred Stocks:
A preferred stock holder has a higher claim to dividends or asset distribution than common stockholders. The details of each preferred stock depend on the issue.
Premium Bond:
A bond that is valued at more than its face amount.
Present Value:
The value today of a future payment, or stream of payments, discounted at some appropriate interest rate.
Price-Earnings Ratio (P/E):
Market price per share divided by the firm's earning per share. A measure of how the market currently values the firm's earnings growth and risk prospects.
Price-to-Book Ratio:
Market price per share divided by book value (tangible assets less all liabilities) per share. A measure of stock valuation relative to net assets. A high ratio might imply an overvalued situation; a low ratio might indicate an overlooked stock.
Principal: The original amount of money invested or lent, as distinguished from profits or interest earned on that money.
Profit Margin:
Net earnings after taxes divided by sales. Measures the ability of a firm to generate earnings from sales.
Profit Sharing Plan:
A defined contribution pension plan that uses a variable level of contributions based on company profits. profit sharing plans allow firms to limit allocations to a pension fund in lean years. However, they suffer from lower maximum deduction limits than standard plans.
Program Trading:
Computer-based trigger points are established in which large volume trades are indicated. The technique is used by institutional investors.
Prospectus:
The written statement that discloses the terms of a securities offering or a mutual fund. Strict rules govern the information that must be disclosed to investors in the prospectus. You should always read the prospectus on any mutual fund before investing.
Prudent Investor Rule:
The latest development in evaluating fiduciary prudence. The current (1992) model uniform act differs from the traditional Prudent Man Rule in that it indicates that: (1) no asset is automatically imprudent, but must be suitable to the needs of the beneficiaries, (2) the entire portfolio is viewed when evaluating the prudence of a fiduciary, and (3) certain actions can be delegated to other agents and fiduciaries. ERISA [ 404(a) (1) (C) ] generally follows the approach of the Prudent Investor Rule.
Prudent Man Rule:
A rule originally stated in 1830 by the Supreme Judicial Court of Massachusetts in Harvard College v. Armory [ 9 Pick. (Mass) 446 ], that, in investing, all that can be required of a trustee is that he conduct himself faithfully and exercise a sound discretion and observe how men of prudence, discretion, and intelligence manage their own affairs not in regard to speculation, but to the permanent disposition of their funds considering the probable income as well as the probable safety of the capital to be invested. The current (1959) model uniform rule categorizes certain types of assets as automatically imprudent, looks at each investment separately in determining prudence, and prohibits the delegation of responsibilities. Most states have adopted the Rule as part of state fiduciary law, usually with certain different specifics from state to state.
Put Option:
The right to sell stock at a specified (exercise) price within a specified period of time
Qualified Plan:
A private retirement plan that meets the rules and regulations of the Internal Revenue Service. Contributions to such a plan are generally tax deductible; earnings on such contributions are always tax sheltered until withdrawal.
Real Rate of Return:
The annual percentage return realized on an investment, adjusted for changes in the price level due to inflation or deflation.
Relative Strength:
Price Performance of a stock divided by the price performance of an appropriate index over the same time period.
A measure of price trend that indicates how a stock is performing relative to other stocks.
Required Rate of Return:
The rate of return demanded to induce investors to invest in a security.
Retention Ratio:
The percent of earnings retained in the firm for investment purposes.
Return on Equity (ROE):
A ratio calculated by dividing common stock equity (net worth) at the beginning of the accounting period into net income for the period after preferred stock dividends, but before common stock dividends. ROE tells common stockholders how in effect their money is being employed.
Return:
Consists of income plus capital gains (or losses) relative to investment.
Revenue Bond:
A municipal bond supported by the revenue from a specific project, such as a toll road, bridge, or municipal coliseum.
Risk/Return Trade-off:
The balance an investor must decide on between the desire for low risk and high returns, since low levels of uncertainty (low risk) are associated with low potential returns and high levels of uncertainty (high risk) are associated with high potential returns.
Risk:
Possibility that an investment's actual return will be different than expected; includes the possibility of losing some or all of the original investment. Measured by variability of historical returns or dispersion of historical returns around their average return.
Rollover:
An employee's transfer of retirement funds from one retirement plan to another plan of the same type or to an IRA without incurring a tax liability. The transfer must be made within 60 days of receiving a cash distribution. The law requires 20 percent federal income tax withholding on money eligible for rollover if is not moved directly to the second plan or an investment company.
Round Lot:
The basic trading block for stocks--usually 100 shares.
Salary Reduction Plan (Cash or Deferred Arrangement):
A CODA is a defined contribution plan that allows participants to have a portion of their compensation (otherwise payable in cash) contributed pre-tax to a retirement account on their behalf. The following are types of CODA plans named after the section of the Internal revenue code that establishes the rules for the plan.
* 401(k) - CODA plan for the non-profit sector of private industry;
* 403(b) - CODA plan for the not-for-profit sector of private industry;
* 457 - CODA plan for state and local governments.
Savings or Thrift Plan:
A defined contribution plan in which participants make contributions on a discretionary basis with limits and to which employers may also contribute, usually on the basis of fully or partially matching participants' contributions. Contributions are commonly made with after-tax earnings.
Secondary Market:
A market in which an investor purchases an asset from another investor rather than the issuing corporation. An example is the New York Stock Exchange.
Security Analyst:
One who studies various industries and companies and provides research reports and valuation reports.
Security Depository:
A physical location or organization where securities certificates are deposited and transferred by bookkeeping entry.
Security Lending:
A practice where owners of securities, either directly or indirectly, lend their securities to (primarily) brokerage firms for a fee. The borrower pledges either cash, securities or a letter of credit to protect the lender. Securities are borrowed by cover fails of deliveries or short sales, provide proper denominations, and enable brokerage firms to engage in arbitrage trading activities.
Short Sale:
A market transaction in which an investor sells borrowed securities in anticipation of a price decline. If the seller can buy back that stock later at a lower price, a profit results. If the price rises, however, a loss results.
Sinking Fund provision:
A means of repaying funds advanced through a bond issue. The issuer makes periodic payments to the trustee, who retires part of the issue by purchasing the bonds in the open market.
Soft Dollars:
The purchase of research materials from brokerage firms and paid for by commissions (or part of the commissions) generated by securities transactions or trust accounts. Covered by section 28(e) (1) of the securities exchange act of 1934. Opposed to this is the purchase of materials by "hard dollars", which is when payment is made by the trust department itself, typically by issuing a check.
SPD:
Summary Plan Description for ERISA employee benefit plans.
Standard and Poor's 500 Index:
An index of 500 major U.S. corporations. It is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The index tracks industrial, transportation, financial, and utility stocks. The composition of the 500 stocks is flexible and the number of issues in each sector vary.
Stock Dividend:
A dividend paid in additional shares of stock rather than in cash.
Stock Split:
The division of a company's existing stock into more shares.
In a 2-for-1 split, each stockholder would receive an additional share for each share formerly held and the price would be split in half.
Stock Broker:
An agent who for a commission handles the public's orders to buy and sell securities.
Stockholders' Equity (book value):
An indication of how well the firm used reinvested earnings to generate additional earnings.
Stop-Limit Order:
An order placed with a broker to buy or sell at a specified price or better after a given stop price has been reached or passed.
Stop-Loss Order:
An order placed with a broker to buy or sell when a certain price is reached; designed to limit an investor's loss on a security position.
Target benefit:
A target benefit plan is a defined contribution plan that acts much more like a defined benefit plan. Contributions are set for each year, but are variable based on the age of the employee. This allows older employees to receive similarly sized pensions as younger employees despite having less time for investments to grow.
Tax Free Rollover:
Provision whereby an individual receiving a lump sum distribution from a qualified pension or profit sharing plan can preserve the tax deferred status of these funds by a "rollover" into an IRA or another qualified plan if rolled over within sixty days of receipt.
Technical analysis:
An analysis of price and volume data as well as other related market indicators to determine past trends that are believed to be predictable into the future. Charts and graphs are often utilized.
Total Debt to Total Assets:
Short-term and long-term debt divided by total assets of the firm. A measure of a company's financial risk that indicates how much of the assets of the firm have been financed by debt.
Trading Range:
The spread of prices that a stock normally sells within.
Transaction costs:
Costs incurred buying or selling securities. These include brokers' commissions, and dealers' spreads(the difference between the price the dealer paid for a security and for which he can sell it).
Treasury Bill:
Short-term debt security issued by the federal government for periods of one year or less.
Treasury Bond:
Longer-term debt security issued by the federal government for a period of seven years or longer.
Treasury Note:
Longer-term debt security issued by the federal government for a period of one to seven years.
12(b)1: fees
A plan that permits a fund to pay some or all of the costs of distributing its shares to the public.
Some of these plans provide for payment of specific expenses, such as advertising, sales literature and dealer incentives. Others are simply intended to protect the fund against possible claims that certain operating expenses, such as administrative or advisory costs, constitute indirect forms of distribution expenses. Both load and no-load funds may adopt 12(b)1 plans.
They are not hidden charges, but are clearly explained in the fund's prospectus and in its semi-annual and annual reports. Many funds have 12(b)1 plans that have not been activated. The
majority of such plans have maximum annual charges of .25% (one quarter of 1%). 12(b)1 charges are included in the total expense ratio figures which are provided in a fund's literature. Some funds' expense ratios, including management fee and 12(b)1 charges, may be lower than the ratios of funds that do not have 12(b)1 plans.
Trust:
A fiduciary relationship in which one person (the trustee) is the holder of the legal title to property (the trust property) subject to an equitable obligation (an obligation enforceable in a court of equity) to keep or use the property for the benefit of another person (the beneficiary).
Unfunded Vested Pension Liability:
In a defined benefit pension plan, the difference between the actuarially-determined value of the vested (nonforfeitable) benefits under the plan, and the market value of the plan's assets.
Unfunded Prior Service Pension Liability:
In a defined benefit pension plan, the difference between the actuarially-determined value of the projected future benefit costs (both vested and manifested) and administrative expenses, as well as the unamortized portion of prior benefit costs, under the plan, and the market value of the plan's assets.
Valuation:
The process of determining the current worth of an asset.
Value Line Index:
the index represents 1,700 companies from the New York and American Stock Exchanges and the over-the-counter market. It is an equal-weighted index , which means each of the 1,700 stocks, regardless of market price or total market value, are weighted equally.
Variability:
The possible different outcomes of an event. As an example, an investment with many different levels of return would have great variability.
Vesting:
The period of time an employee must work at a firm before gaining access to employer-contributed pension income. For 401(k) plans, employee contributions are immediately vested, but employer contributions may be vested over a period of several years.
Wilshire 5000 Equity Index:
A stock market measure comprising 5,000+ equity securities. It includes all New York Stock Exchange issues and the most active over-the-counter issues. The index represents the total dollar value of all 5,000 stocks.
Yield:
The amount of interest paid on a bond divided by the price. A measure of the income generated by a bond. A yield is not a total return measure because it does not include capital gains or losses.
Yield Curve:
A curve that shows interest rates at a specific point for all bonds having equal risk but different maturity dates. Usually, government bonds are used to construct such curves.
Yield to Maturity:
The rate of return anticipated on a bond if it is held until the maturity date.