Financial

Get your basic financial questions answered here — about everything from developing a financial plan to stocks, bonds and mutual funds.

Developing a Financial Plan

What should my long-term financial goals be?

The first step is to figure out a realistic financial goal for yourself and your family. Talk with your loved ones to ensure that everyone has the same goals in mind. Clearly not all families will have the same end goal – figure out what is important to you, whether it is early retirement, financial comfort, children’s education, travel, taking care of elders, or your children.

Are there simple guidelines to follow towards a comfortable retirement?

Someone starting their savings in their early 20s can save 10% of their income and have a sufficient nest egg, while someone starting in their 40s may have to bump that number up more towards 20%. Read More »

What should I take into account when I start investing?

Consider these four things as you think about investing: risk vs. return, asset allocation, diversifying and monitoring progress. Read More »

What risks will I be exposing myself to by investing?

There are definite risks to investing, but educating yourself can drastically limit your exposure to these risks. Read More »

How can I avoid taking unnecessary risks?
  • Always trade through your brokerage firm.
  • Never make purchases from phone solicitations offering the next hot stock.
  • Never send personal checks to a sales rep, always to the company.
  • Always receive your monthly statements to double check that everything is correct and that there are no irregular charges.
  • If any sales representatives attempt anything that seems out of place, contact the branch manager of the company.
What factors should I consider before making a stock investment?
  • Is this investment too risky for me?
  • Do I feel comfortable with this investment?
  • Do I have any moral conflict with what the business provides?
  • Is this investment registered with the SEC?
  • What sorts of fees are associated with this investment? Does it have a load that could possibly cancel out the earnings that you would receive?
  • How liquid is the investment? Could I sell this quickly?
  • What would need to happen in order to profit from this investment?
What factors should I consider before making a mutual fund investment?
  • How has this fund performed previously?
  • Is there a load? What fees are associated?
  • How often will they produce statements?
  • What does the fund invest in?
  • Are there any specific risks related to this investment?
What investment pitfalls should I be on the lookout for?
  • Don’t invest emotionally. It is better to keep a moderate controlled approach to investing as opposed to constantly chasing the jackpot which can be dangerous.
  • Don’t trust tips. If you aren’t the head of a large investment firm, by the time a tip reaches you, it is probably too late.
  • Pay attention to your investments. Stay involved with what your investments are doing, don’t rely solely on others helping you.
  • Reevaluate. Your financial situation may change over the course of time, be sure that all of your investments are still appropriate.
How should I allocate my IRA investments?

IRAs are just like any other investment – you should take into consideration how much risk you are willing to take on and act accordingly. Read More »

What are derivatives and options?

Derivatives are investments whose values derive from the security which they are based on. Options can be useful in making a portfolio less risky. Derivatives can also be futures contracts or swap agreements. Read More »

What are the biggest mistakes investors make?
  • Starting too late
  • Paying high fees
  • Investing Emotionally
  • Using a one-size-fits-all plan
  • Not taking taxes into consideration
  • Overly Risky Investing

Read More »

What is the difference between Cumulative vs. Annualized Return?

Annualized return is the return on investment received that year. Cumulative return is the return on the investment in total.

For instance, the money gained in the first year of an investment would be the annualized return. The total return of investment accumulated at the end of the second year would be the cumulative return.

What is the Rule of 72?

The rule of 72 is a quick way to calculate how long it will take your investments to double at different interest rates.

Take the rate of yearly return on your investment and divide 72 by that number. The result is the number of years it will take for you to double your investment.

What is significance of total return?

The total return is the amount of money that a fund makes after reinvesting and receiving dividends. This will deliver the most benefit from the compounding interest. The total return is a way to accurately gauge the real return on investment that you will get with a mutual fund.

What is a yield?

The yield is the amount paid annually by an investment. The yield is most commonly a percentage of the market price of an investment, which does not take into account the appreciation. Since money market funds and certificates of deposit don’t fluctuate like stocks and bonds do, the yield would be the same as the total return.

What is an annuity?

An annuity is an insurance contract – the insurance company invests in stocks and bonds on behalf of the purchaser with the tax deferred money. Read More »

What do I need to beware of when investing in an annuity?

You will not be able to withdraw any of the money in an annuity during its tax deferred growth period without incurring large fees. You will be charged 10% for tax code and the insurance will usually charge “surrender charges” on top of that.

What types of annuity are available?
  • Single-Premium Annuity. This is where the investment is made all at once in a lump sum.
  • Flexible-Premium Annuity. This annuity can be funded with a series of payments.
  • Immediate Annuity. With this annuity, the payments begin back to the purchaser instantly.
  • Deferred Annuity. Payments will be redistributed back to the purchaser many years later. This is usually used as a vehicle to let the money gestate tax deferred.
  • Fixed Annuity. The company will invest your money into fixed investments such as bonds, and the principal is guaranteed for a minimum period of time.
  • Variable Annuity. With a variable annuity you are able to invest in either stocks, bonds, or cash equivalents. The principal is not guaranteed with this annuity.
How and when do I collect my annuity?

There are a few choices that you have when choosing to collect your annuity. Some people opt for a lump sum, even though it negates one of the major features of the annuity: payments until death. Read More »

How are the annuity payments taxed?

The tax rates will differ for qualified and non-qualified plans. Read More »

What taxes will my annuity be subject to after death?

Annuity payments to beneficiaries are subject to the same taxes that would have been collected from you.

What should I take into consideration when shopping for annuities?
  • Commissions. Check the broker commissions – even though the insurer is the one who gives you the annuity, the broker may make anywhere from 3 to 8% which can substantially cut into your money.
  • The Company. Make sure that the company that you are buying the annuity from has a good track record. There is no agency (such as the SEC) that checks the procedures of these companies, so the reputation of the company is of the utmost importance.
  • Compare and Contrast. Check the amount of payments that you will receive from different companies. This may vary greatly from company to company – however, do not judge solely based on these numbers. Keep in mind the legitimacy of the company.
What hidden costs may be associated with the annuity?
  • Commissions. If the commission is paid in a front-end load, this can reduce the amount of your initial investment. A no or low-load annuity contract is preferable.
  • Penalties. The surrender charges usually only apply for the first 7 years, starting at 7% the first year, declining 1% per year until after the 7th year, when these surrender charges no longer apply.
What about other fees?
  • Maintenance Fees
  • Mortality Fees
  • Investment Advisory Fees

These fees should be stated plainly in the prospectus.

BondsFAQ

What is a bond?

A bond is simply a certificate which the borrower promises to repay within a certain time period. For the privilege of using the money, the government entity, municipality or company will agree to pay a certain amount of interest per year, usually an exact percentage of the amount loaned. Read More »

What is bond quality?

Bond quality is the rating of the creditworthiness of an issuing organization. There are organizations that specialize in judging bond quality. The higher the rating, the lower the risk of the investment. The rating system uses letters A through D. The only bond considered to be risk free is the U.S. Treasury Bond.

How does the bond rating system work?
Highest Quality Moody’s Standard & Poor’s
High Quality Aaa AAA
Good Quality Aa AA
Medium Quality Baa BBB
Speculative Elements Ba BB
Speculative B B
More Speculative Caa CCC
Highly Speculative Ca CC
In Default D
Not Rated N N

How do interest rates affect bond prices?

Generally bond prices and interest rates have an inverse relationship – as interest rates drop, bond prices rise and vice versa.

How does maturity affect bond prices?

Bond prices are heavily influenced by maturity – the longer the maturity, the greater the change in price for a change in interest rates. If interest rates rise, it would make a larger difference in the 20 year bond, as opposed to a 10 year bond. Because of this, bond fund managers will attempt to change the fund’s average maturity to anticipate changes in interest rates.

What is a bond call provision?

A “call” is when the issuer of the bonds has an opportunity to redeem the bonds after a certain specified amount of time has passed. This doesn’t guarantee a continuation of a high yield after the call date – it limits the appreciation of the bonds, and it makes the investment more risky. These call provisions can be complex, so it is best for investors that don’t have strong knowledge to avoid bonds with a call feature.

Should I buy bond funds directly or go through a mutual fund?

A bond mutual fund has within it multiple bonds, and for that reason it is impossible to lock in the payment rate or the principal, which you would be able to do if you were directly buying a fund. Read More »

What are the different issuing organizations?
  • Municipal bonds are offered by local governments, states and cities. The interest of these bonds is not subject to federal income tax, and if the bondholder lives in the jurisdiction of the governing authority, the interest is exempt from state and local tax. Because of all of these tax advantages, the interest rates paid on these bonds is usually lower than others.
  • Like municipal bonds, the U.S. government also issues these securities. Since they are issued by the U.S. Government, they are considered to have the best safety of all bonds.
  • Treasury bills can be bought through a broker or directly from the Federal Reserve.

Mutual Funds FAQ

How are mutual funds taxed?

All mutual funds distributions should be reported as income, whether you reinvest or not. Taxable distributions come in two forms, ordinary dividends and capital gains. The distributions of ordinary dividends represent the net earnings of the fund and are paid out periodically to the shareholders. Since these payments are considered to be dividends to you, they must be accounted for accordingly.

Capital Gain Distributions are the net gains of the sales of securities in the fund’s portfolio and will be taxed at a different rate than that of ordinary dividends. Yearly, your mutual fund will send you a form, called the 1099-DIV, which will have a detailed breakdown of all of these.

Can I avoid tax by reinvesting mutual fund dividends?

Funds will generally give you the opportunity to automatically reinvest in the fund. This does not prevent you from paying tax on your assets, but this reinvestment will prevent you from paying more “buy” fees to get into the fund, so it is advantageous.

What taxes apply to my return-of-capital distributions?

Mutual funds sometimes will distribute back to shareholders monies that haven’t been attributed to the funds earnings. This is a non-taxable distribution.

Stock FAQ

How does stock trading work?

Stocks are traded in quantities of 100 shares, called round lots. Any quantity of stock under 100 shares will be considered an odd lot.

What is the difference between Preferred and Common Stock?

Most stocks are common stocks. However, there is another type (known as preferred) which gives certain advantages regarding dividends. Generally, preferred stock holders do not have the same voting rights that the holders of common shares do. Common stocks are based on company performance, while preferred stocks will usually have a stated dividend.

How can I invest in foreign stocks?

It is fairly easy to invest in foreign corporations, because these corporations need to register these securities with the SEC. These companies are subjected to the same rules as U.S. companies.