Liquidity & Compound Interest

This week let's review two more finance terms: liquidity and compound interest. Both terms are entering the comfort zone of Americans polled by YouGov, a research firm, with a little over half of respondents reporting being comfortable with the terms.

As a reminder, the poll was trying to gauge awareness of 35 finance terms and phrases. Americans claimed to know about three quarters of the list, but how well do they (or you) really know them? I think we'd all agree that awareness doesn't necessarily equal understanding. There's the textbook definition and then there's the real-world, "how does this apply to me" definition. With these posts I'm aiming at the latter.

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Don't Believe the Hype

The stock market has felt brutal the past several weeks, no doubt about it. The widely-reported point swings on indexes like the Dow and NASDAQ seem eerily reminiscent of the 2008 Financial Crisis, so it's natural to be concerned. This is all a bit overhyped by the media, but that goes with the territory.

We've been reviewing definitions to key finance terms lately, but with the stock market going through another manic phase, I wanted to address some of your concerns. I'll do so by presenting a few graphics and then explaining the significance of each.

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More Definitions

Continuing our theme from last week, let's review three more of the finance terms folks report having little knowledge of: asset allocation, bull and bear market, and endowment. You may know these terms already and, if so, that's great. But since about 50-60% of Americans are either unaware of or aren't confident about the terms, let's dive in.

Asset Allocation – Asset allocation is a foundational component of financial planning and investment management, so it pays to know at least something about it. Weighty scholarly works have been written about the topic and it's hard to condense a definition down to a few paragraphs, but I'll try.

Asset allocation is a strategy that helps determine your investment return and the downside risk you'll have to endure to get it. Since more risk equals more return (and vice versa), the asset allocation process mixes riskier investments, such as stocks, with less risky investments like bonds and cash, to find the optimal blend for an investor.

Mixing different categories of investments together turns asset allocation into a series of tradeoffs. Do you want more growth over time? If yes, this means you'll need more stocks and will have to endure more downside risk in the short-term. Want more stability? If so, your allocation will require more bonds, cash, as well as lower expectations for growth.

Ideally, your asset allocation is based on your tolerance for risk and how hard you need your money to work for you. If created appropriately, your allocation should stay the same for a very long time and would only be altered if something fundamental changes in your life (not just because the market is down, political concerns, etc).

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Happy Holidays

I've always felt a sense of inertia during the holiday season. Thanksgiving passes and then time seems to speed up as the end of the year rapidly approaches. As I've done in prior years, my plan is to take a couple weeks off from writing this blog to spend a little extra time with family.

My next post will be on January 8th, but I'll still be working in the meantime. Please feel free to reach out if you have any last-minute needs or burning questions.

That next post will also be my Quarterly Update, and we'll recap the fourth quarter in the markets as well as the rest of the year. Who knows how the next handful of trading days will work out, but at this point 2018 seems to be one of those "in with a bang, out with a whimper" years. More to come on that topic.

Until then, from my family to yours, Happy Holidays! I hope you get to spend time with family and friends and appreciate the little things that make your life wonderful.

Let's review two more finance terms from the YouGov poll we've looked at in recent weeks: Capital Gains and Losses, and Adjustable-Rate Mortgages. Roughly half of Americans polled had little or no knowledge of these terms. Think about that.

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Round Three

This week we'll define some more finance terms, but first let's review a headline from the past few days.

You have likely heard that George H.W. Bush passed away on Sunday. What you may not have heard is that the stock market will be closed tomorrow as part of a national day of mourning for the former president.

The stock and bond markets traditionally close following the passing of former presidents and vice presidents, but they have also closed for a host of other reasons, such as blizzards, coronations and funerals of kings and queens, the beginnings and endings of World Wars 1 and 2, and in August of 1917 for "heat". And of course, the market was closed for four days following the September 11th terrorist attacks.

There have also been partial closings for local traffic jams and computer system malfunctions, and whole days off to allow office staff to catch up after heavy trading during the Great Depression. A list of historical NYSE closures reminds me that with all the technology underpinning global markets these days, they're still fundamentally human institutions.

Continuing our theme from the past two weeks, here are two more finance terms from the YouGov report that roughly 60% of Americans profess to know little about: Roth IRA and Annuity. Entire books have been written about these terms, but I'll do my best to condense the definitions down to a few short paragraphs.

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Happy Thanksgiving

It's been a tough year for many of you and it's a good time to acknowledge all we have to be thankful for. Personally, I'm thankful for many things, including the trust you place in me as your financial planner. So, from my family to yours, Happy Thanksgiving.

Last week we discussed how one of the main impediments to increasing investor transparency is how complicated the financial services industry is. A big part of this has to do with jargon.

Every industry has its own language, but finance, perhaps along with medicine, has the added distinction of being dangerous if you don't understand the lingo. One of my jobs, so far as I see it, is educating you about the terms, themes, and jargon that's most important to your financial health over time.

Without basic knowledge it's hard to know what questions to ask and if the answers you're getting are sufficient, leaving you open to missteps or even fraud. In other words, what you don't know can hurt you.

While everybody's knowledge level is different, it's helpful to get a sense for where we are as a country. Earlier this year research firm YouGov surveyed about 1,200 American adults to gauge awareness of 35 financial terms.

Folks have a decent understanding of fundamental terms like "Savings Account", "Net Worth", "Asset", and "Liability", with over 70% of respondents reporting confidence about those terms. But the numbers are almost reversed for terms like "Index Fund" and "Amortization", with 60-70% reporting being uncomfortable with, or having no knowledge of, the terms.

These terms, and the others on the YouGov list (see the link below), are essential to one's financial health. Accordingly, over the next several weeks I'll be starting at the bottom (the least understood terms) and choosing a couple or so to define and comment on. Yes, you could easily look these terms up in Google, but I'll attempt to give you the real-world-financial-planner definition. Hopefully this will provide some clarity and increase your understanding.

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