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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Picking Out the Good Stuff

These are anxious times for many of you, I know. The stock market has been volatile lately and other news you're hearing may make it seem like things are going from bad to worse. There's good information out there, but sometimes we have to look for it.

We learned last week that our economy is continuing its strong run of over eight years of job growth. Our economy isn't perfect, of course, nobody's is, but the current 3.7% unemployment rate is near the lowest in history.

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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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Looking for Clarity

Sometimes when doing research for these posts I stumble across an information goldmine. Case in point, the Ethics Unwrapped project from the McCombs School of Business at the University of Texas at Austin.

I was searching the web for a concise definition for "conflict of interest" and found this collection of short videos and educational resources. The content covers personal and professional ethics and does so in a way that's fun and easy to digest. If you have some time and are curious, I'd highly recommend perusing the website (a link follows at the end of this post).

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The Search for Silver Linings

It can be hard staying positive amid what can seem like an onslaught of negative news. Whether it's the stock market, politics of the day, or even the horrible tragedy in Pittsburgh this past weekend, finding the silver lining can seem like searching for a needle in a haystack.

Through yesterday this has been the 8th worst October for stocks since 1928, with the S&P 500 down almost 10% and the Dow down about 9%. 1929 and 1987 both saw 20+% declines in October, while '08 saw a 17% drop. So, I guess the silver lining is that it can always be worse?

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