Investing 101

A mutual fund is a single investment that contains a basket of other investments. Stocks and bonds are the most common securities to be held in mutual funds but mutual funds can hold other types of investments, including investments that are normally not available to the general public such as hedge strategies and private equity. Mutual funds do not trade throughout the day like stocks. Instead, a mutual fund’s value is determined by its net asset value (NAV). The NAV is calculated once per day at the end of the trading day by adding the funds assets, subtracting liabilities and dividing by the total number of outstanding shares.

ETFs, like mutual funds, contain a basket of investments. There are some differences from mutual funds. ETFs are traded like stocks throughout the trading day, unlike mutual funds which trade only once per day. There are exceptions to this but ETFs also tend to be more tax efficient than mutual funds. Mutual fund managers rebalance by buying and selling securities held within the fund which can create taxable events for shareholders. This doesn’t always create capital gains as sometimes mutual fund managers are able to use tax mitigation strategies during the rebalancing process. An ETF issuer can create or redeem “creation units” with authorized participants (APs), usually a broker-dealer. The AP delivers securities to the ETF issuer “in-kind” and in exchange, the ETF issuer delivers new ETF shares to the AP. This results in fewer taxable events for shareholders.

A bond is a debt instrument that can be issued by governments or private corporations. Bonds usually pay an interest rate to the bondholder referred to as the “coupon.” The most common types of bonds issued in the United States are government bonds, issued by the US government, municipal bonds and corporate bonds. US government bonds are considered to be very safe. The US treasury issues T-Bills, notes, longer duration bonds and Treasury Inflation Protected Securities (TIPS). In the case of TIPS, unlike other bonds, the principal of a TIPS can go up or down and because the interest rate is based on the principal, the rate can also go up and down. The value of a TIPS goes up with inflation and down with deflation. Municipal bonds are bonds issued by a state or local government. Most municipal bonds are divided up into separate categories of general obligation bonds (GOs) and revenue bonds. GOs are backed by the full faith and credit of the issuing government entity. They are used to fund projects like schools and parks. Revenue bonds are backed by revenues sourced directly from the project or by taxes assessed by the government entity. Because revenue bonds are not backed by the full faith and credit of the issuing government entity, they are considered to have higher risk. Corporate bonds are issued by private corporations to fund things like expansions, acquisitions and debt refinancing. Because they are not backed by a government entity, they are considered to be higher risk than government bonds but often have higher yields as well. Zero coupon bonds are bonds that do not contain a coupon/interest rate but are instead issued at a discount and pay face value at maturity. US Government bonds, municipal bonds and corporate bonds are all taxed differently. US treasuries are generally exempt from state and local taxes but are not exempt from federal taxes. Municipal bonds are tax exempt from federal taxes and state taxes in the state where the bond was issued. An exception to this is when a bond is purchased at a discount on the secondary market. The discount is not tax exempt. There are many other subgroups of bonds in addition to these.

A market index is a snapshot of a group of investments that we use as a benchmark to gauge the performance of a sector of the market. There are many indices that cover stocks, fixed income products, commodities and other investments in countries all across the world. Some notable examples include: S&P 500, Dow Jones, Nasdaq Composite, Russell 2000 and MSCI (Morgan Stanley Capital International).

Capital gains are profits that result from the purchase and sale of an asset. Long term capital gains are profits from the sale of an asset that has been held for more than one year. Short term capital gains are profits from the sale of an asset that has been held for one year or less. Long term capital gains are preferred to short term capital gains as they are taxed at a lower rate than short term capital gains. Short term capital gains are taxed at your regular income tax bracket.

An expense ratio is the annual operating cost of an investment such as a mutual fund or ETF. The expense ratio is baked into the value of the fund. A higher expense ratio will reduce the value of the fund.

A fiduciary is a person or organization that is legally and ethically obligated to act in the best interests of someone else, particularly when managing money or property on their behalf. In the financial world, a fiduciary financial advisor must put your interests ahead of their own at all times, which means making decisions and providing advice that is best for you, not just suitable or convenient for them.​ The core duties of a fiduciary include: Acting in good faith and loyalty: Fiduciaries are required to always act with honesty and complete loyalty to the client, avoiding any conflicts between the client’s interests and their own.​ Duty of care: This involves making well-informed and prudent decisions as if the fiduciary were making those decisions for themselves. They must consider all relevant factors and do thorough research when offering advice or managing assets.​ Full disclosure and transparency: Fiduciaries must provide all the necessary information for clients to make informed choices, including clearly disclosing any potential conflicts of interest or compensation received for recommendations.​ Avoiding self-dealing: Fiduciaries are forbidden from using their position for personal gain at the expense of their clients, such as prioritizing investments that pay them higher commissions or personally benefitting from the client’s assets.​ Why It Matters The fiduciary standard provides a higher level of trust and protection for clients. When you work with a fiduciary, you can be more confident that the advice you receive is intended to help you reach your financial goals, free from hidden motives or conflicts of interest.​

No. A systematic investment plan is a great way to get started. This approach involves investing a fixed amount of money at regular intervals. It helps you build the habit of saving and investing consistently, which is one of the most important factors in growing wealth over time. A systematic plan also allows you to take advantage of dollar cost averaging. By investing steadily regardless of market conditions, you buy more shares when prices are lower and fewer when prices are higher. This reduces the stress of trying to time the market and can smooth out the impact of short-term volatility. Finally, starting with a systematic investment plan keeps the process simple and manageable. Whether you’re contributing to a Roth IRA, a traditional IRA, or a taxable account, automated investing helps ensure you stay on track toward your long-term goals without having to make frequent decisions. Over time, even small, consistent contributions can add up significantly.

There is no simple answer to this question but first, we must define what “risk” is. Many people see stock market risk as the only kind of risk. In reality, there are many kinds of risk. Stock market risk is one. Others include interest rate risk, credit risk, liquidity risk, concentration risk and more. For example, investing stocks and mutual funds carries market risk. The overall level of volatility depends heavily on investment selection. CDs are a potential alternative to this. CDs do not carry market risk but are very sensitive to interest rates and thus carry interest rate risk. CDs, money market accounts and cash also carry inflation risk as an overconcentration in these may not keep up with inflation and could reduce your purchasing power. This is the reason why it is important to have investments that are well diversified, tax conscious and are in alignment with your risk and return expectations across multiple asset classes. Although risk can never be completely eliminated, having an investment strategy that aligns with your goals can mitigate some of it.