Investment Management Archives - Page 2 of 3

Sustainable Investing Simplified

Over the years, the nomenclature around sustainable investing has morphed to the point of confusion. Besides “sustainable,” other descriptive terms for this investment style include environmental, social, and governance (typically referred to as ESG), socially responsible (SRI), and impact investing. You may also see the terms green, values-based, climate, intentional, or personal investing used to describe this investment approach.

While the terminology may vary, there’s a common theme inherent to this investment style. People who invest sustainably not only want to grow their wealth, but they also want to support their values with their capital.

What is Sustainable Investing?

In traditional stock analysis, investors evaluate a variety of fundamental factors to determine a stock’s expected return. For example, they may look at a company’s earnings and growth prospects to determine if it’s a good investment. The underlying belief is that if a company is profitable, its investors should profit as well. Unfortunately, traditional investment analysis doesn’t consider how a company makes its money.

A sustainable investment approach takes traditional analysis a step further by including environmental, social, and governance factors in the analysis. The goal is to reward companies that not only take care of their investors and stakeholders, but that also care about their employees, the planet, and society in general.

Indeed, numerous studies have found that companies that score well on ESG factors perform better over time. Since many of us are investing with a long-term view for retirement, investing in companies that operate responsibly can be both financially and personally rewarding.

Let’s take a closer look at the individual elements of ESG:

In many cases, ESG can be used interchangeably with sustainable investing. Here’s a deeper look into each ESG factor.

The E, which stands for environment, measures how a company uses energy and resources. Today, carbon emissions and climate change are critical environmental issues encompassed in the E analysis.

S stands for social and addresses employee and labor relations, diversity and inclusion, and reputations fostered between people, institutions, and communities.

G, or governance, refers to a company’s internal system of practices. In other words, it considers the procedures a company follows to govern itself, make effective decisions, comply with the law, and meet its stakeholders’ needs.

Unfortunately, analyzing securities for these criteria can be challenging since there aren’t uniform ESG reporting standards yet. However, as investor interest grows, so has the industry that rates companies for ESG performance. This trend suggests the future of ESG investing may offer greater opportunities for investors who wish to align their investments with their values.

How to Invest Sustainably

Investor interest in ESG investments hit an all-time high during the Covid-19 pandemic. In fact, Morningstar reported that ESG funds captured $51.1 billion of net new money from investors in 2020—a record and more than double the net inflows in 2019.

As interest in responsible investing gains momentum, sustainable investment strategies are increasingly becoming more accessible to individual investors. Whereas options were once constrained to mutual funds, there’s now a wide variety of ESG exchange-traded funds (ETFs) available. Specifically, the number of sustainable mutual funds and ETFs available to U.S. investors rose 30% year-over-year in 2020, according to a report issued by Morningstar earlier this year.

In addition, ESG strategies are no longer limited to stock funds. There’s also a growing number of options entering the ESG bond fund universe. Meaning, investors can now incorporate sustainable investment strategies across their entire asset allocation if they want.

Women and Sustainable Investing

Interest in sustainable investing appears to be growing among all types of investors. However, women have long led the charge in ESG investing since values-based investment strategies entered the scene.

For example, a recent client survey conducted by RBC Wealth Management found that women are more than twice as likely as men to say it’s extremely important that the companies they invest in integrate ESG factors into their policies and decisions. Another report from Cerulli found that the majority of women in the U.S. under age 60 favor ESG investing.

Why do these statistics matter? Today, more than half of women in the U.S. are the primary breadwinners in their families, according to research from Prudential. And 30% of women surveyed are married breadwinners who are producing more than half of their household income. In other words, as our financial power grows, our investment decisions can have a greater impact on how companies address environmental, social, and governance issues.

At Curtis Financial Planning, we help you invest in strategies aligned with your values, so you can feel better about your financial decisions. Please get in touch if you’d like to learn more. We’d love to hear from you.

In the meantime, if this brief primer on sustainable investing interests you, please take this survey. You’ll find out what issues you care most about when it comes to your investment dollars.

If you found this information interesting, please share it with a friend!

Sustainable Investing Simplified Read More »

The Truth About Diversification

Most investment advisors (including me) believe that building and maintaining a diversified portfolio is the most prudent way to invest clients’ money.

Not only do numerous studies of asset class* returns support this, but no matter how smart and experienced the advisor is, it’s near impossible to predict with consistency which asset will outperform in any given time frame. That isn’t to say that it doesn’t take skill and expertise to build a diversified portfolio – it does – many metrics come into play such as growth prospects, valuation metrics, and global economic trends.

* There are four broad assets classes:

Stocks or equities
Fixed income or bonds
Money market or cash equivalents
Real estate (represented by REITS)

And, within each asset class are sub-asset classes (or stock sectors) that allow for greater diversification, for example, with the stock asset class, you will find large U.S. stocks, small U.S. stocks, international stocks, and emerging markets stocks. And, within the fixed income asset class are different types of bonds: short-term, hi-yield, muni, etc.

The reality about diversification is that a truly diversified portfolio will not provide the return of the best performing asset over a given time, nor will it match the performance of the worst performing asset. The return will be somewhere in between. Which is precisely the point – the highs are less high, but the lows are less low making it more likely that an investor will not panic and change strategy at exactly the wrong time.

Remember the calmness in the markets in 2017 when all stock sectors seemed to go only up? And, indeed, the returns were pretty amazing: 37.2% for emerging market stocks, 27.4% for S&P 500 growth stocks, and 24.2% for the MSCI (a global stock index) for example. Now, take a look at the chart below which shows returns year to date through June 15, 2018. You can see that the best performing sector so far this year is the Russell 2000 (an index that represents small-cap U.S. Stocks).

And, the worst performing sector is emerging markets stocks (EM Equity). The S&P 500 (representing large U.S. stocks) is up only 2.3%. I’ll wager that there aren’t too many investment advisors that could have predicted that small-cap stocks would be the best performer so far this year, but I can also almost guarantee the portfolios they manage for their clients have an allocation to small-cap stocks.

A truth about investing is that past performance does not predict future results. A great visual of this phenomenon is shown in Callan’s Periodic Table Of Investment Returns – a chart showing annual returns for key indices from 1998-2017. You can see how random the returns are and how easy it might be to try and chase top performers and then be disappointed.

You can liken diversification to the Tortoise, and the Hare story…as the Tortoise said: “slow and steady wins the race.”

If you found this information interesting, please share it with a friend!

The Truth About Diversification Read More »

Stock Market Corrections are Inevitable

Investment Management, Simple Truths About Money, Women and Money / Cathy Curtis / June 9, 2018

As you open your account statements and see your balance go up month after month you breathe a sigh of relief. But, then your next thought is – can the market keep going up like this? When will it end?

It helps to recognize that every market has pullbacks and that they are a regular part of stock market behavior.

Volatility does not imply the direction of the stock market. Instead, it’s the price we pay for a higher return in the long run.

We are currently in the 9th year of a bull market that started on March 9, 2009. In a few months, it could be the most extended bull market in history. However, it hasn’t all been up, up, up. There have been five corrections (market drops of 10% or more) and many smaller dips since 2009.

Second, it helps to recognize that market corrections are unpredictable. Realizing there will be a pullback doesn’t tell us when or help us maximize returns. If we cash-out today, we are just as likely to miss another year or two of upward movements as we are of sidestepping the next downturn. In result, our long-term financial plan may get derailed.

Third, recognize now that the next unpredictable correction will look obvious in hindsight. The reality is that even the most seasoned of investors can’t accurately predict stock market direction. Why? There are many events that can cause stocks to drop that are unpredictable themselves – from terrorist attacks to civil unrests, to a sudden change in economic policy.

Finally, realize that corrections are healthy for long-term bull markets. As stocks get close to full value or overvalued, it makes sense that prices will fluctuate to a more reasonably priced range. This leaves the door open for buying stocks at better prices and more gain in the future. Sometimes taking no action is the best action.

If you found this information interesting, please share it with a friend!

Stock Market Corrections are Inevitable Read More »

Why You Need A Financial Plan

Financial Planning, Investment Management, Simple Truths About Money, Women and Money / Cathy Curtis / July 13, 2017

There are a few times a year when the volume of calls to my office from people seeking financial advice goes way up. One of them is in January when New Year’s resolutions are top of mind and another is the 30 or so days leading up to the tax deadline in mid-April.The “January effect” arises from a wish to get a fresh start on financial planning; the “tax effect” has to do with figuring out how to pay less to Uncle Sam.

But most people would be better off if they didn’t wait for a deadline or time of year to take a hard look at their finances. Financial planning can be compared to being proactive about your health – we’re way better off maintaining a healthy lifestyle than waiting for a medical crisis to change our habits! Same goes for your finances. Making smart financial choices early and often will ensure a strong financial future.

For sure, meeting with a financial advisor isn’t always the easiest thing to do. It’s hard to talk about money especially if you feel “clueless” (not my word, but a word many women use to describe their financial savvy) or embarrassed about some of the financial decisions you’ve made in the past. But a good advisor doesn’t care about any of those things; they want to objectively help you make good financial decisions going forward.

When I ask a potential client why they contacted me, here are some of the most common answers:

I want to retire early and do something different with my life. Can I afford to do this and how soon can I do it?
I am retiring in 5 years and I have no idea if I’m on track.
I want to buy a house and I need to know how much to save and what I need to do to qualify for a loan.
I am afraid to invest my money in the stock market because I don’t trust it, but I’m not earning any return on my money in the bank, what should I do?
My father (or mother) just passed away and left me some money. I want to make sure that I make the right decisions with this money and need help and a plan.
I want to send my kids to private schools but they are expensive. I want to know if I can afford it and save for other goals like retirement.
I’m single and I don’t want to rely on anyone else for my financial health, I want a plan to reach my goals.
I’m going through a divorce and I worried about my financial future.I need help figuring it out.
I make a great salary but I spend too much. I want help to set up a budget, reign in my spending and start saving and investing more.
My spouse/partner passed away and I’ve never managed the finances alone. I need someone I can trust to help me.

Some of these situations are like a medical crisis – “oh my gosh…I’m retiring in 5 years and I haven’t saved enough money!”, others are unexpected, such as a divorce. But all share one thing in common: all situations will be less stressful and better managed with financial education and a plan.

Photo by Teerapun/freedigitalphotos.net

Editor’s note: This post was originally published on April 7, 2014 and has been updated and refreshed.

Do You Need A Financial Advisor? Investopedia
Six Important Steps to Hiring a Financial Advisor Forbes

If you found this information interesting, please share it with a friend!

Why You Need A Financial Plan Read More »

Smart and Savvy Roth IRA Strategies Updated for 2018

Investment Management / Cathy Curtis / March 30, 2017

Roth IRA’s are a great savings tool. Contributions aren’t deductible like with traditional IRAs, so Roth contributions don’t lower your tax bill immediately. However, the tax-free nature of any earnings, no required minimum distributions (RMD’S) and ability to withdraw your at any time, tax and penalty free, make them an excellent planning and savings tool.

Before any discussion about Roth IRA strategies it’s important to be aware of the income and contribution limitations:

Income Limits

In 2018, for single taxpayers, there are phase-outs between modified AGI of $120,000 and $135,000 and over $135,000 Roth contributions aren’t allowed. For married taxpayers the phase-out range is from $189,000 to $199,000 and over $199,000 is disqualifying.

Contribution Limits

In 2018, the total amount individuals can contribute $5,500. People over 50 can contribute an additional $1,000 for a total of $6,500.

Here are some features of Roth IRA’s that highlight their unique saving and planning advantages:

1. You Can Open A Roth For Your (Employed) Children

As soon as your child has taxable earned income and regardless of age, you can contribute to a Custodial Roth IRA for them up to their earnings, or a maximum (in 2017) of $5500.00, whichever is less.

As a parent, you retain control of the account until your child turns 18 (or 21 in some states). What a great way to start a nest egg for your children and teach them something about money at the same time!

2. High Earners can contribute to a Roth 401(k)

High earners can work around the income limits noted above by contributing to a Roth 401(k) if their company plan allows it. No income limits apply to Roth 401(k) contributions so it can make good sense for big earners to contribute to a Roth 401(k) or split contributions between a traditional and Roth 401(k). Total contributions cannot exceed the 2018 limit of $18,500 (or $24,500 for those 50 and older).

3. Roth Conversions

Seven years ago income limits on Roth conversions lifted so that anyone no matter how much money they make can convert a traditional IRA to a Roth in any given year. High-earners may not want to take the tax hit that a conversion would trigger while earning the big bucks, but if there is a year where income is lower (i.e., a sabbatical year, quitting a salaried job, first years of retirement before RMD’s, to work at a start-up) a Roth conversion may be a good move.

For many, the lowest tax years of post-20’s life may be the years in between retirement and the beginning of Required Minimum Distributions (RMD’s) at age 70 ½ – this is also a good time to consider converting some IRA money to a Roth.

4. The Backdoor Roth

At about the same time the rules on Roth conversions were changed, a strategy developed called the Backdoor Roth. People who hit the income limits for Roth contributions instead contribute to a non-deductible IRA and then immediately convert it to a Roth IRA.

However, it’s not that simple because of the pro-rata rule. If the person converting has other traditional IRA assets, the taxes due on the conversion will depend on the ratio of IRA’s that have been taxed to those that haven’t. There is a workaround to the pro-rata rule: roll traditional IRA assets into a company plan such as a 401(k) or solo 401 (k) before attempting the back-door Roth, taking them out of the pro-rata equation. This move makes sense if the company plan has decent investment choices and low fees.

Due to the wide array of tax outcomes that could occur while applying these strategies, it would be wise to get a second opinion from your financial advisor or tax accountant.

Do you want to manage your money (and life!) better?

If you want to think differently about the relationship between your spending, your values and your happiness, then sign up to get your FREE copy of The Happiness Spreadsheet.

Like this post?

If you found this blog post useful and educational, please share it on your favorite social media network!

If you found this information interesting, please share it with a friend!

Smart and Savvy Roth IRA Strategies Updated for 2018 Read More »

Getting On The Same Page: Investing With Your Spouse

Investment Management / Cathy Curtis / June 21, 2016

Are we speaking a different language?

Financial experts, thought leaders, and academics have written extensively about the role gender plays in investment styles, and the innate differences can be a source of conflict during financial planning.

Studies generally agree women feel less confident about investing, and prefer to keep more cash assets, while men can be overconfident, preferring to make more trades – with either style, a singular approach often adversely affects long-term returns.

Successful long-term investment strategies can be especially challenging to implement when a couple can’t agree on what to do with their nest egg – or when one investment style dominates to the detriment of the couple’s finances.

As an advisor, facilitating communication and building consensus between clients is so important. Being on the same investment strategy page will help avoid some of the following situations:

Over-Invested in One Asset Class

Pam and Kevin* were confident they had enough money to retire, and happily sold their high-priced home in the San Francisco Bay Area, relocating to a lower cost area in the Southwest. Kevin was a do-it-yourself investor and prided himself on growing the couple’s retirement savings. Pam was happy to let her husband handle the investments, and focused on managing the household finances.

For the first few retirement years the outgoing couple thoroughly enjoyed life without work, getting involved with the local community and volunteer opportunities, and taking full advantage of their newly free time. However, when oil prices plunged in 2015, so did the value of their investments.

Since 2009, Kevin had invested the majority of their savings in Master Limited Partnership (MLP) funds that invested in companies in the oil and gas industry. He was not alone – between 2010 and 2014, $44 billion flowed into these MLP Funds, primarily for their high dividend pay-out, but also to enjoy the growth of the oil and gas industry in the U.S. In 2015 the price of U.S.-traded crude oil declined 30%, but the shares of MLP’s fell over 44%.

The devastating loss in the value of their investment portfolio prompted Kevin and Pam to reenter the job market – they realized it was no longer sustainable to withdraw from their investments for living expenses. Retirement looks very different to them now, but they are recalibrating, and dealing with changed circumstances as best they can.

Trying to Time the Market

Ann and Paul* both worked for Silicon Valley technology companies for many years and saved enough to fund substantial IRA’s for retirement, and a good amount in taxable savings, as well. During the 2007-2009 recession Paul pulled all his money out of the market, and has kept it in cash. Ann recently rolled over her 401(k) to an IRA, and on Paul’s advice has kept that money invested in cash.

Because Ann and Paul have always kept their assets separate, Ann is now withdrawing from her IRA early (before Required Minimum Distributions begin at age 70 1/2) to pay expenses. She is very concerned because there is no growth in her IRA, and she sees the balance declining. Paul insists that it isn’t the right time to invest in stocks and bonds, and is convinced there is a huge market crash coming. Ann, however, understands asset allocation and diversification, and believes in investing for the long haul. The problem is, she can’t get Paul to see it her way, and she is hesitant to rock the boat.

What can be learned from these two couples, and their financial challenges (and opportunities)?

Although men and women may have innately different investment styles as evidenced by the stories above, when differing strategies come together they can create a strong complementary approach. As with every ‘battle of the sexes’ difference, communication is key.

If Pam had been more involved in decisions about how the couple’s money was invested, she may have urged Kevin to take a more balanced approach. In Paul and Ann’s case, her long-term outlook could have helped temper Paul’s urge to control things, and time the market.

If consensus isn’t possible, I would suggest the couple agrees to have each person invest a portion of their money individually – especially when the investments involve separate funds such as IRA’s or investment accounts. In the cases I reference, it would be the responsibility of Pam and Ann to educate themselves about different options, and to use that knowledge to make confident investment decisions.

In many cases, couples at odds over investment styles choose to go it alone – without the guidance of a professional advisor to help them find a middle ground.

My advice?

Having a portion of an investment portfolio invested in a balanced way is better than none at all.

And, of course, gender differences may not apply to all couples – every individual approaches investment decisions in their own unique way. Consider your own investing style — it might be the first step in open conversation with your partner about long-term financial goals.

*Names have been changed.

Do you want to manage your money (and life!) better?

If you want to think differently about the relationship between your spending, your values and your happiness, then sign up to get your FREE copy of The Happiness Spreadsheet.

Like this post?

If you learned something useful from this blog post, please share it on your favorite social media network!

If you found this information interesting, please share it with a friend!

Getting On The Same Page: Investing With Your Spouse Read More »

NoBody Knows – And That is Why You Diversify

Investment Management, Simple Truths About Money, Women and Money / Cathy Curtis / January 17, 2015

– Nobody knew that the yield on the 10 year Treasury would keep going down. – Nobody knew that the price of a barrel of oil would drop by 55%. – Nobody knew the Russian ruble would crash. – Nobody knew that Japan would dip into a technical recession. – Nobody knew that Europe’s tentative recovery would falter and fail. And this week, nobody knew, including Christine LaGarde, the director of the International Monetary Fund, that Switzerland was going to un-peg the Swiss Franc from the Euro. These are just a few of the surprises that happened in the last year that even the most experienced investors didn’t predict. These unexpected events can have either a positive or negative effect on stock and bond markets worldwide. Unexpected events like these are also why most investment professionals, including me, espouse the mantra of diversification. You’ve probably read about diversification in your employee benefits package when signing up for your 401 (k) or from reading investment articles or from your financial advisor. Diversification is what it sounds like – an investment strategy that combines a variety of investments (both U.S. and international, a mix of small and large cap stocks, and a variety of bonds) designed to reduce exposure to risk. However, diversification doesn’t just reduce the downside potential it also reduces the upside potential, in the end, hopefully providing a smoother portfolio trajectory. You might say, what?, why would I want to invest in a strategy that reduces the upside potential? Well, if you knew anyone that bailed out of stocks in 2008 or early 2009 and never reinvested, you will know the answer to that question. A portfolio with 100% invested in the S&P 500 in 2008 lost 37%, and if it had a good dose of large technology stocks even more (the NASDAQ Composite was down 41%). That unfortunate time in stock market history scared off a lot of seasoned and unseasoned investors. If instead, that 2008 portfolio was diversified with a dose of bonds in it, the loss would have been less and the investor, more likely to stay in the market. Which is the point – less volatility is more likely to keep a person invested for the long haul. In 2014, the more diversified your portfolio was, the less closely it would have matched the returns of the S&P 500, which was up 13.69%. The S&P 500 is the index along with the Dow Jones Industrial Average, (up 7.52% in 2014) most often quoted in the media. Below are the 2014 returns of various indexes representing the broader asset classes and geographic areas you would find in a diversified portfolio: REITS (Real Estate Stocks) 28.0% Inter.Term Bonds 5.97% US Small Cap Stocks 4.90% Global Stocks (includes US) 4.0% Hi-Yield Bonds 2.46% Emerging Markets Stocks -1.8% International Stocks -4.90% Global Diversified Bonds -5.72% Europe Stocks -7.10% Pacific Stocks -7.10% Commodities(includes oil&gas) -17.01% Russia Stocks -44.9% As you can see, the returns were all over the map, and mostly down. It was not a great year to invest internationally and definitely not in energy stocks. But nobody could predict that going into 2014, in fact, back then it the world looked like it was poised for synchronized global growth. If you were in a diversified portfolio, you had another decent year, maybe nothing to jump up and down on the bed about, but decent. And, the good thing about decent years, even single digit ones, is that they add up over time. ——————– For additional food for thought on this topic, the attached charts illustrate the randomness of asset class and sector return year by year. Please note that the “AA” or Asset Allocator portfolio was created by novelinvestor.com and is for illustration purposes only.

NoBody Knows – And That is Why You Diversify Read More »

Cultivating a Healthy Relationship with Money

Budgeting Help, Cash Flow Planning, Financial Planning, Investment Management, Women and Money / Cathy Curtis / November 16, 2014

Cultivating a healthy relationship with money is the foundation of a rich and happy life. Just like any other relationship, for your money to prosper and grow, it needs attention and care.

You don’t want to smother it with worry and fear, but you also don’t want to be neglectful. You need to get to know it, love it, and not be afraid to let it go, if you strike the right balance, it will always be there for you.

A little understanding goes a long way in our relationships, and it’s the same for money.The first step to understanding money is to figure out how much you need to live your life the way you want.

You can spend your whole life pursuing more money, or you can figure out what it takes to live and be happy. Money is a tool to fund your life – when you think about money as a tool, it’s easier to plan.

How much do you need?

How much money do you need to meet your financial obligations and commitments: the mortgage, the rent, your other fixed bills, your medical insurance, your kid’s education? How much is an important number because you if you can’t afford your basic lifestyle, life becomes one big worry about money.

Next comes regular saving. This step is hard. It trips many people up. It usually involves delayed gratification, and we don’t like that. It also involves investing. Investing can seem scary and complicated. But we must save for the things or experiences we want soon and in the future, and we must invest or our money will lose value due to inflation.

Retirement is the most daunting savings need of all because it involves large numbers and lots of assumptions – assumptions regarding our longevity, health, returns on investment, interest rates, to name a few. For most of us, social security is the only source of income we will have in retirement besides our savings. For this reason, saving at least 10% of income each year and more if behind is critical.

After you understand how much money you need to cover your emergency fund, your necessary expenses and your retirement savings, then you can focus on what else you want to create a rich and happy life. A healthy relationship with money means knowing that you can’t have everything. Instead, you figure out what in life brings you the most joy and satisfaction, and you prioritize those things.

You will know you have achieved a healthy relationship with money when you worry less about it and start feeling good about how you are spending and saving it. Get started working on this most important relationship now for a happier future.

If you found this information interesting, please share it with a friend!

Cultivating a Healthy Relationship with Money Read More »

Interesting Financial Blogs – Really!

Investment Management, Women and Money / Cathy Curtis / January 13, 2014

When I get an extra hour in a day, I like to go on-line and read my favorite financial blogs. Not only do they keep me up-to-date on business news, but I always learn something that I can use in my life or share with clients. I have a feeling that this pastime is not shared with many (other than my financial advisor friends) but I do know that we all want to be smarter about our money. Be honest – how many of you made a New Year’s resolution that had something to do with your finances?

The following is a list of blogs that I promise, will inform but not bore. After all, money really can be quite interesting.

The BillFold is not your typical money blog. It’s about ordinary people and situations and it can be both silly and serious. Each post is related to money in some way, it just isn’t always obvious. In the editors own words “We are a site about money. We are interested in people’s lives and how funds make those lives awesome and not so awesome.”

I enjoy The Business Insider finance blog, called Clusterstock because it not only reports and analyzes business news but it acts as an aggregator of the top news stories from around the web. It can be your one-stop shop for financial news.

Every year we read news stories about the World Economic Forum that is held in Davos, Switzerland where business, political, academic and other leaders gather to shape agendas for a better world. This same organization supports a blog on its website that is full of interesting articles about global economics.

Each business day I receive an email from The Seeking Alpha blog called Wall Street Breakfast-Must-Know News. It summarizes the top stock market and economic news and provides a link to the full article if I choose to read more. I find it to be an incredibly efficient way to stay on top of financial news.

Happy New Year!

If you found this information interesting, please share it with a friend!

Interesting Financial Blogs – Really! Read More »

A Financial English Primer

Finglish, Investment Management / Cathy Curtis / December 4, 2012

Call it “finglish,” or financial English. Financial and economic terms dominate the news nowadays, amid talk of fiscal cliffs and eurozone troubles. Plus, new financial terms crop up all the time for a new product or strategy, like quantitative easing.

Since the news is particularly ripe with financial terms right now, it is a great time for us to learn some common finance terms. Some finglish terms are often confused and used improperly in the media. Hopefully, this will increase your financial knowledge, help you to understand the key issues we’re facing and communicate better with your financial advisor.

Six Finglish Terms You Should Know

Federal budget deficit. This term is in the news constantly and for good reason—the deficit is huge, at $1.1 trillion. This means that the federal government is spending $1.1 trillion more than it is earning in revenues over a year. Why? Because entitlement spending, interest paid on the national debt and defense spending are much greater than revenue from taxes. And when the economy is weak, as it is now, tax collections are down.

National debt. A lot of people confuse the debt and the deficit. The amount of gross federal debt outstanding is a difficult-to-imagine $16.2 trillion. The national debt increases or decreases based on the annual federal budget deficit or surplus. But a surplus has not been seen since 2003 and the deficit is now growing at a rate of almost $1 trillion a year. Together with the budget deficit, this debt was one of the reasons Standard & Poor’s gave when downgrading the United States’ credit rating last summer.

Entitlement spending. This refers to Social Security, Medicare and Medicaid outlays by the government. Though we pay into this system during our working years, with rising costs of healthcare and longer lives, much more goes out than comes in. Our country’s leaders know that entitlement spending has got to be reformed to fix the debt problem. But it’s a political minefield, and a divided post-election government will make change difficult.

Debt ceiling. The federal government is limited by law on the total amount of debt it issues. This limit is known as the debt ceiling. Currently, the debt ceiling is $16.4 trillion, an amount that we will exceed in early 2013. Fortunately, the government can continue to operate and pay its obligations through various accounting mechanisms and Congress will mostly likely vote to increase the ceiling.

Quantitative easing (QE). This is a weapon in the Federal Reserve’s arsenal to help the country out of a recession when all else fails. This is sometimes referred to as “printing money,” but this term is misleading since very few new paper bills are issued and the Treasury prints currency anyway, not the Fed. The Fed tends to use QE when it has lowered interest rates to close to 0% and the economy doesn’t improve. Quantitative easing increases the money supply by flooding banks and other financial institutions with capital through the Fed’s asset purchases in an effort to promote increased lending and liquidity.

The Fed announced the third round of QE on Sepember. 13, 2012. Each month, for as long as it takes, the Fed will buy $40 billion in bonds and mortgage-backed securities, and keep rates close to zero until 2015. Many economists are concerned that open-ended asset purchases could lead to inflation, as there is still a fixed amount of goods for sale (too much money chasing too few goods leads to higher prices).

Yield Curve. When the Fed expands the money supply, it intends to spur borrowing by lowering interest rates further out on the yield curve. The yield curve is basically a chart showing borrowing costs for bonds of different maturities.

Naturally, longer maturities of 10 to 30 years come with higher interest rates to compensate the lender (the bond holder) for parting with that money for a longer time. Short-term debt usually carries a lower interest rate. By driving down long-term borrowing costs, the Fed hopes to encourage businesses to borrow more so they can invest and hire people.

Becoming a Better Informed Investor

The list above is only the tip of the iceberg when it comes to finglish. There are many others terms that you should be familiar with. Getting used to financial terms makes you a more empowered investor and a more informed citizen. Don’t let seemingly arcane vocabulary turn you away from investing and pursuing your financial future.

If you found this information interesting, please share it with a friend!

A Financial English Primer Read More »

Investment Management

What is Sustainable Investing?

Let’s take a closer look at the individual elements of ESG:

How to Invest Sustainably

Women and Sustainable Investing

Income Limits

Contribution Limits

1. You Can Open A Roth For Your (Employed) Children

2. High Earners can contribute to a Roth 401(k)

3. Roth Conversions

4. The Backdoor Roth

Do you want to manage your money (and life!) better?

Like this post?

Over-Invested in One Asset Class

Trying to Time the Market

What can be learned from these two couples, and their financial challenges (and opportunities)?

My advice?

Do you want to manage your money (and life!) better?

Like this post?

Overwhelmed by sudden wealth?

Claim your free digital copy!

Location

Contact Us