WHAT DOES THAT MEAN?
The art of stock picking and market timing. Active investment managers attempt to “time the market” by actively buying and selling those stocks that they believe to be mispriced so as to capitalize on subsequent price corrections in the market. The success of this strategy depends on the active manager’s ability to predict market events. Active managers frequently reshuffle their portfolios in an effort to keep them stocked with the most promising securities. This is costly.
Asset Class Investing
Investing literally in asset classes via passive portfolios that capture, in their entirety, the asset class or classes under consideration. See Passive Management.
Assets Under Management (AUM)
Market Value of assets that an investment company manages on behalf of investors.
Administrative & support personnel in a financial services company. Carry out functions like settlements, clearances, record maintenance, regulatory compliance, & accounting.
Have the ability to customize portfolios individually based on each investor’s risk tolerance.
The Dalbar Study measures the results of the market annually with the average results that individual investors have obtained. It shows that since The average equity fund investor lack knowledge and self-control and they consistently underperform the S&P 500 Index.
Diversified Approach = Diversification
A risk management technique that mixes a wide variety of investments within a portfolio.
Efficient Market Hypothesis
This hypothesis states that markets quickly and accurately reflect available information and are setting “fair” prices for the buyer and seller. Given this information, it would be very unlikely that an active manager could find a mispriced stock.
The process by which an individual or family arranges the transfer of assets in anticipation of death. Includes creating a will; establishing a guardian for living dependents; limiting estate taxes by setting up trust accounts in the name of beneficiaries; naming an executor of the estate to oversee the terms of the will; Creating/updating beneficiaries on plans such as life insurance, IRAs, and 401ks; setting up funeral arrangements, establishing annual gifting to reduce taxable estate, setting up durable power of attorney to direct other assets and investments.
A type of mutual fund or Exchange Traded Fund (ETF) with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover.
Institutional funds usually have lower operating costs and higher minimum investments than retail funds. Often their main objective is to reduce risk, so they invest in hundreds of different securities, which makes them among the most diversified funds available.
Investment Advisor Representative (IAR)
Individual who works for a client in a fiduciary capacity under a Registered Investment Advisor (RIA).
Investment Policy Statement (IPS)
Provides the general investment goals & objectives of a client. Also describes the strategies that the manager should employ to meet these objectives. Specific information on matters such as asset allocation, risk tolerance, & liquidity requirements are included in the IPS.
Active management is the art of stock picking and market timing. Active investment managers attempt to “time the market” by actively buying and selling those stocks that they believe to be mispriced so as to capitalize on subsequent price corrections in the market. The success of this strategy depends on the active manager’s ability to predict market events.
Modern Portfolio Theory
The world’s leading academic economists conducted extensive research, demonstrating that asset class selection (such as small-cap vs. large-cap, value vs. growth and U.S. vs. international) – not stock selection or market timing – is the most important determinant of portfolio performance. Further, the founders of MPT received a Nobel Prize for revealing these four tenets.
- Markets process information so rapidly when determining security prices, that it is extremely difficult to gain a competitive edge by taking advantage of market anomalies or inefficiencies.
- Over time, riskier investments provide higher returns as compensation to investors for accepting greater risk.
- Adding high-risk, low correlating asset classes to a portfolio can actually reduce volatility and increase expected rates of return.
- Passive asset class fund portfolios can be designed to deliver over time the highest expected returns for a chosen level of risk.
Refers to a buy-and-hold approach to money management. Passive managers believe that markets work and that in every asset class they choose, their best course of action is to accept market returns. Passive management makes no forecasts of the stock market or the economy. Many passive managers choose to use index funds to accomplish this management approach.
Prudent Investor Rule
A vast majority of states have passed legislation with major revisions to the Prudent Investor Rule. A summary of these are:
- Modern Portfolio Theory (MPT) is adopted as the standard by which fiduciaries invest;
- May of 1992 American Law Institute (ALI) Third Restatement of the Prudent Investor Rule recognizes:Fiduciaries can avoid liability by exercising reasonable skill and care in making a delegation to an agent that will be held to the same standards as the fiduciary.
- Little or negative payoff when fiduciaries and other investors try to apply expertise, investigation and diligence in efforts to “beat the market”, particularly after research and transaction costs;
- Little correlation between fund managers’ earlier successes and their ability to produce above-market returns in subsequent periods.
A retirement plan established by an employer for the benefit of the company’s employees. Qualified retirement plans give employees a tax break for contributions they make. Some examples of Qualified retirement plans are 401(k)’s, 403(b)’s, and 457(b)’s.
Turn-key Asset Management Program (TAMP)
Allow independent financial advisors to outsource the management of their client’s assets. Advisors gain access to managed account services that allow them to offload time-consuming functions such as; research, portfolio construction, rebalancing, reconciliation, performing reporting,and tax optimization and reporting. This allows advisors to focus on their clients’ personal financial needs and concerns.
The combination of financial planning, estate planning, tax advice, investment management services, & other specialized financial services with the goal of attaining long-term wealth.