basic investment principles 101 - from asset allocations to zero coupon bonds

BASIC INVESTMENT PRINCIPLES 101- FROM ASSET ALLOCATIONS TO ZERO COUPON BONDSSERIES: INVESTING BASICS 2016

Premier date: January 28, 2016

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A Financial Poise Webinar

BASIC INVESTMENT PRINCIPLES 101- FROM ASSET ALLOCATIONS TO ZERO COUPON

BONDS

SERIES: INVESTING BASICS 2016

Premier Date: January 28, 2016

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WE WOULD LIKE TO TAKE THIS OPPORTUNITY TO THANK OUR SPONSORS

© 2016 DailyDAC, LLC d/b/a/ Financial Poise® 3

© 2016 DailyDAC, LLC d/b/a/ Financial Poise®

meet the facultyPANELISTS

Jordan Fishfeld Peer RealtyCharles Sikorovsky North Shore Council of the Financial Planning AssociationMichael Terrien West Loop Financial

MODERATOR Jonathan Friedland,

Sugar Felsenthal Grais & Hammer LLP

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Practical and entertaining education for business owners and executives, accredited

investors, and their legal and financial advisors. For more information, visit

www.financialpoise.comDISCLAIMER: THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD

NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.

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http://www.financialpoise.com/


about this webinar

Alpha. Alternatives. Annuities. Asset Allocation. Bonds. Broker. Correlation. CFP. Compounding. Crowdfunding. Diversification. Expense Ratios, Fixed Income Securities. Hedge Funds. Mutual Funds. Insurance. P/E Ratio. Private Equity Funds. Rebalancing. RIA. Risk. Risk/reward. Stocks. Time value of money. Value Investing. Venture Capital. Z Scores Zero Coupon Bonds.

These are just some of the terms that this Financial Poise webinar lays out while explaining the basic concepts that every investor should know and understand.

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about this seriesAre you saving enough money? How much is enough? That depends, in part, on what your goals are and what sort of returns you can get by investing your savings. Many investors who thought they were well situated for retirement were devastated by the 2008 meltdown. Many others in recent years have lost their entire nest egg to fraudulent schemes. This Financial Poise webinar series will give you a solid introduction to the fundamentals of investing.

As with all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes, and listeners will enhance their knowledge of this area whether they attend one, some, or all of the programs.

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episodes in this series

EPISODE #1 Basic Investment Principles 101-1/28/2016

From Asset Allocations to Zero Coupon Bonds

EPISODE #2 Goal Based Investing- 2/22/2016Planning for Key Events

EPISODE #3 The Legal & Tax Aspect of Investing :3/17/2016

Asset Protection: Estate Planning, and Tax Efficiency

EPISODE #4 Advanced Investing Topics

4/21/2016

EPISODE #5 Options for the Accredited Investor

5/26/2016

Dates above are premier dates All webinars also available On Demand through West LegalEd Center and Vimeo

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Portfolio-Level Concepts

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Asset Allocation

An approach to investing used by investors to diversify their portfolios into different “asset classes”, such as stocks, bonds and cash.

A well-designed asset allocation will reflect the investors risk tolerance and provide plenty of diversification.

The Asset Allocation approach is often used in conjunction with rebalancing.

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Diversification vs. Concentration“Don’t put all your eggs in one basket” as the adage goes.

Diversification seeks to lower risk in the aggregate by investing in multiple non-correlated assets. But diversification may not be for everyone.

Warren Buffett, a value investor, once said, ““Diversification may preserve wealth, but concentration builds wealth.”

• Rebalancing. An investment strategy based on the fundamental rule “buy low, sell high”. Rebalancing is the process selling and buying assets within a portfolio to restore them to the target asset allocation percentages whenever they deviate too far. For instance, suppose the target allocation is 50% stock and 50% bonds and over time the allocations have drifted to 54% stock and 46% bonds, rebalancing would mean selling 4% from the stock allocation and purchasing 4% more of the bond allocation, to restore the target. 11

Correlation

When two securities tend to move together in price, as those of competing firms in the same industry often do, the prices are said to be correlated.

When they tend to move in opposite directions, they have negative correlation.

When neither can be used to predict the other at all, they are called uncorrelated assets.

Asset allocation and rebalancing work better to reduce portfolio volatility the lower the correlation among the assets in the portfolio.



Compounding

Sometimes called “the eighth wonder of the world,” compounding, or compound interest is the principle that re-invested earnings grow exponentially.

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Time Value of MoneyThe concept that a given sum of money is worth more in the present than in the future.

It is based in the fact that given a choice, we generally prefer to consume today rather than deferring consumption to a future date.

Inflation also increases the difference between the present and future value of a sum of money by reducing the future purchasing power of a given sum of money, in addition to deferring the consumption it purchases temporally. Interest rates are used both as a measure of, and compensation for, the difference between a dollar of consumption today and a dollar of consumption in the future.

Time Value of Money calculations are fundamental to working with investments, banking, annuities, insurance products, and everything pertaining to money and time.

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Investment Philosophy

Active Investing is a philosophy of investing that seeks to out-perform the market rate of return. For instance, buying undervalued stocks, searching for muni bonds with a better-than-average risk/return profile, and buying paintings by today’s unknown Picassos with the hope they will appreciate in value are all examples of Active Investing. Passive Investment is a style of investing that seeks to capture the returns offered by the asset classes invested in, at very low cost, by purchasing a broadly diversified collection of securities representing such asset classes, often but not always through the use if indices, and eschewing efforts to identify purportedly undervalued securities or to time the market.

• For passive investors value investing involves investing in a broad portfolio of companies that are characterized by low P/E, Price/Book or Price/Sales ratios



Value v. Growth InvestingThe Value Investor uses fundamental analysis to find companies they believe are selling at a price less than they are actually worth.

• Benjamin Graham and Warren Buffet are two famous value investors.

The Growth Investor uses fundamental analysis to find companies whose earnings are expected to grow at above-market rates.

• Peter Lynch is a famous growth investor.

Warren Buffet said “Growth and value investing are joined at the hip. Value is the discounted present value of an investment’s future cash flow; growth is simply a calculation used to determine value.”

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Fundamental v. Technical AnalysisFundamental Analysis. One method active investors employ to pick stocks they expect will produce with better-than-market returns is to analyze the fundamentals of a business, an industry, and/or a country’s economy. Reviewing company financial statements, calculating price/earnings ratios, and forecasting the growth of corporate earnings and dividends are all aspects of fundamental analysis. Technical Analysis. The technical analyst focuses on trends and charts and attempts to forecast moves of markets or individual stocks based on past data, particularly price and volume. A technical analyst may pick a particular stock strictly from charts, without ever studying the firm’s financial statements or learning about their position in the industry (i.e. their “fundamentals”).

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Types of Advisors

Who Ya’ Gonna Call?

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Fee Only ADVISOR

A fee only advisor is a financial advisor who is licensed as an investment advisor, but not as a stockbroker. In other words, a fee only advisor can accept a fee for giving investment advice, but they cannot receive a commission for buying and selling financial products.

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Broker-Dealer (“B/D”) and Registered Representative (“Broker”)

A broker-dealer is the term for a brokerage that not only executes orders for its customers, but also trades on its own account (“dealer”, or “principal”).

Most big US brokerages trade on their own account as well as for their customers, so they are called Broker-Dealers.

Licensed agents of these firms who purchase and sell securities for investors are called Registered Representatives, or brokers.

• Registered Reps are held to a suitability standard when advising clients regarding securities; the suitability standard is less stringent than the fiduciary standard. Registered Reps are licensed to buy and sell securities, for a commission.



Registered Investment Advisor (“RIA”) and Inv. Advisor Representative (“IAR”)

An RIA is a firm in the business of giving advice about investing and is registered either with the SEC or with the state in which it operates.

Investment Advisors are required to work with clients under a fiduciary standard which requires an advisor to “to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice

Many financial professionals are licensed both as Registered Reps of a broker dealer as well as Investment Advisor Representatives of their RIA.

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Financial planners.

A financial planner assists clients with planning about range of financial issues including investing, tax, risk management and insurance, wealth transfer, legacy and estate planning, debt management, and retirement, education or other large purchase planning. Many, but not all, IARs and Brokers provide financial planning services and some financial planners provide neither brokerage nor investment advisory services

The Certified Financial Planner® designation is awarded by the CFP® board to individuals who have met the requirements of education, testing, work experience and adherence to a professional code of conduct.

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Basic Asset Classes

• Stocks• Bonds (a/k/a Fixed Income Securities)• Cash• Real estate• Commodities

And then…. There are the “wrappers” that package and deliver exposure to underlying asset classes.

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Stocks

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A share of ownership in a corporation.

• There are publicly traded stocks which are sold on exchanges like the New York Stock Exchange and the NASDAQ.

• There are “closely held” stocks not listed or publicly traded.

Stockholders, or shareholders, typically have rights in the company such as voting on the board of directors.

Stock is sometimes called equity.


Stock Mutual Funds

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A pool of stocks created when investors get together in order to enjoy the benefits of diversification without each individual investor having to purchase all the individual stocks in the pool himself or herself.


Bonds

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A debt investment; a type of “Fixed Income Security”.

Through a bond, an investor can loan money to the federal government (“Government Bond”), a state or local government (“Municipal Bond”), a corporation (“Corporate Bond”), or some entity that is based overseas (“International Bond”).

During the term of the bond, the investor typically receives interest payments, and when the term is over, the bondholder receives back the full original principal of the bond, unless there is a default.


Zero Coupon Bonds

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A zero coupon bond has no interest payments (no “coupons”) during the term of the loan, so all the interest is paid at the

end of the term, along with the principal.


Annuities

Usually sold by life insurance companies, in their simplest form, annuities pay a fixed amount to the annuitant for their lifetime.

• But annuities come in many types: • Fixed, Variable, and Equity-Indexed; • Immediate and Deferred. • Depending on the particular product, annuities may have a variety

of payout options as well, including a “lump sum payout.”

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Life Insurance

In its purest form, a term policy, life insurance is not an investment per se.

However, permanent forms of life insurance, which have a cash value, can be a type of investment and should be taken into account when analyzing one’s portfolio.

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Cash

Savings Accounts, Certificates of Deposit (CDs), and Money Market Funds are all often considered to be “Cash” in terms of their asset class.

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Tangible Investments

A type of alternative investment.

(a/k/a Hard Assets)

Gold and other Precious Metals, Collectibles (Art, Wine, Antiques, Coins, Stamps, etc.), Oil and Gas, and Real Estate are examples of tangible assets.

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Alternative AssetsAny investment which is not a stock, bond, or cash, i.e. not a traditional investment. The term is broad and includes both tangible alternatives and intangible (or “financial”) alternatives.

• Intangible Alternative Assets are also known as Financial Alternatives. Private Equity and Private Equity Funds, Hedge Funds, Venture Capital, and Financial Derivatives are all types of Alternative Assets.

• Derivatives. There are a broad range of financial derivatives including forwards, futures (a standardized forward contract), options and swaps. Derivatives can be created to bet on the movements of a variety of underlying phenomena including commodity prices, interest rates, currency exchange rates, equity indexes, credit defaults and home mortgages.

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The Alternative Asset Landscape

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Crowdfund Investing

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Recap: Investment Classes

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Asset-Specific Concepts

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Alpha

The amount of return (expressed in a percentage) by which a security exceeds (or falls below) the market return of an index deemed appropriate for comparison purposes.

• For instance, if the manager of a large cap equity mutual fund outperforms the S&P 500 index by 1%, we can say his fund has an alpha of 1%. Sometimes called the active return on an investment.

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Beta

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A measure of volatility with respect to the market index. Beta only considers that portion of an investment’s return which is correlated to the market index.

• For instance, for an investment whose return is entirely attributable to the market and which is twice as volatile as the market, such as a “2x” S&P 500 ETF, the Beta is exactly 2.

• Whereas investments whose prices have little or no correlation to the market, such as gold, will have a low Beta, even though their prices may be quite volatile.


P/E Ratio

The P/E ratio, or Price-to-Earnings Ratio, is the ratio of the current share price to its per-share earnings. Sometimes called a “multiple” because it expresses how much investors are willing to pay for a dollar of earnings.

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Expense Ratio

Sometimes abbreviated E/R, it is the ongoing cost investors pay for owning shares in a specific fund.

The least expensive stock index funds can have expense ratios under 0.10% (“ten basis points”); the most expensive master limited partnership (MLP) funds can have expense ratios above 5.0%.

Many passive investors are very sensitive to the “cost” of the funds they buy.

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Z -Score

A normalized statistic.

For instance, if a stock’s average price over a 3-year period was $30 and its standard deviation over that period was $10.0, then the Z-score of $50 is 2 ([$50-$30]/$10.0).

The Z-score can then be checked against a standard normal distribution (mean=0, s.d.=1) to calculate confidence intervals and other statistical measurements.

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A Final Word About Risk

A risk is defined as “a situation involving exposure to danger.”

In the world of investments, there are many types of risk: systemic (“market”) risk, business risk, interest rate risk, currency risk and so forth.

The riskiness of a particular investment is usually measured by its “standard deviation,” which is a measure of volatility.

As a rule, investors require a higher return (higher “mean”) for a riskier investment (higher “standard deviation”). The historic means and standard deviations are readily available for most investments, including publicly traded stocks, ETFs and mutual funds.

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More About The Faculty: JONATHAN FRIEDLAND

[email protected] Friedland is a partner with Sugar Felsenthal Grais & Hammer LLP. He regularly represents parties in the purchase and sale of businesses and counsels businesses and their owners in their everyday affairs. Jonathan is also a nationally recognized expert in matters related to financially distressed companies.

Jonathan holds the highest possible rating from Martindale-Hubbell (AV® Preeminent™) and AVVO (10/10), has been repeatedly recognized as an Illinois “superlawyer” in the areas of Business/Corporate Law and Bankruptcy & Creditor/Debtor Rights, and has received several other similar distinctions. He is licensed to in Arizona, Illinois, New Jersey and New York.

Jonathan has been profiled, interviewed, and/or quoted in numerous publications, including Buyouts Magazine; Smart Business Magazine; The M&A Journal; Inside Counsel; LAW360; Business Week.com; The Bankruptcy Strategist; Dow Jones Daily Bankruptcy Review; Bankruptcy Court Decisions; Dow Jones LBO Wire; and The Daily Deal. He has authored three books and more than a hundred articles, and has spoken on more than 100 panels.

Jonathan is also the founder and chairman of DailyDAC, LLC, d/b/a Financial Poise™, an on-line provider of continuing education, information, and business intelligence for business owners, investors, and their trusted advisors. Jonathan graduated from the State University of New York at Albany, magna cum laude, in 1991 after three years of study and from the University of Pennsylvania Law School in 1994. He clerked for a federal judge before entering private practice, spent several years teaching MBA candidates as an Adjunct Professor of Strategic Management at the University of Chicago Booth School of Business, and was the 2006 Clayton Center for Entrepreneurial Law Visiting Professor of Business Law at the University of Tennessee College of Law. Jonathan was a partner with Kirkland & Ellis LLP before joining SugarFGH.

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More About The Faculty: D

JORDAN [email protected]

Jordan Fishfeld is the founder and Chief Executive Officer of PeerRealty. He focuses his time on the development of strategic partnerships with investors, sponsors, and developers, while ensuring all deals are strong and viable. With over 8 years of investing, development and sales experience in the real estate industry, Jordan understands the benefits of strong and tangible assets.

Prior to founding PeerRealty, Jordan worked as a finance attorney for Katten Muchin Rosenman, LLP, where he assisted on more than $1 billion worth of syndicated loan transactions. Before graduate school, Jordan worked as a law clerk for a New York based real estate firm, representing lenders for properties valued at over $45 million.

Jordan holds Bachelor of Arts in Political Science and Bachelor of Science in Business Administration degrees from the University of Florida. Jordan also received Master of Business Administration and Juris Doctorate degrees from the University of Miami, where he graduated Magna Cum Laude.

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CHARLES SIKOROVSKY

Charles Sikorovsky is Chair of the North Shore Council of the Financial Planning Association and has also served on the FPA of Illinois State Board. He currently works with Rick Harig, CFP® at Legacy Resources, LLC, a financial planning firm in Northbrook. In a prior career, Charles was a software consultant and technical trainer, and he brings his technical background and passion for teaching to Financial Poise.

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MICHAEL [email protected]

Michael S. Terrien is the founder and Managing Member of West Loop Financial LLC (WLF). WLF is a registered investment advisor (RIA) committed to disciplined, evidence-based investing and personalized, comprehensive financial planning designed to help clients build their tomorrows while guarding against the pitfalls on the road today and in the future.

West Loop Financial is a member of The BAM Alliance (BAM), a nationwide network of like-minded advisors. Mr. Terrien brings the intensive commitment to client service and attention to detail developed over a legal career spanning more than 20 years to West Loop Financial.

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Important Notes

• THE MATERIAL IN THIS PRESENTATION IS FOR GENERAL EDUCATIONAL PURPOSES ONLY.

• IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.

• YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.