Posts in Financial Education

An Index Overview (Part IV)

June 1st, 2017 Posted by Asset Allocation, Financial Education, Foreign Investing, Investment Strategy, Investment Vehicles, Uncategorized 0 thoughts on “An Index Overview (Part IV)”

Part IV: Index Investing – Opportunities and Obstacles

Legend has it, a pharmacist named John Pemberton was searching for a headache cure when he tried blending Coca leaves with Cola nuts. Who knew his recipe was destined to become such a smashing success, even if Coca-Cola® never did become the medicine Pemberton had in mind?

In similar vein, when Charles Dow launched the Dow Jones Industrial Average (the Dow), his aim was to better assess stock prices and market trends, hoping to determine when the market’s tides had turned by measuring the equivalent of its incoming and outgoing “waves.” He chose industrials (mostly railroads) because, as he proposed in 1882, “The industrial market is destined to be the great speculative market of the United States.”

While the actively minded Dow never did achieve market-timing clairvoyance (and neither has anyone else we’re aware of), he did devise the world’s first index. We’d like to think his creation turned into something even greater than what he’d intended – especially when Vanguard founder John Bogle and other pioneers leveraged Dow’s early work to create among the most passive ways to invest in today’s markets: the index fund.

Bogle launched the first publicly available index fund in 1976. Initially dismissed by many as “Bogle’s folly,” its modern-day rendition, the Vanguard 500 Index Fund, remains among the most familiar funds of any type.

Index Investing Is Born

In defense of Dow’s quest to forecast market movements, it’s worth remembering that his was a world in which electronic ticker tape was the latest technology, there were no open-ended mutual funds or fee-only financial advisors, and safeguards and regulations were few and far between. Essentially, speculating was the only way one could invest in late-nineteenth century markets.

Compared to actively managed funds that seek to “beat” the market by engaging in these now-outdated speculative strategies, passively managed index funds offer a more solid solution for sensibly capturing available market returns. As the name implies, an index fund buys and holds the securities tracked by a particular index, which is seeking to represent the performance of a particular slice of the market. For example, the Vanguard 500 Index Fund tracks the popular S&P 500 Index, which in turn approximately tracks the asset class of U.S. large-company stocks.

Compared to actively managed solutions, index funds lend themselves well to helping investors more efficiently and effectively target these three pillars of sensible investing:

  1. Asset allocation – How you allocate your portfolio across various market asset classes plays a far greater role in varying your long-term portfolio performance than does the individual securities you hold.
  2. Global diversification – Through broad and deep diversification, the sum of your whole risk can actually be lower than its individual parts.
  3. Cost control – The less you spend implementing a strategy, the more you get to keep.

Index Investing: Room for Improvement

As we’ve described throughout this series, indexes weren’t specifically devised to be invested in. There’s often a lot going on underneath their seemingly simple structures that can lead to inefficiencies by those trying to retrofit their investment products on top of popular indexes.

Index Dependence – Whenever an index “reconstitutes” by changing the underlying stocks it is following, any funds tracking that index must change its holdings as well – and relatively quickly if it’s to remain true to its stated goals. In a classic display of supply-and-demand pricing, this can generate a “buy high, sell low” environment as index fund managers hurry to sell stocks that have been removed from the index and buy stocks that have been added.

Compromised Composition – Asset allocation is based on the premise that particular market asset classes exhibit particular risk and return characteristics over time. That’s why your investment “pie” should be carefully managed to include the right asset class “slices” for your financial goals and risk tolerances. As we described in Part III of this series, if you’re invested in an index fund and you aren’t sure what its underlying index is precisely tracking, you may end up with off-sized pieces of pie. For example, the S&P 500 and the Russell 3000 are both positioned as U.S. stock market indexes, but both also track some real estate. If you don’t factor that into your plans, you can end up with a bigger helping of real estate than you had in mind.

Introducing Evidence-Based Investing

So, yes, index investing has its advantages … It also has inherent challenges. No wonder academically minded innovators from around the globe soon sought to improve on index investing’s best traits and minimize its weaknesses. In fact, many of these thought leaders were the same early adapters who introduced index fund investing to begin with. Building on index investing, they devised evidence-based investment funds, to offer several more advantages:

Index-independence – Instead of tracking an index that tracks an asset class … why not just directly capture the asset class itself as effectively as possible? Evidence-based fund managers have freed themselves from tracking popular indexes by establishing their own parameters for cost-effectively investing in most of the securities within the asset classes being targeted. This reduces the need to place unnecessary trades at inopportune times simply to track an index. It also allows more patient trading strategies and scales of economy to achieve better pricing.

Improved Concentration – Untethering themselves from popular indexes also enables evidence-based fund managers to more aggressively pursue targeted risk factors; for example, an evidence-based small-cap value fund often has more flexibility to hold smaller and more value-tilted holdings than a comparable index fund. This provides more refined control for building your personal investment portfolio according to your unique risk/return goals.

Focusing on Innovative Evidence – Evidence-based investing shifts the emphasis from tracking an index, to continually improving our understanding of the market factors that contribute to the returns we are seeking. By building portfolios using fund managers who apply this same evidence to their funds, you can make best use of existing academic insights, while efficiently incorporating credible new ones as they emerge.

An Index Overview, Revisited

From describing an index’s basic functions, to exploring some of the intricacies of their construction, we’ve covered a lot of ground in this four-part series on indexing. To recap, indexes can help us explore what is going on in particular slices of our capital markets. In the right context, they also can help you compare your own investment performance against a common benchmark. Last but not least, you can invest in funds that track particular indexes.

Equally important, remember that indexes do not help us forecast what to expect next in the markets, nor do high-water markets such as “Dow 20,000” foretell whether it’s a good or bad time to buy, hold or sell your own market holdings. And, while low-cost, well-managed index funds may still play a role in your overall investment portfolio, it’s worth ensuring that you select them when they are the best fit for your evidence-based investment strategy, not simply because they are a popular choice at the time.

What else can we tell you about indexes or index investing? Let’s take a look at your unique financial goals, and see how indexing fits into your globally diversified world of investments. To learn more, please get in touch with us at OpenCircle Wealth Partners, 203-985-0448.

[Photo curtesy of ekta kapoor]

 

An Index Overview (Part III)

May 11th, 2017 Posted by Financial Education, Investment Strategy, Investment Vehicles 0 thoughts on “An Index Overview (Part III)”

Part III: Index Mechanics – Interesting Idiosyncrasies

Market indexes. You read about them all the time, such as when the Dow Jones Industrial Average (the Dow) topped 20,000 points in early 2017 … and then broke 21,000 just over a month later. In our last piece, we explored what those points actually measure, which isn’t always what you might guess. Today, we’ll take a closer look at the mechanics of indexing, to gain a better understanding of why they do, what they do.

The Birth of Indexing

When you hear the term “stock index,” you’re in good company if the first thing that comes to mind is the S&P 500; some of the world’s largest index funds are named after it. We’ll talk more about index investing in our next piece, but we’ll note here that, despite its familiarity, the S&P 500 is a babe in the woods compared to the world’s first index. That honor goes to the Dow.

The Grand Old Dow

As described in “Capital Ideas” by Peter Bernstein:

“The first Dow Jones Average appeared in the Afternoon News Letter on July 3, 1884. It consisted of the closing prices of eleven companies: nine railroads and two industrials. [Charles] Dow’s idea was to provide an overall measure of the performance of active companies, at a time when an average day’s activity on the New York Stock Exchange was about 250,000 shares.”

Eleven companies, nine of them railroads, wouldn’t make for much of a market proxy these days! And yet the Dow still only tracks 30 stocks, as it has since 1928. Plus, it still uses mostly the same methods for tracking them. As expressed by James Mackintosh, a senior market columnist for The Wall Street Journal (the effective birthplace of the Dow): “It’s time to ditch the Dow. After 120 years, the venerable Dow Jones Industrial Average is an embarrassing anachronism, abandoned by professionals and beloved only by a media that mostly knows no better. It needs to be updated or, better, replaced.”

And yet, despite its flaws, the Dow persists. Markets are made of people, and people can be sentimental about their past. More pragmatically, the Dow serves as a time capsule of sorts, offering historical perspective no other index can match. It’s also just plain familiar. As its parent company the S&P Dow Jones Indices says, “It is understandable to most people.”

 How Do Indexes Get Built?

What about all those other indexes? New ones come along whenever an indexer devises a supposedly better mousetrap for tracking market performance. If enough participants accept the new method, an index is born.

That’s our free markets at work, and it sounds simple enough. But if we take a closer look at the various ways indexers track their slices of the market, what may seem clear at a glance is often seething with complexities just under the surface. Here are some (not all!) of the ways various indexes are sliced and diced.

Which Weighting?

How much weight should an index give to each of its holdings? For example, in the S&P 500, should the returns delivered by Emerson Electric Company hold the same significance as those from Apple Inc.?

  • The Dow is price-weighted, giving each company more or less weight based on its higher or lower share price. As Mackintosh explained, “share prices are arbitrary, as they depend on how many shares are issued; some companies have very high prices, which give them more influence on the Dow, even though they may be less valuable overall.”
  • Market-cap weighting is the most common weighting used by the most familiar indexes around the globe. It factors in outstanding shares as well as current share price to give more weight to the bigger players and less to the smaller fry.
  • Some indexes are equal-weighted, giving each holding, large or small, equal importance in the final tally. For example, there’s an equal-weighted version of the S&P 500, in which each company is weighted at 0.2% of the index total, rebalanced quarterly.

There are many other variations on these themes. The point is, indexes using different weightings can reach significantly different conclusions about the performance of the same market slice.

Widely Inclusive or Highly Representative?

How many individual securities does an index need to track to correctly reflect its target market?

  • As we mentioned above, the Dow uses 30 securities to represent thousands of publicly traded U.S. stocks. A throw-back to simpler times, it’s unlikely you’ll see other popular indexes built on such modest samples. In its defense, the Dow favors stocks that are heavily and frequently traded, so prices are timely and real … at least for the 30 stocks it’s tracking.
  • At the other end of the spectrum, the Wilshire 5000 Total Market Index “contains all U.S.-headquartered equity securities with readily available price data.”
  • The S&P 500 falls somewhere in between, tracking around (not always precisely) 500 publicly traded U.S. securities.

Tracking a Narrow Slice or a Mixed Bag?

What makes up “a market,” anyway? Consider these possibilities:

  • If an index is tracking the U.S. market, should that include real estate companies too?
  • If its make-up tends to include a heavier allocation to, say, value versus growth stocks, how does that influence its relative results … and is it a deliberate or accidental tilt?
  • Is an index broadly covering diverse sectors (such as representative industries or regions) or is its focus intentionally concentrated?
  • If it’s tracking bonds, are they corporate and municipal bonds, or just one or the other?

The Use and Abuse of Indexing

How well do you really know what your index is up to? Remember, in Part I of this series, we described how every index is a model – imperfect by definition. How might each index’s inevitable idiosyncrasies be influencing the accuracy of its outcomes?

We’ve just touched on a few of the questions an indexer must address. Like the proverbial onion, many more layers could be peeled away and, the deeper you go, the finer the nuances become.

One practical conclusion is that some indexes are much easier to translate into investable index funds than others. In addition, some lend themselves better than others to a sound, evidence-based investment strategy. In fact, indexes often may not be the ideal solution for that higher goal to begin with. In our next and final segment, we’ll explore the strengths and weaknesses inherent to index investing.

[photo curtesy of Kiss My Buttercream]

An Index Overview (Part II)

May 9th, 2017 Posted by Financial Education, Investment Strategy, Investment Vehicles, Uncategorized 0 thoughts on “An Index Overview (Part II)”

Part II: A Few Points About Index Points

As we covered in our last piece, indexes have their uses. They can roughly gauge the mood of a market and its participants. If you’ve got an investment strategy that’s designed to capture that market, you can see how your strategy is doing in comparison … again, roughly. You can also invest in an index fund that tracks an index that tracks that market.

This may help explain why everyone seems to be forever watching, analyzing and talking about the most popular indexes and their every move. But you may still have questions about what they are and how they really work. For example, when the Dow Jones Industrial Average (the Dow) exceeded 20,000 points last January, what were those points even measuring?

An index’s total points represent a relative value for the market it is tracking, calculated by continually assessing that market’s “average” performance.

If that’s a little too technical for your tastes, think of it this way: Checking an index at any given time is like dipping your toe in the water to see how the ocean is doing. You may have good reasons to do that toe-check, but as with any approximation, be careful to not misinterpret what you’re measuring. Otherwise, you may succumb to misperceptions like: “The Dow is so high, it must be in for a fall. I’d better get out.”

With that in mind, when it comes to index points, we’d like to make a few points of our own.

Indexes Are Often Arbitrary

It helps to recognize how popular indexes become popular to begin with. In our free markets, competitive forces are free to introduce new and different structures, to see how they fly. In the same way that the markets “decided” that the iPhone would prevail over the Blackberry, popular appeal is effectively how the world accepts or rejects one index over another. Sometimes the best index wins and becomes an accepted reference. Sometimes not.

Measurements Vary

Different indexes can be structured very differently. That’s why the Dow recently topped 20,000, while the S&P 500 is hovering in the 2,000s, even though both are often used to gauge the same U.S. stock market. The Dow arrives at its overall average by adding up the price-weighted prices of the 30 securities it’s tracking and dividing the total by a proprietary “Dow divisor.” The S&P 500 also takes the sum of the approximately 500 securities it’s tracking … but weighted by market cap and divided by its own proprietary divisor.

With mysterious divisors, terms like “price-weighted” and “market cap,” and additional details we won’t go into here, this probably still doesn’t tell you exactly what index points are.

Think of index points as being like thermometer degrees. Most of us can’t explain exactly how a degree is calculated, but we know hot from cold. We also know that Fahrenheit and Celsius both tell us what the temperature is, in different ways.

Same thing with indexes. You can’t directly compare an S&P 500 point to a Dow point; it doesn’t compute. Moreover, neither index adjusts for inflation. So, while index values offer a relative sense of how “hot” or “cold” a market is feeling at the moment, they can’t necessarily tell you whether a market is too hot or too cold, or help you precisely predict when it’s time to buy or sell into or out of them. The “compared to what?” factor is missing from the equation. This brings us to our third point …

Models Are Approximate

There’s an important difference between hard sciences like thermodynamics and market measures like indexes. On a thermometer, a degree is a degree. With market indexes, those points are based on an approximation of actual market performance – in other words, on a model.

A model is a fake copy of reality, with some copies rendered considerably better than others. Here’s what Nobel Laureate Eugene Fama has said about them: “No model is ever strictly true. The real criterion should be: Do I know more about markets when I’m finished than I did when I started?”

Your Take-Home

According to Professor Fama’s description of a model, indexes have long served as handy proxies to help us explore what is going on in particular slices of our capital markets. But, they also can do damage to your investment experience if you misinterpret what they mean.

For now, remember this: An index’s popular appeal is the result of often-arbitrary group consensus that can reflect both rational reasoning and random behavioral bias. Structures vary, and accuracy is (at best) approximate. Even the most familiar indexes can contain some surprising structural secrets. In our next post, we’ll unlock some of them for you. Ask us a question at (203) 985-0448.

 

[photo curtesy of ACSM_1954]

 

An Index Overview

May 8th, 2017 Posted by Financial Education, Investment Strategy, Investment Vehicles 0 thoughts on “An Index Overview”

Part I: Indexes, Defined

Since nearly every media outlet on the planet reported the news, you probably already know that the Dow Jones Industrial Average Index topped 20,000 for the first time on January 25, 2017. But when a popular index like the Dow is on a tear, up or down, what does it really mean to you and your investments?

Great question. In this multi-part series, we’re going to cover some of the ins and outs of indexes and the index funds that track them.

What Is an Index?

Let’s set the stage with some definitions.

An index tracks the returns generated by a basket of securities that an indexer has put together to represent (“proxy”) a particular swath of the market.

Some of the familiar names among today’s index providers include the S&P Dow Jones, MSCI, FTSE Russell and Wilshire. It’s perhaps interesting to note that some of the current index providers started out as separate entities – such as the S&P and the Dow, and FTSE and Russell – only to consolidate over time. In any case, here are some of the world’s most familiar indexes (with “familiar” defined by where you’re at):

  • S&P 500, Nasdaq Composite, and Dow (U.S.)
  • S&P/TSX Composite Index (Canada)
  • FTSE 100 (U.K.)
  • MSCI EAFE (Europe, Australasia and the Far East)
  • Nikkei and TOPIX (Japan/Tokyo)
  • CSI 300 (China)
  • HSI (Hong Kong)
  • KOSPI (Korea)
  • ASX 200 (Australia)

…and so on

Why Do We Have Indexes?

Early on, indexes were designed to offer a rough idea of how a market segment and its underlying economy were faring. They also helped investors compare their own investment performance to that market. So, for example, if you had invested in a handful of U.S. stocks, how did your particular picks perform compared to an index meant to track the average returns of U.S. stocks? Had you “beat the market”?

Then, in 1976, Vanguard founder John Bogle launched the first publicly available mutual fund specifically designed to simply copy-cat an index. The thought was, instead of spending time, money and energy trying to outperform a market’s average, why not just earn the returns that market has to offer (reduced by relatively modest fund expenses)? The now familiar Vanguard 500 Index Fund was born … along with index fund investing in general.

There are some practical challenges that prevent an index from perfectly replicating the market it’s meant to represent. We’ll discuss these in future segments. But for now, the point is that indexes have served investors across the decades for two primary purposes:

  1. Benchmarking: A well-built index should provide an approximate benchmark against which to compare your own investment performance … if you ensure it’s a relatively fair, apples-to-apples comparison, and if you remain aware of some of the ways the comparison still may not be perfectly appropriate.
  2. Investing: Index funds that replicate indexes allow you to indirectly invest in the same holdings that an index contains, with the intent of earning what the index earns, net of fees.

Indexes Are NOT Predictive

There is also at least one way indexes should NOT be used, even though they often are:

Index milestones (such as “Dow 20,000”) do NOT foretell whether it’s a good or bad time to buy, hold or sell your own investments.

Indexes don’t tell us whether the markets they are tracking or the components they are using to do so are over- or underpriced, or otherwise ripe for buying or selling. Attempting to use current index values as a way to time your entry into or exit from a market does not, and should not replace understanding how to best reflect your unique investment goals and risk tolerances in an evidence-based investment strategy.

In fact, market-timing of any sort is expected to detract from your ability to build wealth as a long-term investor, which calls for two key disciplines:

  1. Building a cost-effective, globally diversified portfolio that exposes you to the expected returns you’d like to receive while minimizing the risks involved
  2. Sticking with that portfolio over the long run, regardless of arbitrary milestones that an index or other market measures may achieve along the way

As one commentator observed the day after the Dow first broke 20,000: “Sensationalism of events like these [Dow 20,000] has the ability to trigger our animal spirits or our worst fears if we don’t have a long-term investment plan to keep them in check.”

So first and foremost, have you got those personalized plans in place? Have you constructed a sensible investment portfolio you can adhere to over time to reflect your plans? If not, you may want to make that a top priority. Next, we’ll explore some of the mechanics that go into indexing, to help put them into the context of your greater investment management. Ask us a question at (203) 985-0448.

[photo curtesy of journeyman62 at flickr.com]

Fiduciary Now. Fiduciary Always.

February 23rd, 2017 Posted by Financial Education, Life Planning 0 thoughts on “Fiduciary Now. Fiduciary Always.”

You may have noticed the word fiduciary bouncing around the news lately. The Department of Labor (DOL) announced in April 2016 that financial advisors who provide retirement investment advice would be held to a new fiduciary rule — that is, they would be required to put investors’ interests ahead of their own. What followed was applause in some corners, angst in others, and spirited dialogue and debate all around the room. Now, the fiduciary rule hangs in midair as the new administration has asked the DOL to review the wide-ranging implications if the rule is implemented.

What does all of this mean for our clients? Absolutely nothing.

We have already committed ourselves to the highest fiduciary standard — voluntarily, happily, and with a tremendous amount of pride. We avoid conflicts of interest, and provide guidance and services that are always the best for you.

No matter how things play out with the fiduciary rule, we are committed to doing what’s right for you. We don’t need a rule to guide us. We already do the right thing. We always have, and we always will.

The concept of working with a fiduciary has been awakened. There is now a broader awareness of what it means and how it helps investors. If you know someone who is currently not being served by a fiduciary advisor — someone we can help — please let us know. We are devoted to helping investors reach their highest aspirations by serving as their advocates.

We’ll close by sharing a comment from Tim Maurer, our director of personal finance through the BAM ALLIANCE. He says, “Fiduciary — to me, to us — is really about a state of heart, a state of mind. It’s the way we operate. It’s who we are. It’s the only way we know how to do things.

If you would like to discuss this topic, or any other financial planning matter, please give us a call at 203-985-0448. We look forward to hearing from you.

[Photo credit: Stuart Anthony on Flickr.com]

 

 

Financial Planning Glossary

February 14th, 2017 Posted by Financial Education 0 thoughts on “Financial Planning Glossary”

401(k) – A 401(k) Plan, according to the IRS, is a defined contribution plan where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan. According to other sources, a 401(k) plan is a qualified employer-established plan to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pretax basis. Plan sponsors are typically the fiduciary (see below), but can work with OpenCircle to transfer their liability as well as ensure that excessive fees are not leaching employees’ retirement funds.

Asset Management – Asset management is a systematic process of positioning, operating, maintaining, upgrading, and disposing of cash, securities, property and other valuables cost-effectively. The term is most commonly used in the financial world to describe people and companies that manage investments on behalf of others.

Balance Sheet – A balance sheet is an entity’s statement of assets, liabilities, and equity at a given point in time.

Bear Market – A bear market is a condition in which securities prices fall and widespread pessimism causes the stock market’s downward spiral to be self-sustaining. Investors anticipate losses and selling increases.

Bonds – Also known as fixed-income securities, bonds are debt instruments created for the purpose of raising capital. They are essentially loan agreements between the bond issuer and an investor, in which the issuer is obligated to pay a specified amount of money at specified future dates. There are four major bond types in the US markets: Corporate, Treasury (US government), Agency (US Government-Sponsored Enterprises or GSE), and Municipal (state, city or local government).

Broker – A broker is a person or company that is in the business of buying and selling securities (stocks, bonds, mutual funds, and certain other investment products) on behalf of its customers. A broker charges a fee or commission for executing buy and sell orders submitted by an investor.

Bull Market – The opposite of a bear market, a bull market is a condition in which share prices are rising. The resulting investor optimism leads to increased buying of securities.

Certified Financial Planner (CFP)® – Individuals who have been authorized to use the CFP® mark in the US have met rigorous professional standards and have agreed to adhere to the principles of integrity, objectivity, competence, fairness, confidentiality, professionalism and diligence when dealing with clients. Alex Madlener, founding principal of OpenCircle, is a CFP®.

Commission – A commission is a form of payment to an agent or broker for services rendered or products sold.

Diversification – Diversification is a strategy designed to reduce exposure to risk (see below) by combining a wide variety of investments within a portfolio.

Dividend – A dividend is a payment made by a company to its shareholders, usually as a distribution of profits.

Dow or DJIA – The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ (see below). The DJIA was invented by Charles Dow back in 1896.

Estate Planning – Estate planning is the process of anticipating and arranging, during a person’s life, for the management and disposal of that person’s estate during the person’s life and at and after death, while minimizing gift, estate, generation-skipping transfer, and income taxes.

Fee-based or Fee-only Financial Planners – Fee-only financial planners are registered investment advisors with a fiduciary responsibility to act in their clients’ best interest. They do not accept any fees or compensation based on product sales. Fee-only advisors have fewer inherent conflicts of interest, and they generally provide more comprehensive advice.

Fiduciary – A fiduciary, such as OpenCircle, is an entity who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other asset for another person.

Financial Advisor or Planner – A financial advisor (or adviser) is a qualified professional who renders financial services to individual and corporate clients to help them meet their goals. According to the FINRA (see below), terms such as financial advisor and financial planner are general terms or job titles used by investment professionals who also specialize in tax planning, asset allocation, risk management, retirement planning and estate planning.

Financial Planning – Financial planning is an ongoing process to help you make sensible decisions about money in order to better achieve your goals in life. See Financial Advisor/Planner above.

FINRA – FINRA, the Financial Industry Regulatory Authority, is dedicated to investor protection and market integrity through effective and efficient regulation of the securities industry. FINRA is not part of the government. It is an independent, not-for-profit organization authorized by the US Congress to protect America’s investors by making sure the securities industry operates fairly and honestly.

Hidden Fees – The process of investing may have hidden fees, or fees that are not always clear or fully evident. Fees that are not visible to investors, especially in mutual funds, may include managerial fees, compliance fees and marketing expenses. OpenCircle’s fees are not hidden; they are transparent (fully disclosed).

Investing – Investing is the act of committing money or capital to an endeavor (a business, project, real estate, etc.) with the expectation of obtaining an additional income or profit.

IRA (Individual Retirement Account) – An IRA is an account set up at a financial institution that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis.

Life Planning – Life planning is OpenCircle’s first step in comprehensive financial planning, based on the premise that advisors should first discover a client’s most essential goals in life before formulating a financial plan, so that a client’s finances fully support those goals.

Liquidity – Liquidity is a measure of the extent to which a person or organization has easily accessible cash (or assets that can be quickly converted to cash) to meet immediate and short-term obligations.

Market Price – Market price is the unique price at which buyers and sellers agree to trade in an open market at a particular time.

Margin –  Margin is a type of financial collateral used to cover credit risk. In investing, buying on margin refers to the practice of buying an asset and paying only a percentage of the asset’s value, while borrowing the rest from the bank or broker. The lender or broker uses the funds in the buyer’s securities account as collateral on the resulting loan’s balance.

Margin Call – A margin call is a demand by a lender or broker that an investor deposit further cash or securities to cover possible losses. (See Margin above.)

Money Market Fund – A money market fund is a type of fixed income mutual fund (see below) that invests in debt securities (such as US Treasury bills) characterized by their short maturities and minimal credit risk.

Mutual Fund – A mutual fund is a professionally managed investment vehicle that pools funds from many investors and trades in diversified holdings.

NASDAQ – The NASDAQ Stock Market, commonly known as the NASDAQ, is an American stock exchange. It is the second-largest exchange in the world by market capitalization, behind only the New York Stock Exchange.

NYSE (New York Stock Exchange) – The NYSE is an American stock exchange located on Wall Street in New York City. It is the world’s largest stock exchange by market capitalization.

Retirement Planning – Retirement planning is financial planning (see above) that is specifically conducted in anticipation of an individual’s retirement needs.

Risk – Risk is the potential of gaining or losing something of value. All financial investments carry some degree of risk, depending on type (stocks, bonds, mutual funds, etc.).

Short Selling – Short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is motivated by the belief that a security’s price will decline, enabling it to be bought back at a lower price to make a profit.

Stock – Stock is a share in the ownership (equity) of a company. Stock represents a claim on the company’s assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater.

Trusts – A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries.