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This page has general interest financial information with links to useful sites for more details. Note that links are opened in a secondary window. If you click a link and nothing happens it may be that the secondary window is covered by this one. Economic Information
EducationThere are lots of ways to deal with the cost of a college education. One important advantage of saving and investing is that it puts your money to work on the problem. AOL's finance and money section has a page of links and a calculator to help you figure it out. Or try T. Rowe Price for a comprehensive treatment of the subject. Finally there's savingforcollege.com where he'll try to sell you a book but still has lots of information on the many "529" plans. Estate PlanningEstate Plan"If you'd like to ensure your assets are distributed as you'd like them to be when you die, estate planning is the answer. Successful estate planning transfers your assets to your ... " (more) Trust"In common law legal systems, a trust is an arrangement whereby money or property is owned and managed by one person (or persons, or organizations) for the benefit of another. A trust is created ... " (more) Living TrustA well-crafted living trust can be useful in some circumstances but scams are common. The FTC helps sort it out. Financial Planning"You may have come across the term "financial planning" recently and wondered what it means. You may have decided to start your own financial plan but you're not sure how. Or you may feel it's time you went to a financial planner for some professional advice. Whatever your situation ..." (more) InvestingInvestment Basics"Knowing how to secure your financial well-being is one of the most important things you’ll ever need to know in life. You don’t have to be a genius to do it. You just need to know how to get started. No matter how much or little money you have, the important thing ... " (more) Mutual FundsHere's an Introduction to Mutual Funds from the Securities and Exchange Commission. Once you get the hand-wringing, caveat emptor stuff out of the way you might want to try the optimism of the Mutual Fund Education Alliance. Investment RiskMarket fluctuations that give one person a fitful night's sleep make another wake up energized and eager. And while a return 10% above the market could make an investor skip and sing tra-la, that same investor might have a fit of street rage at a portfolio that underperformed the major indexes by half that amount. Risk is more complicated than standard deviations and guaranteed principal, and part of what makes it so is what each of us brings to it. Whether risk terrifies you or excites you, however, you should expect to be compensated for it. In other words, what makes the market work is the notion that risk and return ought to be directly related. Of course, "nothing ventured, nothing gained" doesn't necessarily mean "something ventured, something gained," but there are ways to reduce uncompensated risk in a portfolio. What is risk, and how do we know when we have enough? Intuitively, financial risk is the chance of losing money. Although this is often construed as loss of principal, it would be better to think of it as reduced financial well-being. If the world at large gets a substantially higher return than you, your material standard of living will suffer, even though you lost no principal. Here's a list of risk categories that covers most of the ways financial well-being can deteriorate:
In the financial community, the widely accepted measure of risk is the standard deviation of total annual returns. It is a measure of how the returns have varied over time to produce the average return - how good the good years have been and, more important to the question of risk, how bad the down years have been. It also measures the frequency of good and bad years. Over time, what it means is that two-thirds of historical returns have been within one standard deviation (plus or minus) of the average return. What it implies is a level of predictability about future returns and volatility, that is, the likelihood of future good and bad years and how good or bad they will be. If, for example, an investment has an average total annual return of 10% and a standard deviation of 11% then it returned between -1% and 21% four years out of six. Further, one year in six had a return less than -1%, just as one year in six had a return in excess of 21%. Finally, remember that all the ups and downs together produced an average return of 10% over the measurement period, the same as an investment with an average return of 10% and a standard deviation of 0%. Is this a reliable predictor? Well, yes, as predictors go, but don't bank on it. Both the average and the standard deviation will change over time. In the long run it will be true but we won't know the truth of it until it is past and we can calculate it. And, as Keynes said, in the long run we're all dead. So what's a body to do? Since we can't choose to wait forever, we have to find a way to mitigate the risks, to balance a portfolio with a mix of investments that will tend to offset each other; we have to diversify. Asset Allocation and DiversificationA diversified portfolio is one invested in assets of various risks and returns, and with various correlations between their returns as well. The aim of diversification is to reduce risk. We have to keep in mind, however, that just as a rising tide lifts all boats so a falling tide lowers them. In other words, a severe bear market will probably lower the returns of all the equities in your portfolio even though the statistical correlations might suggest otherwise. Asset allocation is spreading your assets across asset classes. The purpose of a particular asset allocation plan is either to maximize return for a given level of risk, or to minimize risk for a given return. Of course, this is not perfectly predictable. What was optimum over the past five years may prove to be disastrous for the next five. What we want to do is settle on a reasonable plan for the long term and rebalance periodically to account for different returns in the various classes. More About RiskModern Portfolio Theory covers all these topics and more in a systematic way that many find useful. Moneychimp.com has lots of interesting articles including a summary treatment of MPT written for the rest of us. The American Association of Individual Investors (AAII) offers a different slant on MPT. If you're comfortable with the notion of standard deviation as a measure of risk then you may want to look at the normalized risk measurements at riskgrades.com. Presenting risk as a single normalized value weighted for recent history has shortcomings as well as advantages, yet the site offers insight and tools for calculating the risk in your portfolio. RetirementSavings Fitness"Most of us know it is smart to save money for those big-ticket items we really want to buy - a new television or car or home. Yet you may not realize that probably the most expensive thing you will ever buy in your lifetime is your ..." (more) Defined Benefit PensionsYou have a retirement pension plan funded by your employer. What does that mean? Defined Contribution Plans - 401(k)Your employer provides a plan for you to fund your own retirement. How does it work? Annuities"An annuity is a contract between you and an insurance company, under which you make a lump-sum payment or series of payments. In return ..." (more) Variable Annuities"Variable annuities have become a part of the retirement and investment plans of many Americans. Before you buy a variable annuity, you should know some of the basics – and be prepared to ask your insurance agent, broker, financial planner, or other financial professional lots of questions about ..." (more) ReferencesThe sites listed here have useful information although you may have to poke around to find it in some cases. There's a lot of information at the Federal Citizen Information Center maintained by the GSA. Outside groups often provide the content for the site, so some of the treatments are not as unbiased as we might like. The Securities and Exchange Commission has good information for investors along with the expected corporate stuff. Copyright © 2003-2008 Victoria M. Lechner. All rights reserved. |
