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- Benjamin Franklin
INVESTING & RETIREMENT: 101
Retiring without a pension? Make sure you're well-equipped for a financially secure retirement by getting smart about money management. Educate yourself on effective financial, investment and tax strategies for long-term success.

The Power of Investing

Investment Types

Asset classes are specific types of investments that share similar traits and respond to market conditions in similar ways. Each asset class varies in terms of risk, tax implications, ownership, liquidity, returns, regulations, and market volatility.

Types of Asset Classes

Equities (Stocks)
Equity represents the ownership shares issued by a company in exchange for paid-up capital, and belongs to shareholders who have the opportunity to benefit from the company's success.
Fixed Income (Bonds)
Fixed income investments provide investors with regular payments at a fixed interest rate until a scheduled maturity date. Upon maturity, investors receive their principal investment back.
Cash Equivalents
Investments that can quickly be converted into cash are referred to as cash equivalents. These must be short-term investments with a maximum duration of three months or less.
Derivatives (Options)
Derivatives are financial contracts that derive their value from an underlying asset, group of assets, or benchmark. Their prices fluctuate based on the specific underlying asset.
Annuities
Often overlooked as an asset class, annuities can also be considered fixed income due to the security of their income, which is usually in the form of payments that last the owner's lifetime.
Commodities (Futures)
Investments in essential goods for both consumption and production are made using futures contracts, where investors commit to buy or sell a commodity on a set date at a predetermined price.
Alternatives (Alts)
Investments other than traditional assets, with the most popular alts being private equity, hedge funds and venture capital. Due to higher risk and lack of liquidity, alts are sold only to accredited investors.
Precious Metals
The oldest asset class, precious metals like gold and silver have a long history due to their rarity, high value and use as currency. Nowadays they've become critical for use in modern technologies.
Collectibles
Collectibles are items that appreciate in value over time, fetching a higher price than their original worth. They vary from rare works of art to mass-produced items, like trading cards or stamps.

Types of Stocks

When it comes to discussing stocks, common stock is the most prevalent type. Although companies may issue different classes of stock, owning common stock gives you the right to vote on important corporate matters during annual meetings. Generally, one share is equal to one vote, and while there is a possibility of owning non-voting common stock, the vast majority of stock issued by companies is common stock. Preferred stockholders have the benefit of receiving dividends that are guaranteed to be paid by the issuing company, however preferred shareholders do not have voting rights. Many businesses opt for multiple classes of stock. These classes are differentiated by letters, like class A and class B. Prominent investors wield significant influence in company operations through separate classes often issued by companies.
Common Stock
Investors who hold common stock have the potential to see gains from price appreciation, with some stocks also offering regular dividend payments. However, it's important to note that dividends are not guaranteed when it comes to common shares, and if the company goes bankrupt shareholders of common stock are last in line to be repaid.
Preferred Stock
Preferred stocks pay guaranteed dividends with a chance for price appreciation. Additionally, preferred stockholders are more likely to receive compensation in the event that the company becomes insolvent. While the issuing company can choose to buy back preferred stock, shareholders typically have the option to convert their preferred shares to common stock.
Stock Classes
Companies often issue separate classes to give prominent investors greater influence over company operations. In practice, founders and executives would receive class A shares, while the public could obtain class B shares. Class A shares may hold 10 times the voting power of class B shares, providing insiders with significant sway over the company's affairs.

Types of Bonds

The bond market facilitates the issuance and trading of debt securities, which can include bonds, notes, and bills for both public and private companies, agencies or government. Investors can engage in new debt issuance in the primary market or the buying and selling of existing bonds in the secondary market.
4 Largest Bond Types by Market Share
Treasuries
Treasuries are government bonds issued by the United States Treasury Department that offer twice yearly interest payments and the highest credit rating of all debt securities, making them low risk and attractive to investors. They are also easily convertible into cash, making them a liquid investment option. Note that while these investments come with very low risks, inflation and interest rate changes can still affect them. The yields paid on Treasuries are also not historically high because of their low risk.
Corporate Bonds
Corporate bonds are a popular way for companies to raise funds for their capital expenditures, operations, and acquisitions. Corporate bonds provide investors with interest payments from the issuing company in exchange for their investment, but do not provide ownership rights to the company. Investors can select from a variety of bonds that suit their preferences, including structure, coupon, maturity, and credit quality. Corporate bonds typically range in maturity from 1 to 30 years.
Mortgage-Backed Securities
Mortgage-backed securities (MBS) are bonds secured by home and other real estate loans. They’re created when a number of these loans with similar characteristics are pooled together and then sold to a federal government agency like Ginnie Mae, a government-sponsored enterprise (GSE) like Fannie Mae or Freddie Mac, or to a securities firm to be used as the collateral for the new MBS. MBSs may not be suitable for many individual investors due to their general complexity and the difficulty of assessing the creditworthiness of an issuer.
Municipal Bonds
Municipal bonds are a form of debt security issued by local, county, and state governments to finance capital expenditures such as the construction of highways, bridges, or schools. When investing in municipal bonds, one becomes a creditor and receives interest on their capital with the principal balance being repaid by the maturity date.
The attraction of municipal bonds lies in their tax-exempt status, which makes them an ideal investment choice for individuals in higher income tax brackets. However muni bonds pay lower interest rates as a result, compared to taxable bonds.

Investments: Did you know?

MARKET CAPS
Market Capitalization: Market capitalization measures a company's value on the open market, taking into account investors' perception of future potential. By reflecting what investors are willing to pay for its stock, market cap helps investors compare the size of one company versus another.
Type
Market Valuation
Examples
MEGA CAP
$200 billion and over
Apple, Alphabet (Google) Amazon
LARGE CAP
$10 billion - $200 billion
Nike, Verizon, Walt Disney
MID CAP
$2 billion - $10 billion
Roku, Zillow, DocuSign
SMALL CAP
$250 million - $2 billion
Buckle, Spirit Airlines
MICRO CAP
$50 million - $250 million
Big Lots, J. Jill, Lands' End
NANO CAP
under $50 million
Blue Apron, Party City
To construct a well-balanced investment portfolio, it is imperative to assess your financial objectives, risk tolerance, and investment horizon. Incorporating a diversified mix of market capitalizations can lower the potential for risk in any single area and assist in achieving long-term financial goals.
Company specific market cap valuations are as of Q3, 2024.

Types of Investment Funds

Investing in a fund involves a group of investors combining their money, which is then used by an asset manager to purchase assets like stocks or bonds. These assets make up the fund's portfolio, giving you access to an array of investments in one easy instrument, as well as... Professional Management Fund managers give you access to expert risk analysis, valuable insights and skillful selection to help maximize potential returns and minimize risk. Opportunities Actively managed funds utilize flexibility to adapt to changing market conditions, where short-term volatility can lead to pinpointing long-term opportunities. Diversification Recent years have shown how critical the use of diversification can be to lower the risk against sharp declines of individual stocks, bonds and sectors. Liquidity A fund's size can increase liquidity, giving investors more control over their returns with less potential to be forced into selling assets at a discount. Economies of Scale A fund can create cost savings and access to high volume discounts that DIY investors may not be able to achieve when rebalancing and trading.
Mutual Funds (MF)
Mutual funds are one of the oldest type of investment funds and are often the sole investment type inside of 401(k)s. They are essentially baskets of securities with built-in diversification, where the spreading of investments across multiple companies helps to reduce the impact of one company performing poorly. Mutual fund shares are issued and redeemed on demand at the end of the trading day based on their Net Asset Value.
Exchange Traded Funds (ETF)
Unlike mutual funds, ETFs provide real-time trading opportunities throughout the day, providing greater transparency for investors. Offering a variety of investment possibilities, such as stocks, commodities, and bonds, ETFs boast low expense ratios and reduced broker commissions as compared to MFs. ETFs are typically more tax efficient than mutual funds, generating fewer capital gain distributions overall.
Closed-End Funds (CEF)
Similar to ETFs, closed-end funds are created through an IPO, raising a fixed amount of money by issuing a set number of shares. While open-ended funds are priced once a day at the end of business, closed-end funds have an Net Asset Value, but their trading price can fluctuate throughout the day on the stock exchange. This means that the trading price may be higher or lower than the NAV, depending on supply and demand.
UnderstandING the markets

11 Market Sectors

S&P's breakdown of companies based on their primary business activities.
Utilities
Utility companies that provide households, businesses, farms, and other entities with gas, electricity, water and other essentials.
Consumer Staples
Consumer staples stocks cover consumer spending on essential "needed" items like groceries, household and personal hygiene products.
Consumer Discretionary
Consumers tend to splurge on products and services provided by these companies during a strong economy.
Energy
Companies involved in production or distribution of fuels, including both traditional oil and gas as well as renewable energy sources.
Health Care
This sector involves pharmaceutical companies, medical equipment, supply manufacturers & distributors, as well as medical research.
Real Estate
Real Estate Investment Trusts, realtors, developers, property managers, as well as other companies associated with property ownership.
Financials
Banks, mortgage companies, wealth management firms, credit unions, and credit card companies all fall within this sector.
Information Technology
Software, hardware and semiconductor companies, as well as internet and related service providers.
Industrials
Includes companies that manufacture capital goods and machinery for processing and assembling various goods across numerous industries.
Materials
Businesses tied to the collection, processing, or distribution of raw materials, such as lumber, steel and various building materials.
Communication Services
This encompasses landline, cellular, and internet services. It also applies to companies involved in movie and television production.

Investment Risk Management

While it’s a good idea to take some risks in order to grow your savings, it’s also imperative that you have a system in place to limit that risk and protect your money on the downside.

Types of Investment Risk

Market Risk
Market risk, commonly referred to as systematic risk, is the potential of investment losses due to various factors that impact the overall performance of financial markets, such as fluctuations in interest rates, geopolitical circumstances, or economic downturns.
Business Risk
Business risk, or unsystematic risk, refers to the risks a specific company or industry may face, which can impact its ability to operate efficiently and succeed financially. These risks can stem from internal sources, like poor management, or external, like rising raw material costs.
Concentration Risk
Concentration risk is the potential for significant losses due to an oversized portion of your portfolio in a single investment, asset class, or market segment. For instance, an employee may want to invest heavily in their employer's stock for their retirement savings.
Inflation Risk
Inflation reduces the purchasing power of money, where the same amount of money can buy fewer goods and services over time. If your investments can't keep up with inflation your purchasing power decreases, which is trouble for those on a fixed income.
Liquidity Risk
Liquidity risk refers to the potential difficulty in the cashing out of an investment when necessary, and at a fair price. To sell the investment you may need to accept a lower price, or in some cases it may not be possible to sell the investment at all.
Credit Risk
Credit risk, also known as default risk, is the risk of a financial loss resulting from a borrower's failure to repay a loan, and the risk of default that may arise from that borrower failing to make that required payment. The company's credit rating may fall as well.
Interest Rate Risk
Interest rate risk refers to fixed-rate investments, like bonds, losing value due to interest rate changes. When interest rates increase, bond prices decrease, and vice versa. The decrease is to balance out the higher rates of new bonds.
Reinvestment Risk
Reinvestment risk is the potential risk where an investor becomes unable to reinvest cash flows, such as interest or coupon payments, at a rate that is equivalent to their current rate. This can happen in both the bond and stock markets.
Legislative Risk
Legislative risk refers to the risk of regulations or legislation imposed by the government that have the power to fundamentally change the business prospects of one or more companies, which may lead to losses in company valuations.

4 Core Approaches to Risk Management

RISK AVOIDANCE
"Completely avoiding activities having potential risk."
While attractive, this is not always practical. By avoiding risk we forfeit potential gains (Opportunity Cost), be it in life, in business or with investments. Simply holding cash leaves one vulnerable to Inflation/Purchasing Power Risk and Longevity Risk, where you can outlive your savings. (Longevity is a “Risk Magnifier” of all other risks retirees face)
RISK RETENTION
“The act of accepting risk and the negative effects (loss) thereafter, if and when it occurs.”
In this process no action is taken to avoid, transfer or reduce risk. Unfortunately, most investors fall into this category by simply not understanding the risk/reward nature of investing in financial markets, and take on 100% of the risk of losing money on their investments.
RISK REDUCTION
“The process of diminishing risk through the implementation of loss prevention methods or implementing safety features or improvements.”
If you’ve ever worn a seatbelt or installed a smoke detector, you’ve already practiced Risk Reduction. With investing, diversification is the most popular method of reducing risk and helps protect against Non-Systematic Risk, which is the risk associated with an individual company or industry. However, diversification does not easily protect against Systematic Risk, which is the risk associated with the overall market. Even though diversification wasn’t much help to investors during the Economic Crisis of 2008 and COVID in 2020, diversification still plays a vital role for reducing the risks involved with investing in financial markets.
RISK TRANSFER
“A control strategy that involves the contractual shifting of a pure risk from one party to another.”
For however long you’ve owned a car or a home, that’s how long you’ve been involved with Risk Transfer. Car insurance and homeowners insurance are the most widely used risk management strategies worldwide. Insurance does not stop the risk from occurring (car accident or house fire), it simply transfers the financial burden of those risks to another party…typically an insurance company. The same strategy has been used for decades with various assets and investments, where the average investor can take certain risks off the table and into the hands of an insurance company. Insurance companies offer a variety of financial solutions, which could benefit retirees without pensions.

Investments: Did you know?

RISK TOLERANCE
RISK TOLERANCE: As an investor, your risk tolerance refers to the level of market volatility and financial loss you are willing to accept.
The following table shows how much of a gain is required to make back a given loss:*
Loss Incurred
Gain Required to Break Even
-10%
+11.11%
-15%
+17.64%
-20%
+25%
-25%
+33.33%
-30%
+42.85%
-40%
+66.66%
-50%
+100%
-60%
+150%
-70%
+233.33%
-80%
+400%
-90%
+900%
As you can see, recovering from a loss is no small feat. When choosing your investments, always factor in the potential risks and know your risk tolerance first before you invest.
UnderstandING the markets

Corrections, Crashes & Bear Markets

CORRECTIONS
A market correction is when securities markets fall 10 percent from their 52-week highs. Wise investors welcome it. A pullback allows the market to consolidate before going toward higher highs. Each of the bull markets in the last 50 years has had a correction. It's a natural part of the market cycle. Corrections can occur in any asset class and are inevitable. When the stock market is going up investors want to get in on the potential profits, which leads to irrational exuberance. That makes stock prices go well above their underlying value. A correction happens when prices return to a sensible level.
CRASHES
A stock market crash ensues when the 10 percent price drop occurs in just one day. Crashes generally occur at the end of an extended bull market. Frightened sellers normally cause a crash. An unexpected economic event, catastrophe or crisis triggers the panic. For example, the market crash of 2008 began on Sept. 29, 2008. The Dow fell 777.68 points. It was the largest point drop in the history of the New York Stock Exchange at that time. Investors panicked when Congress failed to approve the bank bailout bill and were afraid more financial institutions would go bankrupt.
BEAR MARKETS
Crashes can lead to a bear market. That's when the markets fall another 10 percent for a total decline of 20 percent or more from their 52-week highs. A bear market occurs when the major indices continue to go lower over time. They will hit new lows and their highs will be lower than before as well. Bear markets occurred 35 times between 1900 and 2023, with an average duration of 289 days, and they typically happen once every three years*. Bear markets often happen during economic downturns, like a recession. Bear markets challenge investors, but they don't last forever.

Investment Taxation

Investing is not just about what you earn...it's about what you KEEP.*

Capital Gains Tax

When you sell stocks, bonds, or any other capital assets such as real estate, a capital gain or loss takes place. Put simply, it's the difference between the amount you receive from the sale (cash or property value) and your adjusted cost basis in the asset. If you sell an asset for more than its adjusted cost basis, you'll have a capital gain. To accurately calculate this, you'll need to know your adjusted cost basis, the sale amount, your holding period and the type of asset involved. When you sell a capital asset for more than what you initially paid, the amount of tax you pay on that capital gain depends on how long you held the investment or property. This gain can be classified as either short-term or long-term.
Short-Term Capital Gain
Short-term capital gains, acquired from assets held for a year or less, are subject to the same tax rate as your ordinary income. This can range anywhere from 10% to 37%, depending on your annual income.
Long-Term Capital Gain
Long-term capital gains on an asset that was held for longer than one year are taxed at a more favorable rate compared to short-term gains, which is 15% for most Americans, but capped at 20% for high income earners.
Capital Loss
When an asset is sold for less than its purchase price, it results in a capital loss. Short-term losses offset short-term gains, while long-term losses offset long-term gains. Any remaining net losses can be deducted against the other type of gain.

Taxation: Did you know?

QUALIFIED vs. NON-QUALIFIED
Qualified Accounts
Qualified accounts are retirement accounts, such as IRAs, 401(k)s, etc., that offer special tax advantages. Contributions made to these retirement accounts can be deducted from your taxable income in the year they are made, however contributions can be capped at certain levels depending on the type of retirement account. Any gains and dividends from the investments inside of qualified accounts can be deferred as taxable income until they are withdrawn, better known as tax-deferral. This tax deferral option allows the account owner to delay paying taxes until they reach age 59 1/2. At this age, they can begin withdrawing funds penalty-free. Another option is to wait until age 73, at which point Required Minimum Distributions (RMD) must be taken. Withdrawals from qualified accounts, other than Roth IRAs or Roth 401(k)s, are fully taxable at ordinary income rates and may be subject to an additional 10% tax penalty if withdrawn before age 59 1/2.
Non-Qualified Accounts
Non-qualified accounts, such as checking, savings and brokerage accounts, do not receive preferential tax treatment. The funds contributed to these accounts come from income sources that have already been taxed, and you can invest any amount of money and withdraw at any time. However, when you sell an investment for a profit or receive certain dividends within your non-qualified account, you will be required to pay capital gains tax as well as tax on any interest or dividends received for that tax year. Profits realized on investments that were held for over one year are taxed at long-term capital gains, which is 15% or 20% depending on your adjusted gross income for that year. Any profits realized on investments held for under one year are considered part of your income for the year, and taxed at your ordinary income tax level. Certain dividends are taxed at long-term rates, and others at ordinary income rates.

Dividends & Interest Tax

Dividends are a share of a company's profits that are distributed exclusively to equity shareholders. Dividends are taxed based on the type of dividend you receive and the amount of time you have held the asset that is paying the dividends. Interest on the other hand consists of payments made by a borrower to a lender for use of the lender's money. When you deposit money in to a bank account your money is used by the bank to lend to other depositors or bank customers. In exchange you receive a percentage of interest for allowing the bank to do so.
Qualified Dividends
Qualified dividends can be reported to the IRS as capital gains instead of regular income, at a rate of 0%, 15%, or 20%, depending on your annual income. To qualify, the dividend must be from a U.S. company and you must have held your stock for over 60 days during the 121-day period preceding the ex-dividend date.
Non-Qualified Dividends
Dividends that do not meet the IRS requirements to be a qualified dividend are also known as "ordinary dividends", as they are taxed at ordinary income levels ranging between 10% - 37%. Dividends from bond funds, REITs and MLPs are also considered non-qualified, and taxed at ordinary income levels.
Interest Income
The interest you receive from checking and savings accounts, bank cds, money markets and bonds are taxed in the year they are received at your ordinary income tax rates. However certain interest income may be exempt from federal income tax, such as municipal bond interest, which could also be state tax exempt.

Not sure where to start? Schedule your free consultation with a thrivealike Financial Professional

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INVESTMENT & RETIREMENT INSIGHTS
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