Stocks and Bonds: What are they, and how do they work?

The world of investing can be pretty confusing, and there are so many things that you can invest in that it is not any wonder people don’t know where to start. Today, I am going to discuss the two most common types of investments: stocks and bonds.

When you buy a stock, you are buying a piece of a company. Companies issue stock when they need to raise money. Think about the show “Shark Tank” – business owners are in need of money in order to grow and improve their business, and they come to the “sharks” asking for money for a percentage of their company. When you buy company stock, you are essentially a “shark,” except the percentage of the company that you own is so small that you don’t have a miniscule amount of say in how the company is run.

The price of stocks rise and fall based on how much people are willing to buy or sell them for. When the price of a stock increases, that means that people are placing a higher value on the company, and the opposite is true when the price decreases. It is also easy to think about the movement of stock prices like supply and demand. When the demand for the stock goes up (and more people are buying) the price also goes up. When the demand for the stock goes down (and more people are selling) the price goes down.

Companies issue bonds for the same reason they issue stocks – in order to raise money. The difference is that bonds are a form of debt financing where the company is the borrower, and you are the lender.

When the bonds are issued, the company sells them to you for face value at the coupon rate – the fixed interest rate that the company will pay over the life of the bond. In the olden days, your bond certificate would come with little coupons (hence, the coupon rate) that you would mail in annually (or more frequently, depending), and the company would send you back the interest earned. With the power of modern technology and tracking, coupons are no longer necessary.

Let’s imagine that you buy a bond directly from the company at a face value of $1,000 with a coupon rate of 5% over a 10 year period. You would receive $50 every year for 10 years. At the end of the 10 year period, you would receive your final interest payment plus the return of your initial investment.

This is just the tip of the iceberg when it comes to financial instruments, even stocks and bonds themselves. If you have any questions that delve deeper into stocks and bonds, please reach out to me at

Portfolio Allocation, Rebalancing, and Reallocation

In last week’s blog, we discussed diversification using an investment example from the islands of Hawaii. This week, we are going to expand on the example to talk about allocation, reallocation, and rebalancing.

In basic terms, asset allocation is the process of dividing your assets among different investments in order to balance the risk and reward within the portfolio.

To better understand the risk/reward balance, let’s go back to the Hawaii example. We discussed investing in two different companies: one that sold sunscreen and one that sold raingear. What we didn’t discuss was the percentage of our investment that we should allocate to each.

Portfolio Allocation
While it may be easy to split the investment 50-50 between the two, it may not be the best idea. We invested in raingear in order to make the impact of the rainy season on sunscreen sales not hurt so badly. However, the rainy season does not last for 6 months. It only lasts for about 4 months (about 33% of the year). Also, even though the rain can seem endless, it doesn’t rain every day.

Here is where the risk/reward balance comes in. If we invest 30% of our assets in the company selling raingear, we are taking the risk that it will rain 30% of the time in Hawaii, rewarding us with earnings when sunscreen is not selling.

Let’s continue to pair up the example with last week’s illustration and throw in some real numbers. Say that we have decided that the 30% allocation to the raingear company and 70% allocation to the sunscreen company is the best way to go and that we invested $10,000 total ($3,000 and $7,000, respectively).  A year passes, and the rainy season wasn’t spectacularly dreary, and your investment in the raingear company actually went down by 5% (a $150 loss). However, the tourist season was better than ever, and people were flocking to the sandy island shores – your investment in the sunscreen company increased by 10% (a $700 gain).

Now, your portfolio balance is $10,550, and your portfolio is allocated 73% toward sunscreen and 27% toward raingear. You have decided that you would like to adjust your allocation so that it again reflects the 70-30 split that you originally invested. You take some money from your sunscreen investment and put it towards the raingear to achieve your original allocation. This is known as rebalancing the portfolio.

As we said last week, you decide to change up your portfolio and invest in some companies on the mainland. Let’s assume that you invest your assets so that your portfolio now only holds 35% in sunscreen, 15% in raingear, and the remaining 50% in the mainland companies. You have now effectively reallocated your portfolio.

Wahoo! We just got through three more investment terms, and in one post! Join us next time as we delve into stocks and bonds. As always, if there is anything you want to know more about, give me a shout at

Diversification: The What and Why

Paradise Cove

One of the most important foundations of investing is diversification. The term in itself is relatively simple to understand – holding a variety of investments within a portfolio – but more questions arise when it comes to the process of diversification. How many different investments are enough? 2? 200?? 2,000?!? Is it enough to just invest in American companies, or should we invest in companies around the world?

I want to discuss the importance of diversification with a little investment scenario:

Imagine that you are making an investment in the Hawaiian Islands, and you have decided to purchase stock in a company that sells sunscreen. You feel that you can never lose with this investment because the sun is always shining! But then something happens that you forgot to account for – the rainy season, which brings with it torrents of rain that last for days. The sun isn’t shining, no one is going to the beach, and no one is buying sunscreen. Your investment in the sunscreen company starts to lose money.

Thankfully, the rainy season ends, and your sunscreen investment begins to improve, but you want to stave the losses that you experience during the rainy months of the year. So you decide to allocate some of your investment toward a company that sells rain gear and ponchos to the unsuspecting tourists who have visited the islands during the rainy season. Without the investment in rain gear, you would have always experienced a loss when sunscreen wasn’t selling. Now, when the rainy season hits Hawaii, your rain gear investment makes the losses you experience from your sunscreen investment hurt less.

Because your investments in Hawaii are doing so well, and the rainy season taught you not to put all of your eggs in one basket, you decide that it wouldn’t be a bad idea to invest in some companies on the mainland. Then, the unthinkable happens – a tsunami hits Hawaii and plunges the islands beneath the ocean. Because you invested in companies on the mainland, the impact that the tsunami could have had on your investments isn’t as bad as it may have been.

What this simplified scenario demonstrates is the importance of investing in more than one industry (sunscreen and rain gear) and the importance of investing in more than one arena (Hawaii and the mainland). When we diversify our investments, we are working to protect ourselves against risks from one company, industry, or country. This type of risk is referred to as unsystematic risk – risks specific to a company and that exist outside of the market.

In our next blog post, we’ll get into a few more investment terms: allocation, reallocation, and rebalancing.

Alphabet Soup: Financial Designations

Last week, we went over some of the acronyms that make up the alphabet soup of retirement planning. This week, we decided to cover some of the certifications that make up the alphabet soup of financial professionals.

This is not a comprehensive list by any means, and you may find people with more than one of these acronyms on a business card, but of one thing you can be certain: the people who have earned these designations underwent a thorough curriculum to earn the letters after their name, and most must complete continuing education in order to maintain them, meaning their knowledge is kept in check over time.

CFP® – A Certified Financial Planner® is an individual who has undergone rigorous testing and experience requirements in order to gain this certification. They are tested in detail on all facets of financial planning including investments, retirement planning, education planning, life insurance, property and casualty insurance, estate law, income taxes, etc. A CFP® is a similar certification to the CPA (Certified Public Accountant) of the accounting world. These people know a lot about a lot of different topics.

CPA PFS – This is a Certified Public Accountant who has gone beyond the CPA designation to become a Personal Financial Specialist, learning more about financial planning in order to assist their clients.

CFA – A Chartered Financial Analyst has spent a lot of time studying, gaining work experience, and taking 3 difficult examinations to become an demonstrate their knowledge in professional and ethical standards, investment analysis, and portfolio management – among other topics. Generally, these professionals work in institutional money management providing stock analysis, but your financial planning professional may very well carry this charter or work with someone who does.

CLU – Chartered Life Underwriters are insurance professionals who have completed coursework and examinations to demonstrate their knowledge in insurance planning, life and health insurance, insurance law, estate planning, business insurance, and risk management.

As always, if you have any questions about any of these designations or any that I didn’t mention, please feel free to email us at

Alphabet Soup: Retirement Accounts

Alphabet Soup

Personal finance is difficult enough as it is, but then throw in a bunch of acronyms, odd terms, and number-letter combinations and you have no idea what anyone is talking about when it comes to your investments, retirement, and future.

We want to give you a list of a few acronyms and their meanings so that you have a little bit of a better understanding when it comes to all of these fancy words people are throwing around; today, we are going to focus retirement accounts.

IRA – When it comes to retirement, IRA doesn’t stand for Irish Republican Army, but is instead of Individual Retirement Account/Annuity. An IRA is a retirement account that you open independently through an investment company. Individuals can save $5,500/year into one of these babies (subject to a few tax rules that you can read here), and if you are over age 50, you can save an extra $1,000.

A traditional IRA is tax deferred (you don’t pay taxes on the incomes you use for contributions this year, and must pay taxes on both contributions and earnings when you take money from the account) and a Roth IRA is not tax deferred (you pay taxes on the income you use to make contributions this year, and taxes are not due when money is withdrawn on both contributions and earnings).

myRA – This is a new one that you may hear pronounced as either Myra (like the name) or My-R-A; the “RA” again stands for retirement account. The myRA was first described in President Obama’s Address to the Nation in early 2014. The myRA is for individuals who do not have a retirement plan available through their employer; contributions are made to the account through direct deposit from the individual’s paycheck. The account follows the same contribution and taxation rules as a Roth IRA, but the account can only be used until the balance reaches $15,000 (including both contributions and earnings) or the account has been opened for 30 years, whichever comes first.

Maybe the most important thing to note about the myRA is that contributions can only made to a fund consisting of Treasury Bonds (much like the G Fund for those of you who know the TSP).

401(k), 403(b), 457 – Retirement accounts sponsored by a company or government organization for its employees. The letter-number combinations refer to the section of the IRS code that created these specific types of accounts. Through their paycheck, individuals can save a maximum of $18,000 (plus $6,000 if over age 50) pre-tax (similar to a traditional IRA).

These accounts are basically the same, with a few specific nuances that you can delve into further detail here, but the basic difference between them is that 401(k)’s are offered by private companies, 403(b)’s are operated by non-profits, school systems, and hospitals, and 457 plans are sponsored by local and state governments (including school systems) and the federal government (the TSP – or Thrift Savings Plan – is the federal government’s 457 plan).

Your employer may offer a matching contribution to encourage you to save into the plan, but it is not mandatory, and it is up to them to decide the how the match works (a match of 50% of all contributions up to 6% of salary or a 100% match of all contributions up to 3% of salary seem to be popular – or you can be complicated, like the federal government).

Now, the one note I absolutely have to make when it comes to contributing to these accounts is that annual contributions to all IRA accounts (including the myRA) are cumulative. This means that if you were to contribute to one or more of these accounts, you can only contribute a total of $5,500 (in 2015, $6,500 if over age 50). This only applies to IRA accounts and not to employer provided accounts (401(k), 403(b), etc.)

Wasn’t that taste of Retirement Account Alphabet Soup great? I know that you had so much fun that you can’t wait to check us out next week when we go through some acronyms that the financial professionals use!

Time is of the Essence


The average lifespan of today’s American citizen is a little under age 80. Gallup recently reported that the current average age at which American’s retire is 62, the highest age since Gallup started asking this question in 1991.

If we assume that the majority of college educated young adults begin their careers right after graduation by age 23 and retire at age 62, we have around 40 years to save for the last 20 years of our life. This may feel like a long time, and in this society of “gotta have it now,” saving for retirement is not in the forefront of our minds.

Time catches up with many of us, and 46% of Americans have less than $10,000 saved for retirement, and today’s workers are overall less likely to say they have saved for retirement than they did 10 years ago, and those age 25 to 34 have shown the largest drop (Employee Benefits Research Institute).

Navigating the retirement savings landscape is not easy for most of us, but the most important thing we can do as Millennials is develop the habit of saving. Make saving automatic and you may not even miss the dollars from your paycheck. And besides, isn’t it better to miss a few dollars now rather than miss them in retirement?

Financial Stress

Stress is one of the greatest influences in our lives. It can come from a myriad of places (school, work, home, friends, etc.) and has an impact on our daily lives and long-term health. Today, I want to discuss stress as it relates to finances.

When it comes to finances and money, there are plenty of things people stress about:

– Can I pay my bills this month?
– Am I saving too little?
– Am I saving too much?
– What is the stock market doing? Is it going too high and is it going to crash?
– Will I have enough money in retirement?
– Budgets are scary! Making one and sticking to it makes me anxious.

A 2014 study by Financial Finesse found that those individuals with the highest reported levels of financial stress were women under the age of 30 who had minor children and earned under $60,000 annually with 58% reporting high or overwhelming financial stress.

In order to help manage financial stress, we have come up with a few tips and tricks:

Use a secure budgeting and personal finance software: As we said before, budgets are scary! They make you face how much you are really spending and where you are spending it. Budgeting and personal finance software (such as those offered by Learnvest and, to name only a few) help you to track your spending by accessing your bank, loan, and credit card accounts and categorizing what you spent each month. If you aren’t comfortable using one of these services, there are spreadsheet templates online that you can use to help organize your own budget.

Plan in advance: Planning in advance can apply to many things. Mainly, we are discussing planning for a goal and planning for the unexpected. Want to go on vacation in a few months? It is probably in your best interest to start saving ahead for the trip rather than charging your card to the limits.

In terms of planning for the unexpected, life is a spectacular journey, and no one truly knows what could happen. Recently, I encountered someone who had all of their tires slashed by local hoodlums and did not have the money to pay to have them replaced. If an emergency fund had been prudently prepared, they would have been able to purchase new tires.

Live within your means: Not everyone can drive a Maserati, live in a million dollar mansion, or take annual vacations overseas. Keeping up with the Jonses doesn’t mean you’ll be as happy as they are, and who says they’re happy anyway? Stretching yourself too thin can bring stress with it that could quash any joy that your expensive toys or home brought with them in the first place.

Work with a financial advisor: Working with a financial planner can help you to create a plan for overall financial success. They have the knowledge and the tools to help you succeed. If you can find someone that you trust and enjoy working with, you will develop a fruitful relationship that reduce the stress that finances bring during all phases of your working life and retirement.

Do you have tips for managing financial stress in your life? Share in the comments below.

Saving for Retirement the Ronco Way

Who can forget the Ronco infomercials from our childhood? The ones where Ron Popeil would stick four chickens in a countertop rotisserie cooker and the audience would shout “SET IT AND FORGET IT!” with so much enthusiasm that you knew they must have been getting some kind of compensation other than a perfectly done chicken.

I can see you sitting here reading this saying “What in the world does this have to do with retirement?” It’s simple, actually. I want you to think about saving for retirement the Ronco Way – to “SET IT AND FORGET IT!”

Now, there are many things I can mean by this, but here is just a sample:

Automate your savings: Whether it is enrolling in your employer’s retirement plan and having a certain percentage of your salary withheld each paycheck or setting up an auto-draft from your bank account into an IRA, creating an automatic savings plan is great way to ensure that you don’t forget to make contributions to your retirement accounts.

The only thing that you don’t want to forget here is to check your level of savings at least once a year. If you think you can save a little more, up your 401(k) contribution by a percentage or two or add $50 a month to your IRA contribution. I also advise the same in reverse – if you can’t maintain your savings rate, don’t stop all together, but pull back just a little.

Choose an investment portfolio and stick with it: If you aren’t confident when it comes to picking a portfolio for your accounts, don’t be afraid to consult a financial advisor. Another option, especially if your account balance is small or you are just starting to save, is to select a “lifecycle fund.” These are the ones that have a year listed somewhere in the title that will correspond your prospective retirement date. Lifecycle funds are comprised of different types of funds including bonds, stocks, and international investments. The main idea behind this type of fund is that the farther you are from retirement, the more risk you can handle in your portfolio. As you get closer to retirement, the fund managers will adjust the portfolio so that it is less risky.

The reason I say to stick with it is that research has proven that maintaining an investment within a portfolio over time results in greater gains than adjusting the portfolio based on where you think the market is headed.

Don’t touch it: This relates to the “FORGET IT” part of the mantra. You have put the money aside for retirement – leave it there until that time of your life. If you need the money for an emergency, try not to take it from your retirement accounts as robbing the accounts can create tax implications, including a 10% penalty for taking an early distribution.

So, what are you waiting for (aside from that rotisserie chicken to finish)? Set and forget your retirement savings plan as soon as you can!

Let’s Hear it for Income Tax Season!

It’s that time of year again – time to file our income taxes. As a shout out to all of tax accountant friends and the hard work they do at this time of year, please watch the short video below:

Wasn’t that fun? Do you now want to enlist yourself as a CPA combating your clients’ tax issues?

What I actually want to talk about today is tax refunds: those little checks that everyone direly hopes for the first half of each year. Tax refunds actually happen when you have overpaid taxes and the government owes you the overpayment. It sounds like a pretty good deal, but consider that you could have used that money for something during the course of the previous year. Think of a tax refund as a loan repayment by the federal government on a loan you provided to them at 0% interest. The best thing for each of us to try to do is to meet equilibrium where we neither need to make an additional income tax payment nor receive a refund.

However, I think it is safe to say that we would all rather receive a refund rather than pay additional taxes. What’s the best thing to do with our refund when we receive it? I think you know iOme’s favorite answer to that question: save it in a retirement account!

But we also know that putting your tax refund aside for the future isn’t always feasible. While saving for retirement may be preferred to splurging on a vacation or buying a new Fendi bag, it may be a better decision to use the refund to pay off outstanding bills or reduce your student loan principal.

What do you plan to do with your refund? Save? Splurge? Pay bills or loans?

Does feeling powerful influence the way we save money?

A recent study conducted by The Stanford School of Business shows that feeling powerful has an effect on the way we save money. Their findings, outlined in Money in the Bank: Feeling Powerful Increases Savings, illustrates that “…individuals who feel powerful save more because it enables them to maintain their current state.”

The research also suggests that those who feel powerful are more likely to save while those who feel powerless are more apt to spend, rather than save, as they feel that spending on goods will improve the way society perceives them. However, when it comes to saving toward a goal of spending (a new car, for example) rather than saving for the sake of accumulating assets, people who feel powerless increase their savings.

While those who feel powerful save as a way to maintain their current power in the future, their level of savings will decrease once they feel that their power is secure.

How about you? Do powerful people put more aside for the future? Do those who spend on consumer goods rather than saving for the future have feelings of powerlessness?