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Investors Are Human, too

Published June 23, 2016 | By Atul Dubal

Investors Are Human,Too

In 1981, the Nobel Prize–winning economist Robert Shiller published a groundbreaking study that contradicted a prevailing theory that markets are always efficient. If they were, stock prices would generally mirror the growth in earnings and dividends. Shiller’s research showed that stock prices fluctuate more often than changes in companies’ intrinsic valuations (such as dividend yield) would suggest.1

Shiller concluded that asset prices sometimes move erratically in the short term simply because investor behavior can be influenced by emotions such as greed and fear. Many investors would agree that it’s sometimes difficult to stay calm and act rationally, especially when unexpected events upset the financial markets.

Researchers in the field of behavioral finance have studied how cognitive biases in human thinking can affect investor behavior. Understanding the influence of human nature might help you overcome these common psychological traps.

Herd mentality. Individuals may be convinced by their peers to follow trends, even if it’s not in their own best interests. Shiller proposed that human psychology is the reason that “bubbles” form in asset markets. Investor enthusiasm (“irrational exuberance”) and a herd mentality can create excessive demand for “hot” investments. Investors often chase returns and drive up prices until they become very expensive relative to long-term values. Past performance, however, does not guarantee future results, and bubbles eventually burst. Investors who follow the crowd can harm long-term portfolio returns by fleeing the stock market after it falls and/or waiting too long (until prices have already risen) to reinvest.

Availability bias. This mental shortcut leads people to base judgments on examples that immediately come to mind, rather than examining alternative explanations. It may cause you to misperceive the likelihood or frequency of events, in the same way that watching a movie about sharks can suddenly make it seem more dangerous to swim in the ocean.

Confirmation bias. People also have a tendency to search out and remember information that confirms, rather than challenges, their current beliefs. If you have a good feeling about a certain investment, you may be likely to ignore critical facts and focus on data that supports your opinion.

Overconfidence. Individuals often overestimate their skills, knowledge, and ability to predict probable outcomes. When it comes to investing, overconfidence may cause you to trade excessively and/or downplay potential risks.

Loss aversion. Research shows that investors tend to dislike losses much more than they enjoy gains, so it can actually be painful to deal with financial losses.2 Consequently, you might avoid selling an investment that would realize a loss even though the sale may be an appropriate course of action. In some instances, the intense fear of losing money may be paralyzing.

It’s important to slow down the process and try to consider all relevant factors and possible outcomes when making financial decisions. Having a long-term perspective and sticking with a thoughtfully crafted investing strategy may also help you avoid expensive, emotion-driven mistakes.

All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost. Past performance does not guarantee future results.

1) The Economist, May 1, 2015
2) The Wall Street Journal, January 12, 2016

 

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2016 Emerald Connect, LLC.
PrudentProspera.com
5506 Sunol Blvd. suite 205 • Pleasanton, CA • 94566
Phone: 925-523-3459866-900-8376 • Fax: 815-333-3445
www.prudentprospera.com • Atul@PrudentProspera.Com

up and down

Published April 29, 2016 | By Atul Dubal

A Wild Ride: Understanding Market Volatility

On Monday, August 24, 2015, the Dow Jones Industrial Average plunged 1,089 points in the first 10 minutes of trading, the largest intraday point drop in the history of America’s oldest stock index. The benchmark rallied, regaining almost 1,000 points, only to slip again and close down 588 points — the most volatile day in a turbulent stretch that has seen the market bounce around while trending downward.1

As an investor, you might feel nervous about volatility, especially when the trend seems to be heading lower. However, it’s important to consider the reasons behind the market swings and maintain a long-term perspective.

China, Oil, and the Dollar
Three international concerns are at the heart of current volatility: economic weakness in China, low oil prices, and a strong dollar. All three are interconnected, but though they may slow the global economy, their effect on the U.S. economy and stock market reflects fear and uncertainty more than a direct threat.

A faltering Chinese economy, including reduced demand for oil, may affect trading partners that depend on exports to China. However, China accounts for only 7% of U.S. exports, and exports are a relatively small sector of the U.S. economy. Low gas prices and a strong dollar are a mixed bag — good for U.S. consumers while challenging for some multinational businesses.2

Balanced against these international issues is a stronger U.S. economy, as well as improving business results. On September 25, the U.S. Bureau of Economic Analysis released its third estimate of second-quarter 2015 economic performance, revising annual real GDP growth from the advance estimate of 2.3% (released before the big market drop) to a more robust 3.9%. Though consumer spending drove the overall increase, the revision also reflected increased business investment. Corporate profits rose at a 3.5% quarterly rate after falling by 5.8% in the first quarter.3

These are strong economic indicators that bode well for the long term, but uncertainty often has an outsized effect on short-term market performance.

What Will the Fed Do?
Adding to the uncertainty is concern about when the Federal Reserve will raise the federal funds rate. Despite expectations that it might pull the trigger at its September meeting, the Federal Open Market Committee (FOMC) held steady, saying “recent global economic and financial developments may restrain economic activity somewhat.” At the same time, the FOMC affirmed its belief that the U.S. economy is on the right track, and most members still anticipate raising the federal funds rate this year.4

In a measure of how interest-rate uncertainty makes investors nervous, the Dow dropped 121 points in four minutes after the Fed announcement and regained 119 points in the next eight minutes. It closed with a modest loss of 65 points or 0.39%.5

New Trading Strategies
Along with concerns about the global economy and domestic interest rates, new trading strategies may be adding to the volatility, creating rapid large-scale market shifts that do not always reflect investor sentiment about individual stocks. In one telling statistic, during the 15 trading sessions ending September 9, there were 11 “all or nothing” days when at least 80% of the stocks in the S&P 500 index either rose or fell — a daily mass movement unmatched in records dating back to 1990.6

Maintaining Perspective
Although a market loss may be difficult to accept, it’s important to keep the numbers in perspective. The S&P 500 index more than tripled in value from its recession low in March 2009 to its most recent high on July 20, 2015. The 9% loss from July 20 to September 25 still left the index up 185% over the last six-and-a-half years.7 No bull market lasts forever, but the recent pullback doesn’t necessarily mean the market has no more potential for gain, and it may be healthy in the long term.

Some analysts think stocks may have become overvalued during the long bull run, and a pullback or a correction (defined as a market drop of 10% from a previous high) can set a more realistic “floor” for future market growth.8

Fleeing the market during a downturn means you are not in a position to take advantage of growth on the upswing, as many investors learned when they left the market during the recession. In fact, a down market may be a buying opportunity, but it’s just as important to be careful about purchasing investments as it is to be careful about selling. In most cases, it would be wise to maintain a steady course and stick to the sound investment principles you used in building your portfolio.

All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost. The S&P 500 index is an unmanaged group of securities that is considered to be representative of U.S. stocks in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. Actual results will vary.

1, 8) money.cnn.com, August 24, 2015
2) The Wall Street Journal, August 24, 2015
3) U.S. Bureau of Economic Analysis, 2015
4) Federal Reserve, 2015
5, 7) Yahoo! Finance, 2015
6) barrons.com, September 10, 2015

 

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.
PrudentProspera.com
5506 Sunol Blvd. suite 205 • Pleasanton, CA • 94566
Phone: 925-523-3459866-900-8376 • Fax: 815-333-3445
www.prudentprospera.com • Atul@PrudentProspera.Com

Healthcare in Retirement

Published April 15, 2016 | By Atul Dubal

HEALTH CARE IN RETIREMENT
The Need…

The rising cost of health care in the United States has become one of the primary risks to a financially-secure retirement. With health care costs expected to continue increasing faster than inflation, the time to plan for your future health care needs is now…before you retire.

Your ability to enjoy a financially-secure retirement can be enhanced by planning for future needs such as:

Long-Term Care Services: Are you familiar with the variety of long-term care services available? If it becomes necessary, what type of long-term care services would you prefer? How will you pay for any needed long-term care services?

Advance Directives: Have you communicated your medical care wishes in the event you suffer a catastrophic medical event? Have you named someone else, a spouse or other family member, to make medical decisions for you in the event you are incapacitated?

Paying for Health Care in Retirement: Do you know what your out-of-pocket health care costs might be after you retire? Are you aware that Medicare, while it covers many health care costs, has significant limitations? Are you familiar with the various types of insurance that can help pay health and long-term care costs not covered by Medicare?

Did You Know:

  • In 2013, men reaching age 65 had an average additional life expectancy of 17.9 years, while women reaching age 65 could expect to live an additional 20.5 years on average. (Source: A Profile of Older Americans: 2014, U.S. Department of Health and Human Services)
  • While estimates vary, a couple retiring at age 65 without private health insurance from a former employer can expect to pay significant out-of-pocket health care costs during their retirement years. Fidelity Investments, for example, estimates that a 65-year-old couple who retired in 2015 needs about $245,000 to cover medical expenses throughout retirement, a 29% increase from the $190,000 estimated for those retiring at age 65 in 2005. This estimate applies to retirees with traditional Medicare coverage and does not include costs of dental care, long-term care or over-the-counter medicines. (Source: 2015 Retiree Health Care Costs Estimate, Fidelity Investments)
  • At least 70% of people over 65 will need long term care services and supports at some point in their lives. (Source: 2016 Medicare & You, Centers for Medicare & Medicaid Services)
  • The national median daily rate in 2015 for a private room in a nursing home was $250, an increase of 4.17% from 2014. (Source: Genworth 2015 Cost of Care Survey, March 2015)
  • The average length of a nursing home stay is 835 days. (Source: CDC Vital and Health Statistics, Series 13, No. 167, June 2009)
  • At a median daily rate of $250, an average nursing home stay of 835 days currently costs over $208,000.

If you would like assistance in planning for your health care needs in retirement, please contact my office.

Atul C. Dubal CFP(R)

Atul@PrudentProspera.Com

 

Umbrella!

Published April 14, 2016 | By Atul Dubal

Protecting Your Assets Under an Umbrella

Getting caught in the rain without an umbrella can be an unpleasant experience. Getting caught without appropriate insurance coverage can be more than unpleasant — it could damage your hard-earned financial stability. Having an umbrella policy might make the difference between getting a little “wet” financially and facing a financial downpour.

Another Layer of Protection
Americans have become increasingly litigious, and some legal judgments may seem excessive. Injuries related to icy walkways, a swimming pool, a dog bite, or an auto accident could lead to a personal liability lawsuit. If you entertain often, employ workers in your home, or have teenagers who drive, you may have additional exposure.

Standard homeowners and auto insurance policies generally cover personal liability, but you may not have enough coverage to protect your income and assets in the event of a high-dollar judgment. That’s when umbrella insurance could be a big help, providing additional coverage up to policy limits.

Typically, you can obtain $1 million in coverage for a few hundred dollars or less annually; higher coverage amounts may be even more cost-effective.1 Before adding umbrella insurance, however, you generally must purchase the maximum liability coverage on your homeowners and automobile policies, which serve as a deductible for the umbrella policy.

On top of the liability coverage amount, an umbrella policy may pay legal expenses and compensation for time off from work to defend yourself in court. It might also cover situations not included in standard homeowners policies, such as libel, slander, invasion of privacy, and defamation of character.

Umbrella insurance is not just for wealthy households; it is also appropriate for middle-income families with substantial home equity, retirement savings, and current and future income that could be used to satisfy a large jury award. (Qualified retirement plan assets may have some protection from creditors under federal and/or state law, depending on the type of plan and jurisdiction, but you would still be liable for any judgments.)

As Benjamin Franklin wrote, “An ounce of prevention is worth a pound of cure.”2 Protecting yourself with an umbrella policy could help avoid expensive consequences down the road.

1) Insurance Information Institute, 2015
2) ushistory.org
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2016 Emerald Connect, LLC.

 

PrudentProspera.com
5506 Sunol Blvd. suite 205 • Pleasanton, CA • 94566
Phone: 925-523-3459866-900-8376 • Fax: 815-333-3445
www.prudentprospera.com • Atul@PrudentProspera.Com

Risk Tolerence

Published April 7, 2016 | By Atul Dubal

Does Your Risk Tolerance Follow the Market?

According to an investment industry survey, in mid-2008 — when the financial crisis was still developing — 23% of U.S. households were willing to accept substantial or above-average investment risk in order to achieve substantial or above-average returns. The following year, after the stock market hit bottom, the percentage of risk-taking households fell to 19% and did not begin to rise until 2013, the fourth full year of the recovery and a strong year for market performance. Even so, risk-taking remained below the pre-crisis level through 2014 (most recent data available).1

It’s understandable that investors might feel less inclined to take risks when the market is down — after all, no one likes to watch the value of assets dwindle. However, your risk tolerance should be a fundamental component of your investment strategy, based on your own situation rather than market performance.

If you allow yourself to be swayed by the market, you might find yourself investing too heavily in riskier investments when prices are high and selling when prices have dropped, leaving you out of potential gains when the market rises again. On the other hand, if you become overly cautious and stick only to low-risk investments with little potential for gain, your savings may not keep pace with inflation over the long term.

By taking some time to assess your risk tolerance, you may be better able to construct and maintain an investment portfolio that fits your situation, regardless of market conditions. Your risk tolerance typically depends on several factors:

Your time frame. The younger you are, the more time you may have to recover from potential losses. However, if you have a more immediate goal, such as saving for college, your time frame may be shorter than if you were focusing primarily on retirement.
Your goals. You may have to assume more risk if you anticipate an expensive retirement lifestyle. Be careful not to assume too much risk just because you have expensive tastes!
Other sources of income. If you are confident that you will receive retirement income from another source, such as a pension, a business, or an inheritance, you may be able to assume more investment risk. It’s generally not wise to place too much emphasis on Social Security in your calculations.
Your personal style. Regardless of other factors, you have to feel comfortable with the risk you are taking. Will the risk of an investment substantially increase your stress level? If the answer is yes, you may be better off choosing a less risky investment.

Keep in mind that all investments involve some degree of risk, including the potential loss of principal, and there is no guarantee that any investment strategy will be successful. Risk tolerance varies from person to person, and there is no one-size-fits-all approach. The key is to consider the factors that could affect your own risk tolerance and make informed investment decisions appropriate for your situation.

1) Investment Company Institute, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2016 Emerald Connect, LLC.
PrudentProspera.com
5506 Sunol Blvd. suite 205 • Pleasanton, CA • 94566
Phone: 925-523-3459

866-900-8376
• Fax: 815-333-3445
www.prudentprospera.com • Atul@PrudentProspera.Com

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Prudent Prospera Planning, Inc, located in state of California, (PrudentProspera) is a registered investment advisor .The Firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. PrudentProspera continuously monitors its filing requirements in all states, and will provide individualized services only in accordance with various state regulations. Any direct communication by prudent Prospera with a prospective client shall be conducted by a representative who is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.This website is for informational purposes only and does not constitute a complete description of investment services or performance. This website in no way constitutes the provision of investment advice, which will only be provided under a written investment advisory agreement and only in states in which PrudentProspera is registered, has made the appropriate notice filings, or is exempt from notice filing requirements. Information on this website is not an offer to buy or sell, or a solicitation of any offer(s) to buy or sell the securities mentioned herein. Hyperlinks on this website are provided as a convenience and we disclaim any responsibility for information, services or products found on websites linked hereto.Each client or prospective client agrees, as a condition precedent to his/her/its access to PrudentProspera ’s website to, release and hold harmless PrudentProspera its offices, directors, owners, employees, and agents from any and all adverse consequences resulting from any of his/her/its actions and/or omissions which use independent of his/her/its receipt of personalized individual advice from PrudentProspera. Atul C. Dubal CFP(R) Ca Insurance Lisc # 0B42798

Inheriting an IRA

Published March 29, 2016 | By Atul Dubal

Inheriting an IRA

Although IRAs are primarily intended to help fund retirement, some people don’t withdraw all IRA assets during their lifetimes. Any remaining assets go to the account owner’s designated beneficiaries and could provide a generous legacy.

If you’ve inherited an IRA or might inherit one in the future, it’s important to understand your options. IRS rules and regulations for inheriting an IRA can be complex, and an uninformed decision could result in unexpected taxes and penalties.

To Stretch or Not to Stretch?
An individual who inherits an IRA can take all or part of the funds as a lump-sum distribution or stretch withdrawals over his or her life expectancy (under current law) by taking required minimum distributions (RMDs). If the original account owner was under 70½ at the time of death, the beneficiary can delay distributions until December 31 of the fifth year after the original owner’s death, but all the assets must be distributed by that time.

The lump-sum approach may be appropriate for small accounts, but you should think twice before liquidating a large account. Distributions from a traditional IRA are subject to ordinary income tax, so taking a large distribution could push you into a higher tax bracket and reduce the potential value of the inheritance. Roth IRA distributions might not be taxable (as long as the original owner met the Roth five-year holding requirement), but liquidating the account would lose the benefit of potential tax-free growth.

Taking RMDs
The rules on RMDs depend on the beneficiary’s relationship to the original owner. RMDs are generally based on the life expectancy of the beneficiary.

A nonspouse beneficiary who doesn’t cash out should properly retitle the account as an inherited IRA — such as “Joe Smith (deceased) for the benefit of Mary Smith (beneficiary).” Inherited IRAs are not subject to early-withdrawal penalties, but they are subject to annual RMDs, which must begin no later than December 31 of the year after the original owner’s death (regardless of the beneficiary’s age). However, if the original owner died after age 70½ and failed to take an RMD in the year of death, the beneficiary must take at least the amount of the RMD by December 31 of that year.

A surviving spouse who is the sole beneficiary has more options. The survivor can treat the assets as his or her own by rolling them over to an existing or a new IRA. RMDs would not have to start until age 70½ (distributions prior to age 59½ may be subject to a 10% early-withdrawal penalty). If the account remains an inherited IRA with the surviving spouse as sole beneficiary, minimum distributions are based on the beneficiary’s or the late spouse’s life expectancy (whichever is longer). If the late spouse died before reaching age 70½, distributions can be delayed until the year he or she would have turned 70½, but RMDs would be based on the surviving spouse’s life expectancy.

Another option that may be available to both spousal and nonspouse beneficiaries is to disclaim the IRA and allow it to pass directly to the account’s contingent beneficiaries. RMDs typically would be lower if based on the life expectancy of a younger beneficiary, which may result in a greater opportunity for the assets to pursue growth.

RMD rules become more complex when multiple beneficiaries are designated or when the IRA is left to the estate or a trust. Be sure to consult with a tax or estate professional before taking any specific action.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.
PrudentProspera.com
5506 Sunol Blvd. suite 205 • Pleasanton, CA • 94566
Phone: 925-523-3459

866-900-8376
• Fax: 815-333-3445
www.prudentprospera.com • Atul@PrudentProspera.Com

print this page print this page
Bookmark and Share

Prudent Prospera Planning, Inc, located in state of California, (PrudentProspera) is a registered investment advisor .The Firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. PrudentProspera continuously monitors its filing requirements in all states, and will provide individualized services only in accordance with various state regulations. Any direct communication by prudent Prospera with a prospective client shall be conducted by a representative who is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.This website is for informational purposes only and does not constitute a complete description of investment services or performance. This website in no way constitutes the provision of investment advice, which will only be provided under a written investment advisory agreement and only in states in which PrudentProspera is registered, has made the appropriate notice filings, or is exempt from notice filing requirements. Information on this website is not an offer to buy or sell, or a solicitation of any offer(s) to buy or sell the securities mentioned herein. Hyperlinks on this website are provided as a convenience and we disclaim any responsibility for information, services or products found on websites linked hereto.Each client or prospective client agrees, as a condition precedent to his/her/its access to PrudentProspera ’s website to, release and hold harmless PrudentProspera its offices, directors, owners, employees, and agents from any and all adverse consequences resulting from any of his/her/its actions and/or omissions which use independent of his/her/its receipt of personalized individual advice from PrudentProspera. Atul C. Dubal CFP(R) Ca Insurance Lisc # 0B42798

Retirement Income Pay Plus!

Published March 25, 2016 | By Atul Dubal

Move your IRA money into secure plan, We can help! Contact us!

Indexed Annuities Can do more than you think!
Why do retirees love annuity? 2 minutes video click here:

Assessing Portfolio Performance

Published March 23, 2016 | By Atul Dubal

Assessing Portfolio Performance

You can’t help but hear about the frequent ups and downs of the Dow Jones Industrial Average or the S&P 500 index. The performance of both major indexes is widely reported and analyzed in detail by financial news outlets around the nation.

Like the Dow, the S&P 500 tracks the stocks of large domestic companies. With 500 stocks compared to the Dow’s 30, the S&P 500 comprises a much broader segment of the stock market and is considered to be representative of U.S. stocks in general. Both indexes are generally useful tools for tracking stock market trends, but some investors mistakenly think of them as benchmarks for how well their own portfolios should be doing.

However, it doesn’t make much sense to compare a broadly diversified, multi-asset portfolio to just one of its own components. Expecting portfolio returns to meet or beat “the market” is usually unrealistic, unless you are willing to expose 100% of your life savings to the risk and volatility associated with stock investments.

Asset Allocation: It’s Personal Just about every financial market in the world is tracked by one or more indexes that investors can use to look at current and historical performance. In fact, there are hundreds of indexes based on a wide variety of asset classes (stocks/bonds), market segments (large/small cap), and styles (growth/value).

Investor portfolios are typically divided among asset classes that tend to perform differently under different market conditions. An appropriate mix of stocks, bonds, and other investments depends on the investor’s age, risk tolerance, and financial goals.

Consequently, there may or may not be a single benchmark that matches your actual holdings and the composition of your individual portfolio. It could take a combination of several benchmarks to provide a meaningful performance picture.

Keep the Proper Perspective Seasoned investors understand that short-term results may have little to do with the effectiveness of a long-term investment strategy. Even so, the desire to become a more disciplined investor is often tested by the arrival of your annual financial statements.

The main problem with making decisions based on last year’s performance figures is that asset classes, market segments, or industries that do well during one period don’t always continue to perform as well. When an investment experiences dramatic upside performance, it may mean that much of the opportunity for market gains has already passed. Conversely, moving out of an investment when it has a down year could mean you are no longer in a position to benefit when that segment starts to recover.

There’s really nothing you can do about global economic conditions or the level of returns delivered by the financial markets, but you can control the composition of your portfolio. Evaluating investment results through the correct lens may help you make appropriate adjustments and effectively plan for the future.

Keep in mind that the performance of an unmanaged index is not indicative of the performance of any specific security, and individuals cannot invest directly in an index. Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss. All investments are subject to market fluctuation, risk, and loss of principal. Shares, when sold, may be worth more or less than their original cost. Investments that seek a higher return tend to involve greater risk.

 

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2016 Emerald Connect, LLC.

 

The Appeal of ETFs

Published March 23, 2016 | By Atul Dubal

The Appeal of ETFs

Exchange-traded funds (ETFs) represented 28% of the total trading value on world stock exchanges at the end of June 2015, a 35% increase over the previous year.1 In the United States, 1,502 ETFs held more than $2 trillion in assets at mid-year, up more than 10% and 13%, respectively, over the same period in 2014.2

Why the increased interest in ETFs? The primary factors may be trading flexibility and relatively low costs.

Built Like Mutual Funds, Traded Like Stocks An ETF is a portfolio of securities assembled by an investment company, similar to a mutual fund. Yet these two types of funds are traded very differently.

Mutual funds are typically purchased from and sold back to the investment company and priced at the end of the trading day, with the price determined by the value of the underlying securities. By contrast, ETFs can be traded throughout the day on stock exchanges, like individual stocks, and the price may be higher or lower than the value of the underlying securities because of supply and demand.

The trading flexibility of ETFs is part of their appeal, but it might lead some investors to trade more frequently than may be appropriate for their situations. And while you can usually trade between two mutual funds in the same fund family directly at the end of the trading day, if you want to move assets between two ETFs (without using additional funds), you have to sell the first ETF and then purchase the new ETF.

ETFs typically have lower expense ratios than mutual funds, but you must pay a brokerage commission whenever you buy or sell ETFs, so your overall costs could be higher, especially if you trade frequently. Most ETFs are passively managed and track an index of securities, which helps keep fees low. However, a growing number of actively managed ETFs assemble a specific mix of investments reflecting the fund’s objectives. They may have higher fees than passively managed funds.

Because ETFs are available across a broad range of indexes, they can help provide cost-efficient diversification. As with any investment, consider the potential risks before making a decision to include ETFs in your portfolio. Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.

The principal value of mutual funds and ETFs fluctuates with market conditions. Shares, when sold, may be worth more or less than their original cost.

Exchange-traded funds and mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

1) CNBC.com, July 2, 2015 2) Investment Company Institute, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2016 Emerald Connect, LLC.