Diversification: The Biggie

By Tosha Dunn, Spring 2016 Student Intern

Now let’s move along to a term that I have been sort of dancing around: diversification.  This is definitely a term that you may, or may not, hear but one that should be in your mind, even if it isn’t in your adviser’s mind.  Simply, diversification is investing in a true portfolio, so your investments aren’t concentrated in a single industry or a single market.  Instead, you have a portfolio that represents industries that balance one another out, meaning that if one goes down, the other goes up.  The goal is mitigating losses.

If you have a properly diversified portfolio, you may have a certain percentage of money that is invested in risky stock, but you may balance that risk against the investment in an index fund (index funds are meant to return whatever the market returns are from an index, like the S&P 500, so the investments are pegged in a way to a stable market; there’s no promise of 100% returns).  And an index fund isn’t the only option, again, the goal is to create a portfolio with industries and risks that counterbalance one another.  You want to have a wave pattern where if one wave peaks, the other is at a trough, that way, you are receiving a steady flow of returns.  Of course, that is assuming you invest in only two financial vehicles, but you get the idea–balance.

Diversification comes from the idea of Modern Portfolio Theory, which you can investigate to your heart’s content at: http://pages.stern.nyu.edu/~eelton/papers/97-dec.pdf, http://post.nyssa.org/nyssa-news/2011/12/harry-markowitz-father-of-modern-portfolio-theory-still-diversified.html, and http://money.usnews.com/money/blogs/on-retirement/2012/12/13/why-i-am-clinging-to-failed-investment-strategies.

All of these articles delve into different levels of detail regarding the theory and its future, but hey, the guy who came up with it was a Nobel Prize Winning Economist, so there may be something to it.

So you have made some decision about a planner, what’s next?

By Tosha Dunn, Spring 2016 Student Intern

When you meet with a broker/adviser/planner, again, they will ask questions about what your ultimate investment goals are, and these questions may sound like jargon.  Things like “risk tolerance,” “time horizon,” etc. may be a foreign language to you.  However, just nodding along and trusting everything to a person who explains a product and gives you some papers is a terrible, terrible idea.  Terrible.

Risk tolerance is the amount of risk that you are willing to accept when investing.  Do you want to engage in speculation in a particular industry or market, meaning do you want to take the risk by investing in a shaky start-up or a company that is just issuing an IPO (an initial public offering–this is the first time that a company makes an offering of its stock to the public, generally, and the prices associated with the stock may be overvalued, quickly spike, and drop before you have the chance to sell them at a gain in the secondary market)?  Right, all of that sounds scary.  So you not only need to have an idea of what risks you are willing to take, but you also need to be wary of an adviser person who doesn’t fully explain the product to you because, seriously, did you know what an IPO was; do you know that most IPOs are expected to “pop?”  And what is “popping” anyway?  Or a “secondary market”?

What about your time horizon?  Your time horizon is the time between your initial investment and when you plan to cash out the investment, so depending on the financial goal, the time horizon can be very short (you’re saving for a new car and plan to cash out in two years) or it can be long (i.e. your plans for retirement).  Time horizons and risk tolerance are linked–if you have a long time horizon, you may want to pursue a more aggressive investment strategy because if you lose, you have more time to make the money back and vice versa.

You may also hear comments about “volatility,” “business cycles,” and “concentration”…and what are all of these things anyway?  Simply, volatility refers to price shifts in the market; however, those shifts can be severe and seriously affect your investments without some proper attention from your adviser.  This is where the word “concentration” comes into play; if you’re invested in a single stock, then you have 100% concentration in a single financial product.  Stemming from that, concentration is simply the percentage amount of your investment portfolio represented by a specific stock, or within a specific industry, or within a specific market, etc. (so it roughly means what you think it does).

And 100% of your portfolio in one stock may or may not be a problem for you depending on, that’s right, your risk tolerance.  You may think that oil investments in a foreign, war torn country are the ONLY investment you should be involved in, and that’s fine.  Your adviser may warn you otherwise.  However, you may have a portfolio of investments across different industries, and you may be concerned about the concentration of your investments in a particular industry.  But that assumes that you know about concentration in a specific, rather than general, way.

Business cycles are also something akin to what you expect; they are cycles within business where business goes up and down in a somewhat predictable pattern–you know, a cycle.  Right, so generally a business cycle moves in a wave pattern with highs and lows.  You may be investing in a down market but with the expectation that the market is going to go back up.  However, you want to consult with your adviser about your tolerance when the market seems to be really climbing–do you sell because the market cycle may be peaking and about to move downwards fast? Or do you ride the bull?  Again, it’s all about your risk tolerance and your rapport with your adviser.

And if you really want some overly detailed information about business cycles, the National Bureau of Economic Research has you covered.

Financial Planners…Helpful?

tosha2By Tosha Dunn, Spring 2016 Student Intern

Broadly, financial planners are professionals who you pay to manage your investments.  They come in many different flavors from investment advisers to brokers to Certified Financial Planners.  All of these are people who you may consider leaving in control of your money because, hey, you maybe feel like you shouldn’t be the one making these decisions.  Given this, how do you decide who is right for you and your money?  What do any of these people actually do?

Financial planning, in a nutshell, is essentially about lifestyle: do you want to be eating cat food or people food?; do you want to work until you’re 90 or actually retire and have hobbies (I know, painting and the great American novel)?  A financial planner is someone who can look at your current salary, current spending habits, current debt, current assets, etc. and measure financial items against the future that you have in mind.  They can then determine what level of savings you need to attain the desired retirement lifestyle.  Your age also plays a factor in this calculation: if you’re younger, you can save at a lower rate over a longer time to reach your goals, and if you’re older, you will likely be looking at saving a higher rate of your salary over a shorter period of time.  And to be clear, you aren’t going to be just saving money in a bank account; you’re going to be considering investment strategies to reach your goal.  This is also where a financial planner comes in–depending on your age or goals, they can recommend the sort of investments that will best suit you.  You may want to pursue a more aggressive strategy or, if you are looking for safer investments, you may prefer a more conservative strategy.  Again, this is where advice is helpful.

But who is the right advisor for you?  According the SEC some planners will get into all the details of who you are as an investor, but some will ask you just very basic questions.  This, of course, can be a risk for you–do you want someone to go through your financial background and hopes with a fine tooth comb or do you just want someone who will ask what your “risk tolerance” is and move along with some suggestions of some items that you may not even fully understand?  That issue is more of a personal decisions, but a more informed and careful planner is likely to be more helpful than one who isn’t.

So Certified Financial Planners sound fancy, and they are to some degree.  Being a CFP requires training and certification for membership, and the CFP Board also enforce ethical requirements on their members, meaning that were a member to violate one of their ethical rules, the member can be sanctioned by the Board.  The CFP Board’s ethics include issues of professionalism, competence, and diligence among others.  The CFP also makes its sanctions publically available, so you can investigate the background of a person you are considering as a financial planner.  CFP’s may also hold the same qualifications as investment advisers and brokers because the titles are not mutually exclusive.

Investment advisers and brokers are required to participate in training.  They are also held to the standard of their state’s securities laws.  Investment advisers generally work solely in the area of recommending investments, while a CFP may take a more holistic approach to your investment and savings needs.  Still, investment advisers and brokers are required to take specific tests to sell securities and more complicated financial products, and to find out the qualifications of an investment adviser or a broker, you can simply visit Broker Check or the SEC.  This will let you know what certifications the broker has and if there are any current or past consumer complaints against the adviser/broker.

Of course, you are the master of your destiny, so choosing a financial planner or a broker, etc. may not be the route for you, but we’ll cover that later.  Overall, selecting a financial person is difficult and can be scary, but researching the person is helpful and can give you some piece of mind about the person who will be calling some shots about your nest egg.

Stuff Offered by Your Employer

By Tosha Dunn, Spring 2016 Student Intern

Right, let’s start with the easiest thing.  Your employer will likely offer some sort of benefits package that you should carefully consider.  For one thing, benefits packages are essentially a sort of additional salary, even though they aren’t included in that magic per year earnings number–think of them as the icing on the cake.  Benefits packages on the whole generally include healthcare, sick leave, etc.

But let’s move along and imagine Company A offers you a salary of $46,000 per year plus benefits that include healthcare and investment opportunities (maybe they offer a matching plan, more about that below), and Company B offers you a salary of $51,000 with only healthcare–how do you compare the two on your own?  Remember, the benefits are a form of salary, and you need to be able to assign proper values to each because the $46,000 per year may actually be worth more than $46,000; in fact, it may raise the salary beyond the $51,000 depending on how good the benefits are.  So two questions: (1) what are the most common plans offered, and (2) how do you compare the plans?

The plan you are most likely to encounter will be the 401(k).  Insert scary music because whaaat is a 401(k)?  Again, sorry, your biology degree isn’t going to help in deciphering this one.  However, the IRS supplies the most interesting definition of a 401(k) ever: “[it] is a defined contribution plan where an employee can make contributions from his or her paycheck either before or after-tax.”  Right-o, what that definition is trying to say is that a certain amount of money (determined by you) is removed from each paycheck received, and that money is set aside in an investment account.  The investments are generally some financial vehicles offered by your employer that you select from, so maybe there’s a fund or maybe there’s company stock.  The definition also gets at the removal of the money before or after taxes are removed–we won’t be discussing the full ramifications of taxes here, so consult a tax professional.

Besides the 401(k), a secondary perk/common form of investment to check for is if the company offers any sort of matching plan.  “Matching” means that whatever percentage of your paycheck that you determine to set aside in the 401(k) account, the company will match up to a defined percent.  See, this is where you need to carefully look at the benefits offered because some employers will match up to 100% of the funds you put into the account (up to some level and then there may be a reduced amount of matching).  Nonetheless, a matching plan of any sort means that whatever amount you invest will be increased by your company, and this results in a greater amount of funds to grow over time (which is extremely important because the more funds you having growing a longer period of time, the greater the amount you will have at retirement).  However, matching is not always offered, but where it is, you would generally value a matching plan more highly than a plan not offering matching.

These two options are the most common retirement benefit plans offered, and for information about other less common plans a study from the Society for Human Resource Management provides a comprehensive list.  The IRS also offers more dry definitions and a comprehensive list of benefit plans.

Investing as a Young Professional: Introduction

By Tosha Dunn, Spring 2016 Student Intern

So you’ve finally graduated for the last time, and you’re about to cash in at some totally sweet job that has, you know, benefits or whatever.  And come on, you took intro finance like 2 years ago, so you definitely know what’s up when you’re looking at that contract.  You totally have this one, bro.

Right, so do you actually though?  The goal of this series is to give young professionals some hand holding regarding finance and investing.  Because, while you may have taken one finance class, you aren’t Warren Buffet, and (again, sorry) you aren’t Leonardo Dicaprio in The Wolf of Wall Street–you can’t just be a hedge fund manager, or a flash trader, or a day trader, etc..  I mean maybe if you have the right background, but hey, for everyone who majored in biology or marketing, here’s some stuff that’s helpful. Of course, remember that we don’t provide investment advice, so this is for your information only and a starting point for your own homework.

Think of this as a jumping off point to actually become savvy about the grown up topic of financial investment.  This is not investment advice.  I am not suggesting what stocks to buy so that you will be a millionaire in less than a week–you’re entering the no-scheme-zone.  I’m presenting sources of information, explanations of some important terms, and general persons you may want to contact on your own for further information and actual investment advice.  We’re the tech generation, so why not have some links that you can refer to?

Next week, we’ll start at the beginning.  First, you have a job with a contract that includes a benefits package, so what’s really in a benefits package?  What is a 401-K?  What are some of the other common forms of investments that companies may offer?

Second, who can you talk to about financial planning?  What certifications might be important?

Third, what are the terms that might come up?  For instance: risk tolerance, time horizon, volatility, and business cycles.

Fourth, diversification.  Yes, it’s a term that’s regularly used, but it’s a term with some serious magnitude that requires focused discussion.

Fifth, investing on your own.  What are some of the products offered (IRAs, Roth-IRAs, etc.)?  What fees may apply, and what fees mean for your investment when you want to cash out?

Keep on High Alert: Fraudulent Stock Promotions May Be Coming Your Way

By: Alexandra Hughes, Spring 2016 Clinic GRA

The SEC’s Office of Investor Education and Advocacy recently released an updated Investor Alert on Fraudulent Stock Promotions “to warn investors about fraudsters who promote a stock to drive up the stock price and then sell their own shares at the inflated price, making money at investors’ expense.” These stock promoters are generally paid promoters or company insiders. If stock promoters don’t disclose the compensation they receive from promoting a stock, the SEC will bring charges. However, disclosure of compensation does not necessarily mean that the promotion is legitimate.

Fraudulent stock promotion was recently discussed in a SEC press release. In March 2016, the SEC settled charges against Tobin Smith, a former market analyst and TV news commentator, and NBT Group Inc., for fraudulent promotion of a penny stock to investors. Smith and NBT were barred from involvement in future penny stock offerings and disgorged compensation from the penny stock promotion in the amount of $165,900 plus $16,893 in interest. Smith was also required to pay a $75,000 penalty to settle the charges.

The SEC warns investors that promotion of stock by fraudsters can occur on “seemingly independent and unbiased sources” like:

  • Online Advertisements
  • Internet Chat Rooms
  • Direct Mail

The SEC advises that the most susceptible stock prices to manipulate, and thus the easiest targets for fraudsters interested in stock promotion, are those of microcap stocks and penny stocks. For microcap stocks, the dangers of fraud are further increased because publicly available information about these stocks is scarce and false information about them can be easily spread. Warning signs of microcap fraud may include:

  • SEC trading suspension of the security or of other securities also promoted by the promoter
  • Increases in the stock price or trading volume
  • Press releases or promotion activity about events (that actually never occur)
  • No real business operations
  • Issuance of shares without a corresponding increase in company assets
  • Changes in company name or business type

My Clinic Experience

By Bryan Rafie, Spring 2016 Student Intern

Law practice takes work. Despite all the pressure you feel during finals and all the cases you read during the year, nothing in law school really prepares you for the finer details of practicing law. How do I draft discovery requests? How do I prepare for a conferral call with opposing counsel? How do I build a reputation in the legal community? How do I set expectations with my clients and coworkers? How do I work as a team with other attorneys?

All these lessons I learned in clinic, and it was tough. The first thing that hit me was the pace of practice: it’s fast. You constantly have to keep an eye towards the future and stay ahead of deadlines or it can drown you.

Second, working relationships matter. It takes work and communication, but when the deadlines are quickly approaching and the work seems insurmountable, having someone sitting next to you on a Sunday afternoon furiously drafting a crucial final brief is invaluable.

Finally, I learned to manage expectations. This begins by learning the pace at which you work. You can only learn how fast you can get something done by doing it. That’s what clinic does for a law student. It lets you actually do it. Once you have a good sense of your pace you can then manage expectations of both clients and coworkers. I cannot stress how important this is. Both of these parties rely on the timeframes you set, and not meeting deadlines makes you look bad. Being able to deliver on your promises is everything.

You struggle, make mistakes, and feel like a fish out of water, but it gets easier. Clinic taught me that and provided a safe environment for me to make mistakes and look stupid because, lets face it, we all are going to have to go through it.