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Showing posts from May, 2012

European Volatility & JP Morgan Issues

We wanted to communicate our Firm's views on financial market activity making headlines recently, namely the situation in Europe and the J.P. Morgan trading loss. Please keep in mind that there will always be significant issues that affect the financial markets. Some will be more significant than others, however, if we have a long term view and a diversified portfolio these events present no more than opportunities to us. If we do not have a long term view (i.e., greater than five years) then our portfolio should not be invested in anything that will be significantly affected by such short term events. Remember, just because European governments are having issues right now does not mean that all European companies are poor investments, and the smart money managers we use are using this as a buying opportunity. Regarding the J.P. Morgan trading loss. This is a prime example why we do not advocate putting more than a very very small fraction of any portfolio in individual securiti…

Short Selling

A client recently asked us if individual investors can do what is called short selling.  Our answer to him was that yes, individual investors can definitely execute short sale trades.  The basic definition of a short sale is when an investor sells a security that they do not own (typically stocks) borrowing the security from someone else (typically through or from their financial institution).  Investors who execute short sales are betting that the value or price of the security they are selling is going to decrease.  If the price does decrease they can exit the trade by buying back the security in the market and giving it back to the original owner to pay off their "loan" at a lower price and keeping the difference as their profit. If, however, the price of the security goes up instead of down, and the investor does not own the security they are shorting their downside and hence risk is unlimited because the price can theoretically go to infinity!  The investor would need …

The Difference Between Stocks, Bonds & Mutual Funds

There are so many complex issues and constant change in our business of financial planning and investment management, that we often forget some of the basic questions that many people have, such as what a Stock, Bond or Mutual Fund is? I will attempt to answer these questions at a very basic level below.
A share of stock is, at its most basic level, the representation of ownership of a corporation that is a claim on the corporation's earnings and assets. There are several different types of stock shares. Common Stock usually entitles the shareholder to vote in the election of directors and other matters taken up at shareholder meetings or by proxy. Preferred stock generally does not confer voting rights but it has a prior claim on assets and earnings -- dividends, which are the distribution of company earnings to shareholders, must be paid on preferred stock before any can be paid on common stock. In addition, a corporation can authorize additional classes of stock, each with its…