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Long Term Financial Security: The Value Of Working With The Pros Part 2

Long Term Financial Security: The Value Of Working With The Pros Part 2

Last month I offered some perspective regarding management of our own personal financial well-being. The crux of my argument was that we need to remove our fears, anxieties, historical perspectives, and previous investment results from our vision of what we want to achieve and where we want to be financially, moving forward. I maintained that professional advice, or at least very well-informed advice, is needed in order to continually improve our chances for financial success. I also stated that it is very difficult in the current economic environment to pick the “right” time to be in and/or out of the market without help. To build upon last month’s discussion, I want to offer some potential investment vehicles that may well be considered as we focus on sound financial planning, and using qualified advisors.

Of course, we should expect that whoever we choose to use in our quest for financial security be well versed in any and all investment products, yet we also need to retain the responsibility for educating ourselves sufficiently to understand whatever products an advisor may recommend. As the majority of readers will be well served by products which are standardized and easily accessible by the average investor, we will limit the focus of our discussion in this edition to straightforward equity investments, mutual funds, exchange traded funds (ETFs), and fixed income investments. I also encourage you to bookmark the link to Investopedia below, as this site offers an exhaustive dictionary of financial terms and definitions that you will find useful in understanding financial market products:

Straightforward Equity Investments are purchases of shares in companies. Generally, financial advisors would look for large sums of capital, perhaps $250,000 and up per individual, to choose this approach because in any portfolio management scenario they will want diversification. Diversification allows the risk to be spread over many different investment shares, rather than just a few. In order to diversify with individual shares, you need sufficient capital to acquire reasonable amounts of numerous different shares with the goal of achieving overall gains in the total portfolio, even if some shares don’t perform as well as others. With smaller amounts of capital, advisors would achieve diversification in equities by buying Mutual Funds.

Mutual Funds are pools of money which are used by professional fund managers to buy many different shares within one fund. By pooling the capital of multiple investors, perhaps hundreds of millions of dollars in one fund, managers can buy large blocks of many different shares, thereby diversifying the holdings: not having too many eggs in one basket! There are many highly rated mutual funds to choose from, but to understand how they work let’s first look at how a new mutual fund is started.

In creating a mutual fund, managers declare a “per share” value at the outset, and collect those funds from investors prior to actually buying shares. For example, if Mutual Fund ABC starts a $50 million dollar fund, they may sell 5 million shares for $10 per share. Once they collect the funds, they begin to invest the $50million dollars according to their predetermined objectives for ABC fund. At the end of each day, there will be a new value for the fund based on the changing market prices for the shares that they bought and put into the fund. This value is called the “net asset value.” The original buyers would see their $10 per share purchase price fluctuate accordingly. The number of shares remains the same, so each day if they add up the value of everything the fund owns and divide that value by the 5 million shares sold, investors will know the value of each of their shares in that fund. For example, if the total value of the shares owned rises to $100 million, each share would then be worth $20 ($100,000,000 /5,000,000 shares = $20/share). Mutual funds span a wide spectrum of corporate activity, each fund usually specializing in segments of the market. There are funds comprised of consumer goods stocks, technology stocks, transportation stocks, etc., offering the opportunity for further diversification by owning different types of funds.

The major value to using an advisor to help you choose your mutual funds is that you have two professionals in your camp: the advisor picking the funds and the managers doing the buying and selling in the fund.

Exchange-Traded Funds (ETFs) offer easily traded investments in specific products. For example, if you have an interest in gold, or energy, or other commodities, there are ETFs dedicated to these products which will facilitate your investment. Instead of you having the risk or cost of storing actual commodities, the ETF manager buys a quantity of the commodity, places it in insured storage, and sells shares in the holdings. The daily share price will reflect the value of the commodity being held for the benefit of the ETF, and the shares are easily bought and sold just like share in popular companies such as AT&T or Apple Inc. Again, the benefit of these vehicles lies in the professional management and safekeeping functions offered by the fund manager.

Fixed Income Investments offer various opportunities to invest in interest bearing securities, such as government bonds, tax-free state and municipal bonds, and corporate bonds. The main advantage to these investments is the low risk profile of such vehicles. These investments can be made by both buying the actual bonds, or by buying mutual funds or ETF’s which specialize in these bonds. The determining factor on which mode of purchase is selected is once again based on the size of your portfolio. If you have a large amount of capital, an advisor may recommend buying the actual bonds, whereas if you have more modest sums to work with, it is more likely a diversified fund or ETF would be recommended.

In every example, the fund manager or broker is compensated for professional services rendered by management fees charged to the fund, or by commissions charged for the specific purchase of shares or fixed income securities. Overall, these fees are very competitive. Take stock of your current personal financial picture and consider giving the pros a try.

The experienced Financial Advisors* at BCU have a wealth of knowledge and resources to help you manage your current investments and navigate your best options for the future. To schedule a free, no-obligation financial consultation with the BCU Investment Advisors team, contact 800-388-7000 ext. 8700.

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©Patrick J. Catania 2012
The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Baxter Credit Union, its Board of Directors, or its employees. The author is responsible for the content. Readers should consult with, and seek professional advice from their own attorneys, accountants, and financial advisors with respect to their individual financial needs and circumstances.

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*Non-deposit investment products and services offered through CUSO Financial Services, L.P. (“CFS”, a registered broker-dealer (Member FINRA/SIPC) SEC and Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the Credit Union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. BCU has contracted with CFS to make non-deposit investment products and services available to Credit Union members. BCU Investment Advisors is a trade name for the investment services available at BCU.