GLOSSARY

Active Management A portfolio management strategy where the fund manager deliberately picks and chooses specific investments with the goal of outperforming an investment benchmark (such as the S&P 500).

Asset Allocation The practice of dividing investments among different categories such as stocks, bonds, real estate, commodities and cash equivalents to optimize the risk/reward tradeoff.

Asset Classes A group of securities that exhibit similar characteristics. The main asset classes are:

  • Stocks or equities
  • Fixed Income or bonds
  • Money market or cash equivalents
  • Real estate or other tangible assets
  • Commodities

Benchmark The measure to what you compare your fund’s returns with to judge its performance. A benchmark can be the average performance of funds similar to yours or a broad index of the investments your fund usually picks from. The S&P 500 index is a good benchmark for funds that buy large-company stocks and the S&P Small Cap 600 is a good benchmark for small company stocks.

Bonds Bonds are loans. When you buy a bond, you become a lender to an institution. Your loan lasts a certain period of time—until the date when the bond reaches maturity—and you get a certain dividend payment each month (commonly known as a coupon) as interest on the loan. As long as the institution does not go bankrupt, it will also pay back the principal on the bond, but no more than the principal. There are two basic types of bonds: government bonds and corporate bonds. U.S. government bonds (otherwise known as T-bills or Treasuries) are issued and guaranteed by Uncle Sam. They typically offer a modest return with low risk. Corporate bonds are issued by companies and carry a higher degree of risk (should the company default) as well as return.

Broker An investment executive or registered representative of a broker/dealer that specializes in selling various securities. A broker who sells stocks, bonds, and other securities must be registered in the province where the securities are traded. Broker-Dealers are “not to be deemed investment advisers” and therefore are not subject to the same fiduciary standards when recommending investments to clients, as are Registered Investment Advisers(RIA). They are only required to recommend securities that are deemed “suitable” for clients.

Representatives of a Broker-Dealer who also engage in the business of providing investment advice are required to affiliate with a Registered Investment Adviser. As Investment Adviser Representatives they are held to the “Fiduciary Standard” when providing investment advice to clients. This requires the dually registered Financial Advisers recommending a security to clearly communicate to their clients whether they are brokering a suitable security as a registered representative or providing investment advice as an Investment Adviser Representative and as such acting as a fiduciary.

Capitalization This describes the size of the company. It is the value of a company as measured by the total number of shares outstanding times the market price of each share. For example, if Apple Inc. has 929 million shares outstanding and each share is currently worth $390 per share then the market capitalization for Apple is $362 billion. If Netflix has 55 million shares outstanding and at a price of $70 per share, the market capitalization is $3.8 billion.

In general, stocks are classified as large cap (over $5 billion), small cap (under $2 billion), or mid cap (anything in between).

  • Mega cap: Over $200 billion Apple, Microsoft, IBM
  • Large cap: Over $5 billion Staples
  • Mid cap: $2 billion–$5 billion Wendy’s
  • Small cap: $250 million–$2 billion Pier 1; Shutterfly
  • Micro cap: Below $250 Million Chiquita Brands International

Compound Interest When you save or invest, your money can earn interest or appreciate. The next year, you can earn interest on your original money and on the interest (or appreciation) from the first year. In the third year, you earn interest on your original investment and also on the interest from the first two years. So, when interest is added to the principal, from that moment on, the interest that has been added also earns interest. This addition of interest to the principal is called compounding.

Developed International Markets Countries outside the United States that are considered developed include Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and United Kingdom.

Diversification The practice of spreading money among different asset classes and geographic regions to reduce risk. Diversification is a strategy that can be neatly summed up by the timeless adage “Don’t put all your eggs in one basket.”

Emerging Markets Countries with relatively young stock and bond markets such as Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Peru, Philippines, Poland, South Africa, South Korea, Taiwan, Thailand, and Turkey. Typically, emerging-markets investments have the potential for losses and gains larger than those of developed-market investments.

Equity/Stock Ownership in a single company through the purchase of common shares or preferred shares. For example shares in Apple or Starbucks. Unlike other assets, like bonds and cash, stocks represent a financial interest in businesses that may prove to be extremely profitable.

Exchange Traded Fund An exchange traded fund (ETF) describes the broad class of funds excluding closed-end funds, which trade throughout the day on an exchange. These funds can track a variety of stock, bond, commodity, real estate and currency indexes. ETFs do not redeem shares for cash, and thus do not need to sell securities (possibly realizing capital gains) to pay investors who redeem their shares. They are typically more tax-efficient than mutual funds as they have fewer trades and lower portfolio turnover. Most ETFs are index funds. ETFs have gained favor because of their low expenses, tax efficiency, diversification, transparency, trading flexibility and intraday liquidity. ETFs have low annual expenses (expense ratio) and the investor usually pays a commission to trade them. Diversification is an attractive feature of ETFs. Instead of taking concentrated risks by purchasing individual stocks, investors can own an index of stocks with ETFs.

Expense Ratio The annual fee that all funds or ETFs charge their shareholders. It expresses the percentage of assets deducted each fiscal year for fund expenses, including 12b-1 fees, management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund.

Fiduciary A fiduciary, such as PowerHouse Assets, is subject to the highest duty of care to its clients under law. While we believe that all financial service providers should act as fiduciaries, unfortunately most do not. As a fiduciary we always put the best interests of you, the client, first.

Fixed Income Securities Securities that pay a fixed rate of return in the form of interest or dividend income. Examples include bonds and preferred shares. While these securities generate a predictable stream of income, they do not protect investors against rising inflation.

Growth Stock/Fund A growth-oriented fund will hold the stocks of companies that the portfolio manager believes will increase earnings faster than the rest of the market.

Index Fund A fund designed to mirror the performance of a specific market index such as the Dow Jones Industrial Average or the S&P 500. Expenses of index funds tend to be lower than other mutual funds because the manager is not actively researching, buying, and selling securities. Index funds are considered to be passively managed because the portfolio manager of each index fund is replicating the index, rather than trading securities based on his or her view of the potential risk/reward characteristics of various securities. Conversely, an actively-managed fund has a portfolio manager who is buying and selling securities based on an opinion about which securities will accomplish the fund’s objectives. An S&P 500 index fund is a passively managed fund that mimics the S&P 500 index.

Inflation A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.

Large-Cap Stock A large cap stock refers to almost the same thing as large company stock. A company’s capitalization is the total value of all its stock—that is, the price of a company’s stock times the number of shares it has sold. Large cap companies are usually very big corporations, like Exxon, Apple, IBM or Microsoft.

Mutual Fund A fund that invests in a group of assets in accordance with one or more stated objectives, such as income, growth, aggressive growth. A mutual fund may generally invest in stocks, bonds, options, futures, currencies, and money market securities in accordance with its stated parameters. Most mutual funds, other than index funds, use active management, though different managers use different methods to pick their investments. Active management is the opposite of passive management, or indexing. Fees are higher for active management. All shareholders share equally in the income, gains, and losses generated by the fund.

Passive Investing/Index Investing Investing in a fund that tracks a market index, such as the S&P Index. Because passive funds mirror the performance of a particular index, the performance numbers are very similar to the index. Management fees are considerably lower for index-based mutual funds.

Passively Managed Fund A passively managed fund is a fund whose investment securities are not specifically chosen by a portfolio manager, but instead are selected to match an index or part of the market. This is the opposite of an actively managed fund.

Portfolio The term used for all the securities owned by an individual, an institutional investor, or a mutual fund portfolio manager. A portfolio may contain a combination of investments such as stocks, bonds, and other securities.

Real Estate Investment Trust Known as REITs, this vehicle invest in a portfolio of real estate properties – often commercial or apartment buildings. REITs are modeled after mutual funds, although the tax treatment of REIT income is different.

Rebalancing Bringing your portfolio back to your original asset allocation mix. This is necessary because over time some of your investments may become out of alignment with your investment goals. You’ll find that some of your investments will grow faster than others. By rebalancing, you’ll ensure that your portfolio does not overemphasize one or more asset categories, and you’ll return your portfolio to a comfortable level of risk.

Registered Investment Adviser (RIA) An Investment Adviser who is registered either with the Securities and Exchange Commission or a State’s Securities Agency. In general, Registered Investment Advisers managing assets totaling less than $100 million must register with the state securities agency in the state where they have their principal place of business. Registration of an investment adviser is a legal requirement and does not imply any level of skill or training.

S&P 500 Index The Standard & Poor’s index of 500 stocks is a popular standard for measuring stock market performance among the biggest, most broadly-based companies in the U.S. The S&P 500 represents about 80% of the companies in the United States.

Small caps Typically new or relatively young companies and have a market cap between $100 million to $2 billion. Small capitalization companies do present the possibility of greater capital appreciation and are inherently a greater risk.

Turnover Ratio This is the percentage of stocks that a fund manager sells in a portfolio or mutual fund in a given year.

Value Stock/Fund A value-oriented fund contains stocks that are currently undervalued in price to earnings or price to book value.

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