Investing Basics by TruNorth Investment Management

Investing Basics

If you're new to investing it can be overwhelming to try and understand all the ins and outs. Educating yourself will pay dividends and TruNorth can help you put that knowledge to work to reach your financial goals.

The first thing to understand is stocks and how they work. There are no mutual funds in our portfolios. The portfolios we create for our clients are customized, individual, diversified portfolios made up of individual securities. By holding individual securities, we create a holistic financial strategy that allows us to manage portfolio risk more precisely.

It is not the quick, easy way, but we believe the extra effort is well worth the time and it's what makes TruNorth Investment Management different.

Stocks 101

When you own stock, you own a share of that company.

A share of common stock represents a percentage of ownership in a company. Ownership equals equity. It is similar to creating equity in your home.

Stocks vs. Securities

Stocks are one type of Security. Securities are investments that have value and can be bought and sold. All stocks are securities, but not all securities are stocks. US Treasury Bonds are an example of another type of Security.

Common Stockholder Rights

As a stockholder of a company, you have rights as a partial owner of that company. The details can vary depending on state regulations where the company is incorporated or specific corporate bylaws, but these are most common:

1.Right to Inspect Records: the right to see the company’s financial records and notes from shareholder meetings.
2.Right to Vote: the right to vote on certain business decisions
3.Right to Participate in the Profits: the right to a proportionate share of the company’s profits and dividends.
4.Right to Residual Claim During Liquidation: the right to a portion of earnings after debts have been settled after liquidation due to bankruptcy.
5.Right to Limited Liability: if the company is facing lawsuits or debt collection, you as a shareholder are only liable for the amount of money you’ve invested in the company.
6.Transfer Rights: the right to sell or transfer your shares if and when you want.
7.Preemptive Rights: if a company decides to issue more shares of stock, current stockholders have preemptive rights to buy enough new shares to maintain their percentage of ownership in the company.
8.Right to Sue for Wrongful Acts: the right to file a lawsuit individually or as a class action suit on behalf of the company against a third party (example a lawsuit against an executive who committed fraud).

Diversifying Your Portfolio

2/3 of all publicly traded stocks are outside of the USA. Cycles in markets and economies mean that sometimes it’s better to be invested in the US, sometimes it’s better to be in other parts of the world, sometimes emerging markets sometimes established markets.

What does Market Capitalization Mean?

Market capitalization It is the total dollar market value of a company’s outstanding shares of stock. It is used in the investment community to determine a company’s worth and size, instead of using sales numbers or total asset figures.

Growth Stocks

Growth Stocks have the potential to outperform the market and be worth more in the future.

Example: Buying good artwork that may be worth more in the future

Value Stocks

Value Stocks are thought to be trading below what they are really worth and have the potential to provide a better return.

Example: Getting something on sale that is immediately worth more than you paid for it

How to Measure Volatility

Standard Deviation is a mathematical calculation that measures volatility. A volatile stock has a high standard deviation, a stable stock has a low standard deviation.

In Standard Deviation all uncertainty is calculated as risk, so above-average returns and below-average returns are both considered volatile.

The Rule of 72

The Rule of 72 is a quick, shortcut calculation to determine the average return you will need to double your money in a certain timeframe.

For example, if you want to double your money in 7 years (72 ÷ 7) you would need around 10.3% return, which is the average return of the S&P 500 over time.

If you are comfortable with more risk and volatility, you could double your money in 5 years, but that would require a more aggressive portfolio with an average yield of 14.4% (72 ÷ 5).

The opposite holds true with less risk, but more time. For a 10 year timeframe your returns would only need to be 7.2% (72 ÷ 10).

By looking at the timeframe for your financial goals and your risk tolerance, you can see what your average return needs to be to stay on track. This lets you see the broader picture, through all the inevitable market fluctuations.

Sectors

Another key component when we look at stocks are sectors. Sectors are how the S&P sorts companies based on their primary business activities.

They are not equally weighted and the are not constant. As the world of investments change so do the sectors that will over perform and underperform. This is another part of the recipe of solid portfolio construction.