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Understanding your Liabilities - Liabilities Drive Investment Decisions

Who knew that keeping track of our bills could help guide our investment decisions?

Each month, we keep track of our bills: rent, mortgage, water, electricity, internet, and other expenses. We do it mostly so we can avoid late payments and the penalties that come with them. However, there is another reason why we should keep track of these payments, and it will help drive our investment decisions.

When starting to formulate investment decisions, it can sometimes feel a little overwhelming. Short-term securities, long-term securities, stocks, annuities, insurance, and mutual funds, where do we start? There are many places to invest money. When faced with this long-list of investment choices, it is easy to forget the reason why we sat down to invest in the first place, but if we know what our liabilities are, now and in the future, we will be able to create a framework and strategy for our investments. However, what exactly are liabilities?

Specifically, liabilities are what we are legally responsible for paying, now or in the future. They can consist of loans, accounts payable (like bills), mortgages, deferred revenues, and accrued expenses. Knowing our liabilities can help drive our investment decisions because when we see what we need to pay and when we need to pay it, we have a greater understanding of when we need our investments to be more liquid (cash) or less liquid (real estate). For example, when we know we have a recurring payment of $500 in May, we can plan to have at least that much in cash at that time. At that time, holding all of our assets as 30-year bonds does not make sense for our lifestyle and liabilities. This example clarifies why it is essential to understand our liabilities. Knowing them can help drive our investment strategy and set us up for the future. Here are some specific examples of personal liabilities and some things to know about each one (The list does not include every liability):

Expenses

Expenses include bills and other payments. Typical expenses include rent, water and electricity bills. We can predict the recurrence of these payments as they are generally contracted to occur on a specific date in a certain amount.

What to know: Keep a list of your monthly expenses so you can plan your investing schedule around them. By understanding monthly payments, it can be easier to implement not only investing strategies but also saving strategies.

Mortgages

Fixed-Rate mortgages are mortgages where you pay the same principal payment and interest amount every month.

Adjustable Rate Mortgage is a mortgage where the interest rate you pay varies with the market. When market rates are low, your mortgage may look more affordable. As the market changes, the change in interest rates may make your monthly payments less accessible.

What to know: Do not forget to factor in interest, and its volatility. The changing interest rates can affect monthly payments, for better or for worse.

Loans

A loan is a lump sum amount loaned by a bank (or person) that you can pay back in installments.

What to know: Understand the number of installments, the period, and the interest rate of the loan to be paid back. These details will help drive your investing strategy.

Credit Card Payments

If you do not pay your credit card bills in full each month, you will generally have to pay back the amount with a significant interest rate, meaning the value you initially spent will exponentially multiply as time passes.

What to know: Be aware of banks´ interest rates as they all will vary.

Once we understand our liabilities, we can then start to build the framework of our investing strategy. Though there are other things to acknowledge when investing, knowing our liabilities is an essential first step. So, once we know our liabilities, we can start to identify the amounts of money we can use to invest and where we can invest them. 

We need to determine what the time frame is for our investments. How long do we have until retirement?  Can we utilize long-term investments?  Is our time frame shorter and the assets will need to be in a more liquid investment?

This shows how we now understand what our asset allocations should be, because we first took the time to understand the time frame of our liabilities. 

Understanding our liabilities is a pertinent step in creating an investment strategy that fits our lives. We each have different liabilities and commitments. Being fully aware of each one will help create a framework for your personal investing.

Who knew that keeping track of our bills could help guide our investment decisions?

Each month, we keep track of our bills: rent, mortgage, water, electricity, internet, and other expenses. We do it mostly so we can avoid late payments and the penalties that come with them. However, there is another reason why we should keep track of these payments, and it will help drive our investment decisions.
When starting to formulate investment decisions, it can sometimes feel a little overwhelming. Short-term securities, long-term securities, stocks, annuities, insurance, and mutual funds, where do we start? There are many places to invest money. When faced with this long-list of investment choices, it is easy to forget the reason why we sat down to invest in the first place, but if we know what our liabilities are, now and in the future, we will be able to create a framework and strategy for our investments. However, what exactly are liabilities?
Specifically, liabilities are what we are legally responsible for paying, now or in the future. They can consist of loans, accounts payable (like bills), mortgages, deferred revenues, and accrued expenses. Knowing our liabilities can help drive our investment decisions because when we see what we need to pay and when we need to pay it, we have a greater understanding of when we need our investments to be more liquid (cash) or less liquid (real estate). For example, when we know we have a recurring payment of $500 in May, we can plan to have at least that much in cash at that time. At that time, holding all of our assets as 30-year bonds does not make sense for our lifestyle and liabilities. This example clarifies why it is essential to understand our liabilities. Knowing them can help drive our investment strategy and set us up for the future. Here are some specific examples of personal liabilities and some things to know about each one (The list does not include every liability):
Expenses
Expenses include bills and other payments. Typical expenses include rent, water and electricity bills. We can predict the recurrence of these payments as they are generally contracted to occur on a specific date in a certain amount.
What to know: Keep a list of your monthly expenses so you can plan your investing schedule around them. By understanding monthly payments, it can be easier to implement not only investing strategies but also saving strategies.
 
Mortgages
Fixed-Rate mortgages are mortgages where you pay the same principal payment and interest amount every month.
Adjustable Rate Mortgage is a mortgage where the interest rate you pay varies with the market. When market rates are low, your mortgage may look more affordable. As the market changes, the change in interest rates may make your monthly payments less accessible.
What to know: Do not forget to factor in interest, and its volatility. The changing interest rates can affect monthly payments, for better or for worse.
Loans
A loan is a lump sum amount loaned by a bank (or person) that you can pay back in installments.
What to know: Understand the number of installments, the period, and the interest rate of the loan to be paid back. These details will help drive your investing strategy.
 
Credit Card Payments
If you do not pay your credit card bills in full each month, you will generally have to pay back the amount with a significant interest rate, meaning the value you initially spent will exponentially multiply as time passes.
What to know: Be aware of banks´ interest rates as they all will vary.
Once we understand our liabilities, we can then start to build the framework of our investing strategy. Though there are other things to acknowledge when investing, knowing our liabilities is an essential first step. So, once we know our liabilities, we can start to identify the amounts of money we can use to invest and where we can invest them. 
We need to determine what the time frame is for our investments. How long do we have until retirement?  Can we utilize long-term investments?  Is our time frame shorter and the assets will need to be in a more liquid investment?
This shows how we now understand what our asset allocations should be, because we first took the time to understand the time frame of our liabilities. 
Understanding our liabilities is a pertinent step in creating an investment strategy that fits our lives. We each have different liabilities and commitments. Being fully aware of each one will help create a framework for your personal invest

Conservative Assets: Navigating Market Volatility

The uncertainty of the stock market has people looking for a conservative way to invest and still yield returns. When talking about investing, it is hard to find a guaranteed, “conservative” investment. Conservative assets exist and we will discuss each one: cash, certificates of deposit, treasury bills, and money market funds.

A conservative asset is an asset in which the risk of loss is low.  Meaning, like cash, we have a relative certainty of the asset´s value. With the stock market´s daily troughs and peaks, conservative assets can make our portfolios feel more secure. Some of the most common conservative assets include:

Cash

Money is unarguably a conservative asset, in the short-term. I say short-term because due to inflation cash may lose its value in the long-term. Another rare moment when money may have  risk would if you ended up holding counterfeit currency. Though less common in the US, counterfeit riddles countries in central and South America. So, in general, holding our investments in cash, in the short term, is conservative.

Certificates of Deposit

A certificate of deposit (CD) is a savings certificate with a fixed maturity date, specified fixed interest rate and can be issued in any denomination depending on the minimum investment requirements. A CD may restrict access to the funds until the maturity date of the investment. CDs are generally issued by commercial banks and are insured by the FDIC up to $250,000 per account registration. 

Money Market Funds

A money market fund is an investment whose objective is to earn interest for shareholders while maintaining a Net Asset Value (NAV) of $1 per share. A money market fund portfolio is comprised of short-term, less than one year, securities representing high-quality, liquid debt and monetary instruments. There is no guarantee that the NAV will stay at $1 per share.

Treasury Bills

Treasury bills are another type of conservative investment. They are considered lower risk because they are backed by the U.S. Government. We can look at these as conservative assets because the likelihood of them defaulting is very low. If we hold a treasury bill to its maturity, we will receive the face value of the treasury bill. If we sell it early, the value may be more or less than we originally paid for it.  If interest rates go up, the value of the Treasury bill will go down.

So, in short, if we invest $100 in a treasury bill, upon maturity we will get $100 back (not factoring in time value of money). Treasury bills usually have maturity dates of up to one year.

……….

Conservative assets can make our portfolios feel low risk and guarded against the unknown, the low risk nature of conservative assets also means a smaller return compared to higher risk investments. Generally, the higher the risks, the higher the potential returns.

So, is there another approach to protecting our portfolios and increasing our returns?

Yes, and the answer is to diversify.

Rather than buying a group of conservative assets and watching their yield increase at the rate at which molasses drips from our spoons,  we can to some extent protect our portfolios by diversifying. 

Diversification means buying a diverse array of assets—both conservative and higher risk. By doing this, we can enjoy the potential higher yields of risky assets while also hedging the unavoidable market cycles with our more conservative assets.

Conservative assets are essentially lower-risk investments. To see higher returns, diversifying our portfolios to include both conservative assets and risky assets could prove to be more beneficial for our portfolios long term, than holding conservative assets alone.

The uncertainty of the stock market has people looking for a conservative way to invest and still yield returns. When talking about investing, it is hard to find a guaranteed, “conservative” investment. Conservative assets exist and we will discuss each one: cash, certificates of deposit, treasury bills, and money market funds.

A conservative asset is an asset in which the risk of loss is low.  Meaning, like cash, we have a relative certainty of the asset´s value. With the stock market´s daily troughs and peaks, conservative assets can make our portfolios feel more secure. Some of the most common conservative assets include:
Cash
Money is unarguably a conservative asset, in the short-term. I say short-term because due to inflation cash may lose its value in the long-term. Another rare moment when money may have  risk would if you ended up holding counterfeit currency. Though less common in the US, counterfeit riddles countries in central and South America. So, in general, holding our investments in cash, in the short term, is conservative.
Certificates of Deposit
A certificate of deposit (CD) is a savings certificate with a fixed maturity date, specified fixed interest rate and can be issued in any denomination depending on the minimum investment requirements. A CD may restrict access to the funds until the maturity date of the investment. CDs are generally issued by commercial banks and are insured by the FDIC up to $250,000 per account registration. 
Money Market Funds
A money market fund is an investment whose objective is to earn interest for shareholders while maintaining a Net Asset Value (NAV) of $1 per share. A money market fund portfolio is comprised of short-term, less than one year, securities representing high-quality, liquid debt and monetary instruments. There is no guarantee that the NAV will stay at $1 per share.
Treasury Bills
Treasury bills are another type of conservative investment. They are considered lower risk because they are backed by the U.S. Government. We can look at these as conservative assets because the likelihood of them defaulting is very low. If we hold a treasury bill to its maturity, we will receive the face value of the treasury bill. If we sell it early, the value may be more or less than we originally paid for it.  If interest rates go up, the value of the Treasury bill will go down.
So, in short, if we invest $100 in a treasury bill, upon maturity we will y get $100 back (not factoring in time value of money). Treasury bills usually have maturity dates of up to one year.
……….
Conservative assets can make our portfolios feel low risk and guarded against the unknown, the low risk nature of conservative assets also means a smaller return compared to higher risk investments. Generally, the higher the risks, the higher the potential returns.
 
So, is there another approach to protecting our portfolios and increasing our returns?
Yes, and the answer is to diversify.
 
Rather than buying a group of conservative assets and watching their yield increase at the rate at which molasses drips from our spoons,  we can to some extent protect our portfolios by diversifying. 
Diversification means buying a diverse array of assets—both conservative and higher risk. By doing this, we can enjoy the potential higher yields of risky assets while also hedging the unavoidable market cycles with our more conservative assets.
 
Conservative assets are essentially lower-risk investments. To see higher returns, diversifying our portfolios to include both conservative assets and risky assets could prove to be more beneficial for our portfolios long term, than holding conservative assets alone

Stay the Course on a Carefully Prepared Investment Strategy

There is always going to be a financial guru trying to sell you the hottest “proven” investment strategy. The truth is that there are many different investment strategies to choose from and there is no single perfect answer for every investor. 

That is not to say that all investment strategies are created equally, but what is right for you may not be right for someone else. Determining your specific goals and risk tolerance is the first step. Disciplined investing is key, and that means following through on your investment strategy before you judge its effectiveness.

The Process of Deciding Your Investment Strategy

The first step to becoming a disciplined investor is to decide on an investment strategy. The main points you will need to think about are uncertainty, asset allocation, your goals, objectives risk tolerance and diversification.

Planning an investment strategy starts with understanding your relationship with uncertainty. A defining characteristic of your investment style will be how much risk you are willing to take on. Aggressive investments may have a higher potential return, but a larger uncertainty of losing value at any given time. These assets tend to be volatile. Other investments may have a relatively stable price without much real uncertainty of losing significant value. Once you are able to define how much risk you are willing to expose yourself to, you can begin to determine which types of investments are best suited to meet your specific goals and objectives. This is where asset allocation and diversification come into play.                                                                                    

The goal is to design a portfolio that limit the risk that you may lose more money than your are comfortable with. The other goal is to earn a return on your investment. But markets move up and down, and new investors are often nervous when they see their investment begin to underperform. This is a common reflex for investors to change their mind about their strategy and sell the asset. 

Give Your Strategy Time to Mature

Fearing that you may have employed a losing strategy is a difficult emotion to overcome. It is one thing to talk about uncertainty in the abstract, but it is another to see the loss in your portfolio. But you should not allow emotion to be the ruler of your investment strategy. You must take the time to choose a strategy you can believe in, because if you sell your asset too early, you might miss out on a potential gain when the market corrects itself.

What happens is that if an asset begins to perform poorly some  investors are likely to sell the stock. Some investors stick to very small margins, others may panic at the dip in value, or any other number of factors could cause this to happen. The volatility of the market will may draw the value of the asset back up after a period of time, which can result in a gain for an investor who held onto it. However, there are events that may occur when it would be in your best interest to sell the position. This is why some people work with an advisor to help them make difficult decisions.

Investing Requires Discipline

Any time you make an investment, it is important to perform the due diligence required to feel comfortable in your purchase. This may include prospectus, research reports, earnings reports, news items or offering memorandums.  If your investment declines in value a short time after you buy it, and you did your research on the company you may feel more secure about holding onto the stock through volatile markets. This is the discipline that any investment strategy needs to be successful.

Sorting through the News: How to use the News to your Investing Advantage

¨Most seasoned investors won't fall victim to media manipulation.¨  Forbes

Today, there are many news sources on the internet, which means there is also an unfathomable amount of news articles, real and fake, floating around too. The overabundance of news makes finding investment information a task comparable to finding a needle in the snowcaps of Mount Everest. However, keeping up with your investments does not have to be an arduous task. There are easier ways to navigate the news and filter out the noise.

First of all, it is good to note that sensationalized, tidbits of news are not going to strengthen our investment portfolios. A small tweet from Elon Musk can put a dent in his net-worth and tweets about fake tariffs can make stock prices waiver, but this type of news is not going to impact our long-term outlook. Rather than rely on the luck and inconsistency of short-term sensationalism to make a buck, we are going to assume here that we are basing our investment decisions on stock value and facts. Therefore, we do not necessarily need to read every piece of news.

So, if we don’t need to read every news article, which ones should we be reading?

Generally, stocks have been more impacted by interest rates and earning results and this is the information we should be paying attention to. The articles containing this Information is where we should start our research on the company :

1.Earning Calls

News about earning calls are usually listed on the company’s website, and if you miss it, you can usually find a summary or a replay posted after the call. In these calls, you will be able to listen to current information about a company, as well, as their quarterly earnings. You will then  be able to make fact-based decisions. More often than not, it is a result of information discussed at these meetings that a company’s stock value will start to rise or fall.

2.SEC Filings

SEC filings are another source of useful information to read. Understanding a company's financial health will help you make critical decisions when managing your portfolio. SEC filings can also help decipher when there is contradictory information.  SEC filings can be found at: https://www.sec.gov/edgar/searchedgar/companysearch.html.

3.Annual Meetings

Annual meetings are held once a year, and you can find the schedule and news on a company’s website. You will be able to hear the strategic goals of the company as well as year-end results. This meeting is another pivotal time for a company’s stock.

4.Extra: General News

With Google News, you can personalize your settings so that you can browse information about the companies you are interested in. This strategy helps filter the noise, and allows us to read news that matters.

Rather than trying to read every news article, start with these three key article topics: Earning calls, Annual meetings and SEC filings. This approach is a way to cut through countless news articles and fine-tune the information you read daily. With these steps, we can hopefully work smarter rather than harder.