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Buying an asset and holding it for the long term in anticipation of an eventual return is a portfolio investment. An investor’s portfolio might include any combination of stocks, bonds, commodities, real estate, or other assets. The portfolio’s composition would depend on the investor’s risk tolerance, the amount of money he or she wanted to invest and the time horizon in which they are striving to achieve various goals.
Many investors generally strive for balanced portfolios that aren’t too weighted in any one type of asset. The aim is to reduce volatility and to achieve diversification that may help manage the potential fallout from a downturn in market values.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
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Investment income is any interest, rents, royalties, dividends, capital gains, and other income derived from an asset. Investment income could come from sources including stocks, bonds, options, property sales, savings account interest, or the sale of valuables or collectibles.
Gross investment income is the total amount of money you collect on your investments before fees and taxes. Net investment income would be what remained after you subtracted what you paid to buy, hold, and sell your investments, investment fees, and capital gains taxes.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
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Mutual funds are professionally managed portfolios made up of securities like stocks and bonds. Retail investors can buy shares of those funds, in effect receiving the experience and diversification strategies of an institutional investor.
Mutual funds are traded in separate categories that indicate the fund’s objective, the expected return, and the types of securities included in the fund. For example, stock mutual funds are balanced with a composite of different securities, so they are generally less volatile than single-stock securities. Investors can find options suited to their risk tolerance and financial goals. Most employer-provided retirement accounts, like a 401(k), offer a choice of stock and bond mutual funds.
Fund performance is tracked as the change in the fund’s market capitalization (or “cap”)—the number of outstanding shares multiplied by the share price, allowing investors to compare mutual funds the same as they would other securities.
Investing in mutual funds involves risk, including possible loss of principal. Fund value will fluctuate with market conditions and it may not achieve its investment objective.Diversification cannot ensure a profit or guarantee against a loss.
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Stockholders can choose a set-it-and-forget-it option to automatically reinvest their dividends to purchase more of that stock. Reinvesting their dividends and accumulating more shares gives an investor the potential to compound their return and grow their wealth if the stock performs well.
A dividend reinvestment plan (DRIP) can apply to any dividend-paying security but is most common with publicly traded companies. With most opt-in DRIPs, investors automatically buy discounted-price shares or fractions of shares directly from the company with little or no commission fee. For investors, it’s an opportunity to accumulate more ownership shares in a company at a reduced price. And with the ability to buy fractional shares, investors can put every dividend dollar to work.
Reinvested dividends are taxed the same as if they were cashed out.
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Investment securities are assets like stocks, bonds, and mutual funds that can be bought or sold in public markets or exchanges. These securities can be held for the long term and traded on a quicker timeline, sometimes within the same day. For long-term investing, experts generally advise you ignore the short-term price changes of the various assets in your portfolio and keep your eye on long-term growth.
There are a number of different approaches to stock investing, such as value investing or growth investing. For many investors, these types of securities provide investment income in the form of interest and dividend payments. And some investors seek to grow their investment securities portfolios by automatically reinvesting their dividends. There are also different strategies for fixed income investing.
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Alpha refers to an investment’s performance compared to a market benchmark. The term is often used to gauge the skill and strategic decisions of an investment portfolio manager.
Alpha can be negative. If an investment delivers a return below the market average, its alpha will indicate that fund as underperforming on a relative basis. While past performance is not an indication of future results, investors, of course, seek opportunities to buy securities that have experienced positive alphas.
Alpha is usually expressed as a number that refers to a percentage. For example, a mutual fund with an alpha of 2.0 would mean that fund has outperformed the market average by 2%. Investors can use this information to help their analysis, though it’s important to remember that past performance does not guarantee future returns.
Alpha measures the difference between a portfolio’s actual returns and its expected performance, given its level of risk as measured by Beta. Beta is a way of measuring a portfolio’s volatility, or systemic risk, compared with the overall market’s volatility. Portfolios with a value greater than 1 are more volatile than the market. A positive (negative) Alpha indicates the portfolio has performed better (worse) than its Beta would predict.
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Capital gains are the profit from the sale of an investment. It is expressed as a dollar amount and calculated by subtracting the sale price of an investment from the price originally paid. If you bought one share of stock for $100 and then sold it for $200, you would have realized a capital gain of $100.
The tax consequences of capital gains may need to be reported on your income tax return and will depend on the tax rate, on how long you owned the investment, and other factors. Short-term investments, or those that were bought and sold within a year, are taxed the same as your regular income. Investments held for more than a year are considered long-term investments and are taxed at a lower rate. Along with other considerations, this may provide an incentive for long-term portfolio investing. Capital gains taxes apply to any kind of asset you sell, including stocks, bonds, real estate, and collectibles.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
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If you own a stock that pays dividends, you can choose to roll those dividend payments into the purchase of more of that stock, and usually at a discounted price with little or no commission fee. Reinvesting your dividends gives you the potential to compound your return if the stock performs well. It can be a great way to accumulate more ownership shares in a company at a reduced price.
Many publicly traded companies allow stockholders to opt in to a dividend reinvestment plan (DRIP), which automatically reinvests your dividends into the purchase of more shares or fractional shares. The shares are sold directly by the company, allowing investors to avoid brokerage fees, and they are typically offered for a lower price than what the stock is trading at on the market. And because you can buy fractional shares, you can put every dividend dollar to work.
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Investable assets are the things you own that can be easily liquidated and invested. The money in your bank accounts, stocks, bonds, and mutual funds may be investable assets. Things like real estate, vehicles, and collectibles are not considered investable assets because, even though you may be able to liquidate them eventually, there’s no guarantee that you can sell them at any given time.
Smart money management includes diversifying your investable assets. Developing a well-balanced investment portfolio that includes various kinds of securities may help cushion the potential fallout of a downturn in asset values.
Your investable assets will also impact your ability to borrow money. Lenders will evaluate your investable assets to determine if you're likely to have the necessary cash available to make timely payments on your debt.
Diversification cannot ensure a profit or guarantee against a loss.
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Diversification in investing means limiting your exposure to any one type of asset. A diversified portfolio may include securities from different industries or risk levels and help cushion the blow if one asset or group of assets loses value. The aim of a diversification strategy is to develop a portfolio that helps provide the investor with an appropriate degree of risk, depending on their risk appetite, time horizon, and goals. Clearly, portfolio investing involves decisions that may be unique to each investor.
As part of portfolio investing, it’s important to find the appropriate balance between conservative and aggressive. Portfolios that are too conservative or that include a disproportionate amount of lower-risk, lower-yield assets can be at risk of inflation outpacing returns. Conversely, an overly aggressive portfolio that’s heavily weighted with equities may be overly exposed to market volatility.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
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A financial advisor is someone who provides guidance and investment analysis to help you pursue your financial objectives. Financial advisors can help you plan for short and-long-term goals such as buying a home, paying for your children’s education, and saving for retirement. They can also help you determine how much to invest and how to select investment options designed to help you achieve those goals.
The Financial Industry Regulatory Authority (FINRA)formally defines financial advisor as a generic term that usually refers to a broker or registered representative. A registered representative (RR) is a financial professional who is able to deal with client transactions in the securities markets. RRs must pass strict licensing requirements, which may include the Series 7 or 6 exams, and must follow rules set out by FINRA and the SEC.
In addition, our financial advisors at Wilmington Advisors @ M&T are also Investment Advisor Representatives and have passed qualifying exams such as Series 63 and/or 65, which includes but is not limited to the study of economic factors, investment vehicle characteristics, client investment recommendations and strategies, and laws and regulations.
Like many investors, you may not have the time, skill, or knowledge to research securities and build, as well as monitor, your portfolio. Financial advisors can help by not only understanding the many facets of investing and the vehicles available, but also by getting to know you, understanding your specific situation, and helping tailor a strategy that is appropriate for you.
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Investment advisors that are registered with either the U.S. Securities and Exchange Commission (SEC) or with state securities agencies are referred to as registered investment advisors, or RIAs. By registering, advisors commit to the fiduciary responsibility of putting clients’ best interests before their own.
Whether investment advisors register with the SEC or in the states where they practice depends mostly on how much money they manage. Advisors managing more than $100 million in assets are required to register with the SEC. Those managing less generally register with their state securities commission.
Registration with the SEC does not imply a certain level of skill or training.
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Owning a variety of stocks, bonds, real estate, or any other type of asset may make you a diversified investor. Diversification may be able to manage the risk of loss that can take place by overexposure to any one asset class or security. Spreading your dollars among—and within— different asset classes may help even out market fluctuations.
A diversified investment portfolio is built for long-term holding. An individual investor’s diversification may depend on factors such as his or her risk tolerance and objectives, and the investment time horizon. Many retail investors work with advisors to accumulate the appropriate combination of assets.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
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Socially responsible investing (SRI) avoids investing in companies and industries that run contrary to an investor’s specific set of values. Back in the mid-1900s, SRI came into play with the notion of eliminating “sin stocks”—those related to alcohol, tobacco, or gambling—from investment consideration, as some viewed them as morally objectionable. You can still exclude or screen out certain industries that don’t align with your values, but the field has expanded to a broader focus on the more inclusionary environmental, societal, and governance (ESG) investing which considers those criteria to help achieve holistic financial objectives.
Put another way, SRI allows an investor to align their principles with their portfolios—to do good while also aiming to do well from a financial standpoint. Today, in addition to looking at a company’s balance sheet, one can look at whether its hiring practices are equitable, whether it promotes diversity, the degree to which it’s seeking to reduce its carbon footprint, etc.
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Investment funds are collections of securities co-owned by a group of investors. Mutual funds, money market funds, and exchange-traded funds are common examples where individual investors own shares in a fund that is operated by a fund manager.
With an investment fund, an individual investor does not have a say in how the fund invests its pool of money. Rather, investors analyze a fund’s goals, risks, and fees before deciding whether that fund is likely to perform according to their expectations. To invest in the fund is to buy shares that can then be traded on the market the same as other equities.
Because investment funds consist of multiple assets, they may be suitable for investors who want to diversify their portfolios. Investment funds are also useful for investors who may lack the analytical skills and experience they believe a fund manager may be able to provide.
All investing involves risk including loss of principal.
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No. Any fees you pay to buy, sell, or hold an asset or to collect interest or dividends are not eligible for income tax deduction. This would include brokerage or transaction fees, management and advisor fees, custodial fees, accounting costs, and fund operating expenses.
Prior to the Tax Cuts and Jobs Act of 2017, you could itemize and deduct investment fees that were necessary to produce and collect taxable income if those deductions were greater than 2% of your adjusted gross income. Those deductions have been suspended through at least 2025.
If you itemize deductions, you may still be able to deduct investment interest expenses, which would mean any interest paid on money you borrowed to buy taxable investments. A tax advisor can help you here since such advice always requires consideration of individual circ*mstances.
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An annuity is a contract between an investor and financial institution that guarantees a future stream of payments to the investor. They are commonly used by retirees as a source of reliable investment income.
You can purchase an annuity, most often issued by insurance companies, with monthly payments or a lump sum. From there, the issuing company will invest your money, hoping to realize a return that exceeds what it has agreed to pay you. At a specified date, you’ll begin to receive regular payments that can last for a set number of years or for the remainder of your life, depending on the type of annuity you purchased.
There are many kinds of annuities, including fixed, variable, immediate, and deferred. Each has distinct characteristics regarding investor cost and risk tolerance and the length of the payout schedule. Annuities are complex investments with potentially significant fees. Obtain guidance from an investment advisor and a tax advisor before purchasing an annuity.
Fixed and variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.
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Yes, in terms of investing, equities and stocks are the same thing. Both refer to ownership shares in a public company. Those shares can be bought and sold on various U.S. and global markets and exchanges. By extension, the terms “stock market” and “equity market” are also synonymous.
When you buy a share of stock, you receive equity, or ownership, in a company. Investors do so with the hope or expectation that the price of that stock will increase and that they may also receive a distribution of profits in the form of dividend payouts. Equity investing may come with increased volatility and loss of principle as there is no guarantee of a company’s success or a return on investment. That risk is counterbalanced with the potential for a greater return than certain other investment opportunities. Investment professionals generally consider equities to be a key component of a fully diversified portfolio.
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Retail investors are individuals who independently invest their own money in a variety of asset classes—such as stocks or bonds—through brokerage firms or their retirement accounts. Institutional investors, on the other hand, are companies or organizations managing pensions, hedge funds, endowments, and mutual funds, that are investing on behalf of a group of investors.
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A fixed income investment is the purchase of a bond or certificate of deposit (CD) that has a predetermined, set interest rate. Investors are paid interest annually until the bond or CD matures, at which point they recoup their initial investment. Fixed income investing can be a lower-risk strategy compared to investing in stocks. The objective is to preserve capital and income.
Governments and corporations often fund operations and projects by selling debt securities. For example, a company may issue a $5,000, 10-year bond with a 3% interest rate. If you purchased that bond and held it to maturity you’d be paid $150 annually for 10 years (3% of your investment amount). At maturity, you would also recoup your $5,000 investment.
Certain fixed income investments provide a guaranteed return—U.S. Treasuries, for example, are backed by the full faith and credit of the Constitution—and many are generally safer than stocks, although no investment is risk-free. There are a number of risks to be considered with fixed income investing, such as the potential that an entity might go bankrupt and not be able to pay back bondholders. Credit ratings can provide an indication as to an entity’s creditworthiness. The higher the credit rating of a company or government, the more likely it will be able to pay back its bondholders. An additional risk is inflation; if inflation rates outpace a bond or CD interest rate, bondholders will have lost purchasing power on the money they invested.
CDs are FDIC insured to specific limits and offer a fixed rate of return if held to maturity, whereas investing in securities is subject to market risk including loss of principal.
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Value investing involves attempting to identify and then buy a stock whose price you believe to be undervalued. When you’re right, you’ve in effect bought that stock at a discount.
This long-term investment strategy is based on deep analysis of a company’s characteristics and potential. Value investors might study metrics including price-to-earnings ratio, cash flow, competitive advantage, target market, and business model.
Value investors look for opportunities born out of investor overreactions. They believe that investors are prone to making emotional decisions based on good or bad news and attempt to take advantage of a dip in stock price.
Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.
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Yield to maturity (YTM) is the annual rate of return on a bond if you did not sell it before it matured. It is expressed as a percentage. YTM includes all the interest the bond would pay annually, known as coupons, plus recoupment of your original investment after the bond matured. It is a useful tool for fixed income investors to compare bonds with different coupons and maturity dates.
YTM is a complex calculation and meant only as a projection. It assumes all interest or coupon payments are reinvested at the bond’s current yield, which may not always be possible or even likely. The formula factors in the bond’s current market price, the coupon payments, the recoupment amount, and the term to maturity. Because a bond’s coupon interest rate fluctuates, YTM on any given bond will fluctuate. YTM does not take into account taxes paid by the investor or investment costs related to the purchase.
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