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Basic Investment Principles 101: From Asset Allocations to Zero Coupon BondsPERSONAL FINANCE & INVESTING FUNDAMENTALS 1.0

Premiere Date: January 30, 2017This webinar is sponsored by: Eisner Amper

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MODERATOR

Michael Terrien West Loop Financial LLC

PANELISTSMatthew Graffagnino Alpha FiduciaryTad Gray Financial Solutions Advisory

Group

MEET THE FACULTY

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ABOUT THIS WEBINAR

This webinar covers the vocabulary of basic investing topics. It provides a basic foundational understanding of different types of investments, different types of investment accounts and the tax attributes of each, different investment philosophies and styles and different types of investment advisors and advisory arrangements.

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ABOUT THIS SERIESEarning a decent living is a necessary, but not sufficient, ingredient for financial independence and an affordable retirement. Spending smartly, saving enough, and investing responsibly are also essential. This webinar series assumes that, while you may be an expert in your chosen field and that you earn a decent income, you know little about investing. It will take you through basic investment principles, discuss goals based investing, and cover some of the legal and tax principles that every investor should have a basic understanding of. Each episode is delivered in Plain English understandable to business owners and executives without much background in these areas. Yet, each episode is proven to be valuable to seasoned professionals. As with all Financial Poise Webinars, each episode in the series brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. And, as with all Financial Poise Webinars, each episode in the series is designed to be viewed independently of the other episodes, so that participants will enhance their knowledge of this area whether they attend one, some, or all of the episodes.

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EPISODES IN THIS SERIES

EPISODE #1 Basic Investment Principles 101: From Asset 1/30/2017Allocations to Zero Coupon Bonds

EPISODE #2 Goal Based Investing: Planning for Key Life Events 4/3/2017

EPISODE #3 The Legal & Tax Aspect of Investing: Estate Planning, 5/8/2017Risk Mitigation and Tax Efficiency

Dates shown are premiere dates; all webinars will be available on demand after premiere date

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BASIC INVESTMENT TYPES/ASSET CLASSES

• Stocks

• Bonds

• Real Estate

• Commodities

• Cash and Cash Equivalents

• Life Insurance/Annuities

Often exposure to these basic investment types or “asset classes” can be achieved through “wrappers” such as mutual funds, or through the use of “derivatives” such as futures or options.

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STOCKS• Stocks, sometimes called “equity” or “equity securities,” are shares of ownership in a

company.

• In investing we are usually referring to “publicly traded” stocks that are bought and sold on exchanges such as the New York Stock Exchange.

• But “stock” can also refer to ownership of private or closely held companies.

• In addition to financial returns, stock ownership typically comes with governance rights, such as the right to vote on members of the company’s board of directors.

• Stockholders are not entitled to a fixed return. Instead they are entitled to the profits left over after all of a company’s obligations are satisfied.

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BONDS

• Bonds, sometimes called “fixed income” or “fixed income securities” are debt obligations of the issuer, usually either a company (a “Corporate Bond”) or a government entity (a “Government Bond”).

• In the United States, government bonds are issued by the federal government ( “Treasury Bonds”) as well as states, cities and other municipalities (“Municipal Bonds.”)

• “International Bonds” are bonds issued by companies or governments outside the United States.

• The issuer of a bond is typically obligated to make periodic interest payments and repay the principal of the loan at the bond’s maturity date, i.e. when it “comes due.”

• Interest is usually at a fixed rate, but it can be variable, and some bonds do not pay periodic interest at all. They are called “Zero Coupon Bonds.”

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BONDS CONT’D• The risk (of default) of and the interest paid by a bond are largely determined by two

variables, the duration (roughly, time to maturity) of the bond and the riskiness of the borrower.

• High quality borrowers, such as large, profitable corporations, and financially sound governments, in each case with good credit ratings, issue relatively safe bonds referred to as “Investment Grade” bonds.

• Companies with significant credit risk based on their finances can only issue “High Yield” a/k/a “Junk” bonds.

• Longer duration bonds also carry additional risk and therefore ordinarily (but not always) pay higher interest rates.

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REAL ESTATE

• Real Estate can be invested in by directly purchasing (and managing) rental property, either commercial or residential.

• Exposure to real estate is also often achieved in a more diversified way and without the cost and work of management through a special type of fund called a “Real Estate Investment Trust” or “REIT” which invests in a portfolio of underlying real estate assets.

• REITs have special income distribution and tax rules not applicable to ordinary mutual funds.

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COMMODITIES

• Commodities are tangible items that are useful or otherwise valuable.

• The most commonly traded examples of commodities include precious metals, energy sources such as oil and natural gas, and agricultural commodities such as wheat, soybeans, or pork bellies.

• Because investors typically do not desire physical possession of commodities, exposure to them is commonly achieved through derivatives such as futures and options contracts.

• Investors are exposed to profits or losses on such contracts at the time of sale, and typically do not “take delivery” of the underlying commodity.

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CASH AND CASH EQUIVALENTS

• Cash and cash equivalents includes paper currency and bank “demand deposits” (so called because they are available on demand).

• It also includes money market funds, certificates of deposit (bank deposits in which the funds are not available on demand), short term treasury bills, commercial paper and various other very safe, highly liquid assets.

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LIFE INSURANCE/ANNUITIES

• Life insurance companies offer a variety of investment products but they can be divided into two primary categories:

• Cash Value Life Insurance, and

• Annuities

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CASH VALUE LIFE INSURANCE• Cash value life insurance includes product types such as whole life, universal life, and variable

universal life.

• Cash value life insurance mixes the risk protection of life insurance with a “cash value” investment feature.

• The cash value of a cash value life insurance can be structured to vary with the performance of an insurance company’s investment portfolio, or it can be tied (usually loosely) to a measure of market performance such as a widely followed stock market index.

• The death benefit on cash value life insurance can also be structured to vary, either with the cash value of the policy, or with “paid up additions.”

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ANNUITIES

• Annuities are designed to provide a stream of income, typically over either a period of years, or for a person or persons’ lifetime.

• Annuities can be funded with periodic contributions (e.g. over a working life) or with a single payment.

• Returns on invested capital can be fixed or variable (e.g. with a market index).

• Annuities can be structured to begin payouts immediately (an “Immediate Annuity”) or at a later date (a “Deferred Annuity.”)

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MUTUAL FUND

• Among the most common ways of obtaining exposure to investment returns is through a fund, such as Mutual Fund or REIT. Other less liquid options (which typically require investor qualification) are Private Equity Funds, Hedge Funds and Venture Capital Funds.

• All offer advantages such as diversification and professional management.

• All also involve the payment of some level of fees for those benefits (from very modest to quite significant).

• Funds can be found which invest in virtually any underlying asset class, e.g. US small company stocks, or intermediate term treasury bonds, or nearly anything else. Some funds leave the types of investment up to a manager’s discretion.

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FUTURES AND OPTIONS

• Futures and options are referred to as “derivatives” because they are not direct investments in an underlying asset.

• Instead they are merely contracts providing for the right to buy or sell an underlying asset on given terms (timing and price) and therefore “derive” their value from the value of this right.

• Futures and options can be written on nearly any underlying asset including stocks, stock indices, bonds, commodities, currencies, etc.

• Futures and options can be used either for financial speculation or to “hedge” (e.g. when an airline purchases a future on fuel to fix the price and mitigate the risk of prices.)

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TYPES OF INVESTMENT ACCOUNTS

• Investment accounts are generally either individual accounts or employer-sponsored plan accounts.

• Different types of investment accounts are subject to different tax treatments.

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INDIVIDUAL ACCOUNTS

• Brokerage Accounts

• Individual Retirement Accounts

• Roth IRAs

• Health Savings Accounts

• 529 Accounts

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TAX ATTRIBUTES OF BROKERAGE ACCOUNTS

• Brokerage accounts receive no “special” tax treatment.

• Income and dividends earned in brokerage accounts are taxable in the manner provided by tax law depending on their origin.

• Sales of assets produce either gains, which are taxable, or losses, which are deductible (subject to limitations).

• Gains or losses can be long term (for assets held more than 1 year) or short term, with different tax rates applicable to each.

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TAX ATTRIBUTES OF INDIVIDUAL RETIREMENT ACCOUNTS

• Money contributed to an ordinary (i.e. “traditional” or non-Roth) individual retirement account is generally excludable from taxable income in the year contributed and taxes are therefore “deferred.”

• Interest, dividends and capital gains earned on assets in individual retirement accounts are not taxable in the year paid so long as they remain in the account.

• Withdrawals from individual retirement accounts, however, are taxable as ordinary income and do not benefit from more favorable capital gains tax rates.

• Early withdrawals can also result in a penalty tax.

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TAX ATTRIBUTES OF ROTH IRAs

• Money contributed to Roth accounts does not benefit from tax deferral like money contributed to a “traditional” IRA does.

• Like a traditional IRA, however, interest, dividends and capital gains on assets held in a Roth account are not taxable.

• The main advantage of Roth accounts is that after five years, all money withdrawn, including earnings and capital gains, can be withdrawn tax free.

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TAX ATTRIBUTES OF HEALTHSAVINGS ACCOUNTS

• Health Savings Accounts are used to save for healthcare expenses.

• HSAs combine the benefits of traditional and Roth accounts.

• Money contributed can be excluded from taxable income.

• Money withdrawn can be withdrawn tax free, including earnings and capital gains.

• The two caveats are: that the money withdrawn must be used for qualifying medical expenses;

and the contributions limits are low

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TAX ATTRIBUTES OF 529 ACCOUNTS

• 529 Accounts are used for education saving.

• They provide the same tax free growth as Roth accounts (so long as withdrawals are used for qualifying education expenses).

• Unlike traditional IRAs and Health Savings Accounts, however, contributions to 529 Accounts do not provide a tax deferral.

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EMPLOYER SPONSORED PLANS• The most common Employer Sponsored Plan is a 401(k). Others include 403(b)s, 457s

and Cash Balance Plans.

• Most Employer Sponsored Plan accounts are used for tax deferral, in which income contributed to the account is not taxable in the year in which it is earned.

• Depending on the type of account and the employer sponsored plan terms, some plan accounts receive Roth taxation.

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INVESTMENT STYLES

• Broadly, investment styles can be divided between “active” and “passive” strategies.

• Within each type, investment styles can be further broken down by the type of asset favored by the investor or investment manager.

• Active strategy investors can also be divided between those who practice “fundamental” analysis, and those who practice “technical” analysis.

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PASSIVE INVESTING• Passive investing seeks to capture the returns offered by each asset class invested in by

minimizing costs and investing in a broadly diversified set of securities in each such asset class.

• Often, but not always, passive investing involves simply purchasing all the securities in an market index (e.g. the S&P 500 Index of large US companies).

• Passive investors tend to cite research suggesting that active management rarely outperforms passive management after accounting for the costs and taxes generated by active management.

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ACTIVE INVESTING• Active investing seeks to outperform the returns of an asset class, usually by one or both

of the following:

• Active investors often attempt to employ “fundamental analysis” of securities in an attempt to identify those that are undervalued. They seek to purchase securities they believe are undervalued with the expectation of earning excess returns when the securities’ value is later recognized.

• Active investors also often employ “market timing” through the use of macro-economic analysis, technical analysis, or other techniques in an attempt to determine the future direction of markets or individual security prices. They then seek to be more invested when they believe prices will go up, and less invested when they believe they will go down.

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TECHNICAL VS. FUNDAMENNTAL ANALYSIS

• Investors practicing “fundamental” analysis seek to understand particular companies, industries and/or economies, in an effort to allocate capital to investments they believe are undervalued and therefore likely to outperform.

• Investors practicing “technical” analysis believe they can forecast the movement of markets or individual security prices based on a study of trends and charts showing past market prices and trading volume.

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OTHER COMMONINVESTMENT STYLE TERMINOLOGY

• “Fixed Income Investors” are investors who invest in bonds.

• “Growth Investors” are in investors who invest in “growth” stocks, i.e. stocks of companies which they expect to grow quickly.

• “Value Investors” are investors who invest in companies with low stock prices relative to fundamental measures such as earnings, revenues or book value.

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INVESTMENT ADVISORY RELATIONSHIPS

• Investment advice is provided in a variety of different arrangements.

• The bulk of advisors provide services either through broker-dealers (e.g. Merrill Lynch), insurance companies (e.g. Northwestern Mutual Life) or independent registered investment advisors (“RIAs”).

• Advisors can be either fiduciaries (owing a duty to serve the client’s best interest) or arms-length sales representatives (owing a primary duty to their employer, and required only to sell investments “suitable” for any investor).

• Advisors are typically compensated either on a “fee only” basis, a “commission” basis, or a “fee based” basis.

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INVESTMENT ADVISORYRELATIONSHIPS CONT’D

• Some advisors limit their services to investment advice and management, while others provide a more comprehensive package of financial planning or “wealth management” services.

• Many advisors hold professional designations such as the CFP or CFA.

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INVESTMENT ADVISORY BUSINESS MODELS: BROKER-DEALERS

• The largest segment of the investment advisory service market is comprised of “broker-dealers.”

• A broker-dealer is a brokerage that both executes orders for its customers and trades for its own “house” account. Most household name brokerages are broker-dealers.

• Broker-dealers license agents known technically as “Registered Representatives” and commonly simply as “brokers” who purchase and sell securities for investors.

• Registered representatives are generally not fiduciaries and brokers can be found operating on any of the compensation arrangements.

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INVESTMENT ADVISORY BUSINESS MODELS: INSURANCE COMPANY

• Insurance companies that offer investment advisory services or wealth management services effect the securities transactions associated with the services through a broker-dealer, typically a “captive” one owned by the insurance company.

• Advisors are not typically fiduciaries and most commonly operate on a “fee based” compensation model that combines commissions for insurance products sold with advisory fees for investment management.

• Investment advisory services offered by an insurance company are more likely to include annuities and/or cash value whole life insurance in their recommendations than other types of advisors.

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INVESTMENT ADVISORY BUSINESS MODELS: RIAs

• RIAs also effect the securities transactions associated with their services through broker-dealers, though typically not “captive” broker-dealers.

• Advisors working for RIAs are referred to as “Investment Advisor Representatives” or “IARs.”

• RIA advisors are legally required to act as fiduciaries and most commonly operate on either a “fee only” or “fee based” compensation model.

• RIAs also frequently offer more comprehensive financial planning services. This is sometimes done in conjunction with an investment advisory relationship, and sometimes separately. Separate services are typically compensated on an hourly or fixed fee basis.

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COMPENSATION ARRANGEMENTS: COMMISSIONS

• “Commission” compensation arrangements refer to the charging of a one time fee upon the purchase or sale of a security or other financial product.

• Examples include brokerage commissions charged by brokers to execute securities transactions, “loads” charged on the purchase or (less commonly) sale of loaded mutual funds, “mark ups” on bond trades, and sales commissions on the sale of insurance products.

• Commissions are often, but not always, required to be disclosed to the investor. In some cases they are built into the cost of a product and paid “on the back end” to the salesperson by the product provider, e.g. to the insurance agent/broker by an insurance company.

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COMPENSATION ARRANGEMENTS: FEE ONLY

• The essence of a “fee only” compensation arrangement is that all compensation is paid by the investor and fully disclosed.

• The most common “fee only” arrangement is one in which the investor periodically pays an advisor a fee calculated as a percentage of assets managed.

• Hourly or fixed fee arrangements for specific services are also not uncommon.

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COMPENSATION ARRANGEMENTS: FEE BASED

• “Fee Based” compensation arrangements simply combine fee only arrangements, typically the fee for assets under management, with commission arrangements on certain products, often insurance products.

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PROFESSIONAL DESIGNATIONS

• The professional designation most commonly held by investment advisors is the CFP or “certified financial planner” designation. Earning the CFP designation requires coursework covering financial planning, insurance, investing, taxation, estate planning, retirement planning and employee benefits, several years of experience working in the field, and passage of a comprehensive exam.

• It is also not uncommon for investment advisors to hold a CFA or “chartered financial analyst” designation. Earning the CFA designation requires coursework covering finance, valuation methods, economics, financial reporting, corporate finance and various types of investments, as well as four years of experience and the passage of three separate exams.

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OTHER INVESTMENT TERMINOLOGY

• Investment professionals use a lot of terminology including:

Concepts from basic finance such as the “time value of money” and the related concept of “compounding”

Investment concepts related to returns such as “beta” and “alpha”; Concepts relating to the characteristics of specific assets such as “P/E ratio,” “expense

ratio,” “yield” and “duration”; and Concepts relating to portfolio construction and management such as “diversification,”

“asset allocation,” “correlation,” and “rebalancing.”

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TIME VALUE OF MONEY• “Time value of money” refers to the commonsense notion that other things being equal,

most of us prefer to consume resources today rather than defer their consumption into the future. As a result, a dollar today is worth more to us than a dollar tomorrow.

• In addition to this subjective preference, in a world where inflation is expected and normal, a dollar tomorrow is actually expected to be able to purchase less in the way of consumption goods than a dollar today.

• These are the basis of investing because, to compensate for these facts, businesses, governments, and others who compete for the use of an investor’s excess dollars are required to promise, or at least offer the hope of, a return.

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COMPOUNDING

• “Compounding” refers to the fact that returns can be earned not only on an initial principal investment but on returns that were earned on that initial principal in a prior period.

• Thus a $100 investment that earns 10% in year 1 becomes worth $110, a gain of $10. If, however, it earns 10% again in year two, it becomes worth $121, a gain of $11 -- $10 of which was earned on the initial $100 principal investment and $1 of which was earned on the $10 earned in year 1.

• Over many periods, such compounding can become a very powerful wealth building tool. After 20 years of those 10% compounded annual returns, $100 becomes $672, versus the $300 it would become without the effect of compounding.

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BETA

• “Beta” is a statistic used to compare the volatility of any particular investment to the market as a whole.

• A market index has a beta of 1, the same as the market.

• An investment that is more volatile (and therefore more risky) than the market has a beta higher than 1, while an investment that is less volatile (and therefore less risky) than the market has a beta lower than 1.

• Beta, however, is only meaningful when comparing a particular investment to a relevant market, i.e. a market who’s price movements explain a significant portion of the movement of the investment’s price.

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ALPHA

• “Alpha” refers to excess returns earned by an investment over and above a relevant market index.

• The earning (or purported earning) of “alpha” is often attributed to manager skill in selecting investments.

• As with “beta” the proper choice of a relevant comparison index is necessary to make “alpha” a meaningful statistic.

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P/E RATIO

• “P/E Ratio,” also called “price/earnings” ratio is a ratio of a company’s stock price divided by its earnings. The P/E ratio is so commonly referred to that it is sometimes just called a stock’s “multiple.”

• Stock prices can grow either when earnings grow, or simply when its P/E ratio “expands” (or becomes larger).

• An expanding P/E ratio is usually understood as a sign that the market expects earnings growth (and conversely, a contracting P/E ratio is understood as a sign that the market expects slowing earnings growth or even declining earnings).

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EXPENSE RATIO• “Expense ratio” is usually used in connection with mutual funds, REITs and other types

of funds. It refers to the ratio of the fund’s administrative expenses in a year to its total assets.

• The expenses of a fund reduce the returns earned by its investors. In other words, they are paid by the investors from their invested assets. Thus a fund’s expense ratio is an important consideration in selecting a fund to invest in.

• Passively managed funds tend to have low expense ratios. In the most extreme cases of large funds that track widely followed indices the expense ratio can be .05% or lower.

• Actively managed funds more commonly have expense ratios between .5% and 1.5% and hedge and private equity funds often charge 2% plus a share of the profits.

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YIELD AND DURATION

• “Yield” refers to the ratio of the interest paid by a bond to its price or the ratio of the dividend paid by a stock to its price.

• “Yield” generally compares the cash payments to a market price, rather than a face value.

• “Duration” measures how sensitive a bond’s price is to changes in market interest rates.

• Duration is closely related to the time to maturity of a bond. A bond with 20 years to maturity will tend to have a longer duration than a bond with 5 years to maturity.

• But duration is a more subtle concept that takes into account the timing and amounts of interest payments paid by the bond as well.

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DIVERSIFICATION, ASSET ALLOCATION AND CORRELATION

• “Diversification” refers to the use of different assets in the construction of a portfolio. It is a fancy word for the old adage: “don’t put all your eggs in one basket.”

• “Asset Allocation” refers to the intentional diversification of the assets in a portfolio intended to adjust the risk and expected return characteristics of the portfolio to suit the needs and tolerances of the particular investor.

• “Correlation” is a concept central to diversification and asset allocation. It is a statistical measure of the tendency of two investments to move (or not move) in tandem with each other.

• Diversification works in large part by pairing low correlation or even negatively correlated assets together to reduce the volatility of a portfolio.

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REBALANCING • “Rebalancing” is a portfolio management technique that builds on an asset allocation.

• It involves monitoring a portfolio for variances from an intended (or “target”) asset allocation that arise over time as a result of differences in the price movements of the different assets used in the asset allocation.

• When variances reach a pre-determined threshold, the portfolio is “rebalanced” by selling some of the assets whose price changes have left them “over weighted” in the portfolio and using the proceeds to by assets whose price changes have left them “underweighted” (either because they’ve risen more slowly or because they’ve fallen in price).

• “Rebalancing” – as a discipline – thus causes an investor to (relatively speaking) “sell high and buy low.” A pretty good recipe for investing success!

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ABOUT THE FACULTY:

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MICHAEL TERRIENmterrien@westloopfinancial.com

Michael S. Terrien is the founder and Managing Member of West Loop Financial LLC (WLF) in Chicago. WLF is a registered investment advisor (RIA) committed to disciplined, evidence-based investing and personalized, comprehensive financial planning designed to help clients build their tomorrows while guarding against the pitfalls on the road today and in the future. West Loop Financial is a member of The BAM Alliance (BAM), a nationwide network of like-minded advisors. Mr. Terrien brings the intensive commitment to client service and attention to detail developed over a legal career spanning more than 20 years to West Loop Financial.

ABOUT THE FACULTY:

Matt has more than seven years of financial planning experience. He has worked with clients from all different walks of life, from physicians and business owners to attorneys and other professionals. Matt’s clients rely on his objective advice and guidance to implement effective solutions. Prior to joining Alpha Fiduciary, Matt worked with a start-up financial planning company where his hard work helped result in the company’s acquisition by a large insurance company.Before Matt began his career in the financial services industry, he served in the United States Army. While serving he deployed twice, once to Iraq in 2003 and once to Afghanistan in 2006. Matt received awards for exceptional service.Matt received his undergraduate degree in finance from Central Connecticut State University and has received the CFP designation. He is currently enrolled in Arizona State University’s MBA program.Matt resides in Gilbert Arizona with his wife, Niky, and their 3 sons.

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MATTHEW GRAFFAGNINOmattg@alphafiduciary.com

ABOUT THE FACULTY:

Tad Gray, CFP®, CIMA® is a Relationship Manager of Financial Solutions Advisory group, an independent fee-only wealth management firm in Chicago.People work with Tad are busy professionals whose primary financial concern is staying on track toward the promises they’ve made. They trust, that together, they'll make financial decisions that will ensure they keep these promises.Prior to becoming a financial planner, Tad enjoyed a 20 year career in investment banking and capital markets, providing him “Wall Street” knowledge of the financial markets.Tad earned an MBA from the Wharton School of the University of Pennsylvania. He received the Certified Financial Planner (CFP) designation from the CFP Board of Standards; and he is a member of the Financial Planning Association (FPA). Tad is also a CIMA® professional.Tad holds a degree in music from the University of Colorado, and continues to enjoy presenting chamber music concerts with his family.

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TAD GRAYtwg@fsadvisorygroup.com

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