BC Journal

Building Investment Portfolios

It’s 2024. Do You Know Where Your Portfolio Is?

The Analogy

If the title has a familiar ring to it, you may be recalling the admonition heard so often decades ago: “It’s 11 o’clock, do you know where your children are?” The safety of our children is always a concern. Where they are, where they are going and who they are with are important considerations, always. The safety of your portfolio obviously doesn’t rise to the level of the safety of your children, but it is important to know where it is, where it is going and who it is with. (By “who”, we do not mean your investment advisor, broker, or management firm as you will see below.)


Where is My Portfolio?

What return can I expect from it? How much risk exposure do I have? Is it efficient? What does efficient even mean?

An efficient worker is more productive than one who is not.  An efficient process improves productivity. An efficient portfolio is also more productive as it improves return for every unit of risk assumed. An optimized efficient portfolio is expected to give you the most bang (return) for your buck (risk).

Your portfolio’s expected return, risk, and efficiency are all measurable. You can discover “Where it is.” (Read on.)

#Finterms: ETF (Exchange-Traded Fund)

An ETF, or Exchange-Traded Fund, is an investment fund holding a basket of stocks, bonds, or commodities. ETFs are similar to Mutual Funds in many ways, with two key differences:

  1. Trading: ETFs trade on secondary exchanges and their prices change throughout the day, just like individual stocks. Mutual Funds are only bought and sold at the end of each trading day based on the closing net asset value (NAV) of the underlying holdings.
  2. Tax Efficiency: ETFs typically generate less tax liabilities than similarly structured Mutual Funds. This is largely because ETFs trade on secondary exchanges.

ETF investors typically sell their shares in the open market when they choose to exit the fund. Conversely, Mutual Fund managers must unload underlying positions each time investors want to redeem their money. The resulting tax consequences are distributed across all investors in the Mutual Fund.

ETFs can provide low-cost exposure to a diversified portfolio of assets. Their unique structure allows for easy buying and selling throughout the trading day. Many ETFs track a defined index, such as the S&P 500 or Dow Jones Industrial. However, there are also many ETFs that target certain sectors, industries, or themes.

#ETF #investments #taxefficiency #diversification #portfolio

Financial Literacy

#Finterms: Federal Reserve

The Federal Reserve, often called the Fed, is the central banking system of the United States. Established in 1913, its primary goals are to promote maximum employment, stable prices, and moderate long-term interest rates. Fed actions are termed monetary policy. The Federal Reserve includes a Board of Governors, twelve Federal Reserve Member Banks, and the Federal Open Market Committee (FOMC).

The Fed has three primary tools to achieve its objectives: open market operations, discount rate adjustments, and reserve requirements.

  1. Open market operations occur when the Fed buys and sells bonds to influence the money supply nationwide. When the Fed sells bonds, investors temporarily exchange their cash for securities offering modest returns. When the Fed buys bonds, this cash is returned to investors and the available money supply increases.
  2. The discount rate is the interest rate the Fed charges member banks for loans. A higher discount rate slows lending activity and limits currency circulation. Conversely, a lower discount rate encourages new loans and bolsters the money supply.
  3. Reserve requirements are the minimum amounts that member banks must hold for consumer withdrawals. Their key purpose is to promote stability in the banking system. Reserve requirements also influence lending practices and the overall money supply.

The Board of Governors are nominated by the President and confirmed by the Senate for staggered fourteen-year terms. This process is intended to insulate Fed officials from changing political tides and partisan pressures.

#federalreserve #fed #centralbank #interestrates #discountrate

Financial Literacy

Looking Back and Ahead

Looking back at key factors and forces that shaped market results for 2023

and ahead with economic, market and portfolio thoughts for 2024.


Looking Back

Looking back, 2023 was a year of catch phrases: “Transitory Inflation,” “Higher for Longer,” “Supply Chain,” “The Magnificent Seven,” “A Recession is Coming,” “Soft Landing,” “Goldilocks Scenario,” “Stagflation,” “What about the Fed?” “Santa Claus Rally.” As the year unfolded, U.S. equity markets fluctuated up and down in the first half of the year then had three consecutive down months ending in October, with the S&P 500 hitting the low for the year on October 17th. Then, against that noise and backdrop, came a remarkable holiday gift: a widespread market rally.

The “What about the Fed?” question, as answered during the year by investors and the Federal Reserve itself, drove the movements in equity and bond returns. Investors reacted to every expectation of what the Fed would do next with rate hikes, and to what it actually did. Fed rate hikes (“Higher for Longer”) and the prolonged inverted yield curve drove investors to money market funds and short-term treasuries. This retreat pushed stock prices lower as demand for risk assets fell. In October, the yield on 2-year treasuries hit a 17-year high of 5.12%. The 10-year followed suit with a 16-year high of 4.7%.

The movement to money market funds was record-breaking. Money flows into money market funds in the year following the October 2022 stock market lows, had a net increase of over $1.1 trillion, or 24.4%. That is the largest jump ever following a market low. (Sources: S&P, Bloomberg) J.P. Morgan estimates that $6 trillion is currently sitting in money market funds and CDs.