Net Asset Value (NAV) is the value of an entity's assets minus the value of its liabilities. It is most commonly used when evaluating mutual funds or exchange-traded funds (ETF) and in this context is calculated at the end of each trading day.
For mutual funds and ETFs, the NAV is the price at which shares of the fund are bought or sold. It's calculated by subtracting the fund's liabilities from the current market value of its assets and then dividing by the number of outstanding shares.
Here's the formula:
NAV = (Value of Assets - Value of Liabilities) / Total number of outstanding shares
This gives the per-share value or "price" for the mutual fund shares at the end of the trading day. When you buy shares in a mutual fund, you pay the NAV per share, and when you sell, the NAV per share is the amount you receive.
It's important to note that the NAV does not necessarily reflect a fund's future performance or potential. It's simply a snapshot of the fund's value at the end of the trading day.
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Basis points, often abbreviated as BP and sometimes denoted as bps or bips, are a unit of measure used in finance to describe the percentage change in the rate or value of financial instruments. One basis point is equal to 0.01% or 0.0001 in decimal form.
Basis points are used as a convenient way of expressing small changes in interest rates, yields, and equity indexes, and the differences in yields between securities. They help to clarify small percentages changes and avoid confusion around the language of these changes.
For example, if an interest rate rises from 1.5% to 1.7%, it has risen by 20 basis points. Similarly, a 0.5% fee would be expressed as 50 basis points.
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Assets Under Management (AUM) refers to the total market value of investments managed by a financial institution, such as a mutual fund, hedge fund, or investment management firm.
It includes the capital invested by all clients, and it can also include the capital of the financial institution itself.
AUM is used to gauge a firm's size and success, as many institutions charge management fees based on a percentage of AUM.
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Risk is an incredibly broad term, particularly in the investment world. Risk encompasses a range of factors, situations, and possibilities impacting one’s portfolio. Risk is also inherently relative. The field of behavioral finance tells us that everybody’s concept of risk is different. Individual experiences inform each person’s perception and tolerance toward risk.
Markets invoke anxiety. This encourages some to escape rather than assess. Others are drawn toward uncertainty and assume undue risk. While our fight or flight response served us throughout evolution, it often leads to poor investment outcomes. Studies show that emotion-driven investors typically underperform.[1]
Risk biases drive harmful decisions. Our brains are hardwired to draw conclusions quickly. These mental shortcuts may rely upon incomplete information. Consider the nervous investor who sells their shares at market bottom. This trade might provide momentary emotional relief. However, that individual effectively locked in losses and forfeited any opportunity for recovery. The converse is also true. An investor may cling to a single high-performing stock. They remain steadfast until an unforeseen event wipes out their portfolio. Then there is the cash-flush individual who shuns markets entirely. While that individual avoids on-paper losses, inflation slowly erodes the portfolio’s spending power over time. Each situation represents an incomplete understanding of risk.
Fortunately, a structured investment plan will combat these inclinations. Risk analysis is a key step. This exercise considers one’s circumstances (risk capacity), beliefs (risk perception), and preferences (risk tolerance). The investor’s risk profile and goals then determine a suitable portfolio structure. This objective process allows individuals to separate emotional biases from actual threats.
Countless factors and influences impact portfolio performance. Some are manageable and others are not. Regardless, proper information can guide portfolio decisions and even reframe risk evaluations altogether. This article will outline several key risk categories affecting stocks and bonds.
