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.
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.
A federal deficit occurs when spending exceeds revenue. Federal spending supports Social Security, Medicare, military defense, and countless other programs. Federal revenues largely come from taxes.
The federal deficit is tracked annually. The chart below shows key deficit trends. The U.S. maintained a relatively balanced budget throughout most of the twentieth century. Change began in the 1980s when sweeping tax cuts met increased spending. The deficit grew modestly before shrinking again in the 1990s thanks to rapid economic growth. This trend sharply reversed in 2001 following additional policy changes.
The United States has carried a budget deficit ever since. The 2020 deficit remains the largest ever at $3.1 trillion. Corresponding debt ceiling increases have sustained deficit growth.
The X-Date is the day the federal government can no longer pay its bills. This is a point-in-time prediction based on the Treasury’s current cash holdings and expected revenue streams. Failure to meet debt payments results in default. Such an unprecedented event would have far-reaching consequences.
The Treasury Department monitors the federal balance sheet. Treasury officials sound alarm when government funds approach insolvency. Two courses of action are available in this instance: raise taxes or adjust the debt ceiling. The latter is most commonly utilized.
By adjusting the debt ceiling, Congress enables the government to issue additional debt. The Treasury Department can then sell new bonds to investors. These funds support key programs, fulfill existing promises, and prevent default.
