Portfolio Management Topics Made Simple
Frequently Asked Questions
Does past performance guarantee future results?
No. Past performance does not guarantee future results. Just because a stock had a great year doesn’t mean it will match that growth the following year. An asset’s performance tends to change often, and its performance is open to interpretation. Avoid trying to time the market, and perform due diligence to get a sense of who the company is and where it’s headed.
How do you build a complete financial portfolio?
You can build a complete portfolio by going through a series of steps in several areas. You can start by creating a balance sheet for your finances. Once you understand how much money is coming in, what’s going out, and what you owe, you can move to investing and saving strategies like 401(k)s, an emergency fund, paying off debt, and funding a Roth IRA.
What can you do to hedge against inflation?
There are a couple of traditional ways to make sure you protect your portfolio from inflation. Investing in treasury inflation-protect securities, floating-rate bonds, stocks, real estate, and commodities are a few options. You can also consider gold, which investors typically believe moves in step with inflation.
Do a company’s annual reports matter?
Yes, they do. Annual reports show you key information about a business’s inner workings, such as how the business operates, what its culture is like, and who its leaders are. Other clues to look for are the tone and content included in a company’s annual report. You’ll also want to look for a clear dividend policy, sensible executive salaries, and transparency.
What’s the difference between a 10-Q and 10-K?
10-Qs are financial statements that a company files every quarter, per SEC rules. They’re unaudited and don’t share the same level of details as their 10-K counterpart. 10-K’s are filed yearly, are granular in their detail, and are audited. Whereas 10-Q’s provide an ongoing view of the company’s financial position, the 10-K gives you a comprehensive look at the company’s finances.
Financial Risk Management
In finance, risk management is a process of identifying, evaluating, and controlling the risk in a portfolio. Having a sound risk management strategy is essential for any investor, as even the safest investments carry some level of risk.
Stockholders' equity is the value of a firm's assets that remain after subtracting liabilities. This amount appears on the balance sheet as well as the statement of stockholders' equity.
Prime brokerage is the bundle of services that major investment firms offer to their hedge fund clients. It includes cash management and securities lending to help the hedge funds increase their leverage as they make large trades.
A hedge fund is a pooled investment structure set up by a money manager or registered investment advisor and designed to make a return. This pooled structure is often organized as either a limited partnership or a limited liability company.
Modern Portfolio Theory
Modern portfolio theory (MPT) is an investing strategy that seeks to optimize the risk-return tradeoff in a diversified portfolio. MPT is based on the premise that markets are efficient; it uses diversification to spread investments across assets.
The current liabilities section of a balance sheet shows the debts a company owes that must be paid within one year. These debts are the opposite of current assets, which are often used to pay for them.
The Form 10-K is an annual business disclosure report all publicly traded companies are legally required to file with the Securities and Exchange Commission (SEC) and make available to investors.
Income Statement Formulas
Income statement formulas are ratios you can calculate using the information found on a company's income statement. Using income statement formulas can help you analyze a company's performance and make decisions about investing. When you are making these calculations, it can help to have an easy-to-reference summary sheet on hand.
An investment mandate is a set of instructions laying out how a pool of assets should be invested. The mandate sets out rules to guide choices during investing. These rules then inform the actions of an investment manager.
Return of Capital
Return-of-capital distributions are non-dividend returns of some or all of the investments you make in a stock or fund. These distributions are tax-free but can have tax implications.