China's Currency - Revisited

Contributed by: Nicholas Boguth

I want to revisit a topic I first discussed back in March – China’s currency.

In the previous blog, I explained why China was devaluing their currency and what potential effects it could have on their economy. As previously stated, one of the biggest risks with currency devaluing is the risk of capital outflow. If investors think that there are better opportunities elsewhere, they will move themselves or their money into a country with stronger currency prospects. In the chart below, we can see this exact event currently happening in China.

http://www.tradingeconomics.com/china/capital-flows

This is a topic that catches a lot of headlines, and it should be useful to have some background to filter through all the noise. We are likely to see headlines about how China is managing its currency well into the New Year; maybe headlines about Chinese goods getting cheaper as the US Dollar strengthens relative to the yuan, or you may have already seen the most recent headline about China placing restrictions to attempt to slow the capital outflow from the country. They want to slow this mass capital outflow because it is increasing their supply of yuan and triggering inflation that can be harmful in excess. We will stay tuned and observe how the country acts and reacts going forward. If you have any questions about these changes, don’t hesitate to reach out to the Investment Department here at The Center!

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.® and an Investment Representative with Raymond James Financial Services.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Nick Boguth and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance may not be indicative of future results.

Third Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®

After a very interesting first half of the year with early negative returns, followed by Brexit in June, markets performed well in July and then quieted down in the month of August. September brought with it a bit of increased fluctuation when investors thought the Federal Reserve Board may raise rates at the September meeting but calmed back down when that fear subsided. As of October 1st the S&P 500 gained over 7.8% this year including dividends with nearly half of that gain (3.85%) coming in the third quarter. The year-to-date story, however, has not been told primarily by the S&P 500 as we have gotten so used to over the past several years. 

Diversification Works Again

This year other asset classes have had the opportunity to shine as Emerging markets; commodities and high yield have topped S&P 500 returns. Diversification seems to once again be working after a long drought. The chart below shows performance of various asset classes by year with the best performer’s bars on the top of the stack and worst relative performers on the bottom. Notice the Green line (S&P 500) has been near the top of the list for the past three years but that hasn’t been the norm over the last 14 years. This year we have returned to the more normal pattern where the S&P doesn’t dominate.

Source: Blackrock

Rate Hike Kicked Down the Road

Not surprisingly the Federal Reserve opted not to raise interest rates last month. The dissention among the voting members, though, was surprising. Three members of the voting board voted for an interest rate increase going against Janet Yellen’s recommendations to hold course. This is the first noted dissention since 2014. The next meeting occurs in November just a few short days before the election. It is highly unlikely they will make waves that close to the election so it looks likely that if a rate increase occurs it will be at the December 13-14th meeting.

Election

I would be avoiding the elephant in the room if I didn’t mention the election. Jaclyn Jackson wrote a piece on political parties and their impact to your portfolio, I would encourage you to read this before making any rash investment decisions based on the election. The battle between Clinton and Trump is proving to fulfill every media fantasy. They both certainly make for excellent headlines. Trump will be doing his best to rally voters to change by making promises but also by making things seem worse in the economy than they likely are. While there is often some volatility leading into an election because of these negative headlines, usually after the decision has been made markets settle down and most often continue in a positive direction the remainder of the year.

Checkout Investment Pulse, by Angela Palacios, CFP®, a special summary of the Morningstar ETF conference she attended.

Harvesting tax loss may sound counter-intuitive but can go a long way to enhance net after-tax returns for investors. Find out some strategies to implement and common mistakes to avoid.

This month Nick Boguth, Investment Research Associate, gives us an introduction to cost basis methods and what we typically have our clients utilize.

Jaclyn Jackson, Investment Research Associate, explains to us how just like the right mix of ingredients for a tasty meal, we also need to know the asset allocation mix that makes our investment journey palatable.

If you have topics you would like us to cover in the future, please let us know! As always, we appreciate the opportunity to meet your financial planning and investment needs. Thank you!

Angela Palacios, CFP®
Director of Investments
Financial Advisor

Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss. Investing always involves risk, including the loss of principal, and futures trading could present additional risk based on underlying commodities investments. Diversification does not ensure a profit or guarantee against a loss. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.

Investor Basics: Cost Basis Accounting

Contributed by: Nicholas Boguth

Cost basis: one of the many things we at The Center monitor in order to serve our clients. Most of us know that cost basis is the original value of a security (usually the purchase price), but a lesser known fact is that there are many different accounting methods used to calculate tax liability when the decision is made to sell a security. The table below describes the different methods available.

This is important because the incorrect accounting method could lead to an unnecessary or unexpected amount of capital gains. Hypothetical example: you bought 50 shares of Tesla back in 2012 when it was $30, and another 50 shares in 2014 when it was $200. Now it is 10/5/16, and you went to sell 50 shares at its current price of $210. How much of your sale would be considered capital gains? Well, if your accounting method was FIFO, the answer would be $180 per share, whereas if your accounting method was minimum tax (The Center’s default option) then it would be $10 per share.

The outcomes between accounting methods can be drastically different, and each method has its place depending on your objective. Decision-making from client to client may vary which is where the help of a financial professional can come into play. Please read our Director of Investments, Angela Palacios’, CFP®, Investor Ph.D. blog for insight into more strategies that The Center practices in order to help minimize tax burden.

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.® and an Investment Representative with Raymond James Financial Services.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Nick Boguth and not necessarily those of Raymond James. This is a hypothetical example for illustration purpose only and does not represent an actual investment. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Investor PhD: Harvesting Losses and Avoiding Gains

Contributed by: Angela Palacios, CFP®

This may sound counter-intuitive, but taking some measures to harvest tax losses on positions and avoiding unnecessary capital gains distributions this time of year can go a long way in improving your net (after tax) returns.

Make sure you are reviewing your portfolio throughout the year for tax losses to harvest.  Stock losses were at their peak during mid-February, but if you waited until this fall to think about tax loss harvesting you have most likely missed the boat as much of those losses have been recovered and moved on to higher highs. The end of the year is rarely the best time of the year to harvest tax losses. 

Harvesting losses doesn’t mean you are giving up on the position entirely. When you sell to harvest a loss you cannot have had a purchase into that security within the 30 days prior to and after the sale.  If you do you are violating the wash sale rule and the loss is disallowed by the IRS. Despite these restrictions, there are several ways you can carry out a successful loss harvesting strategy.

Loss harvesting strategies:

• Sell the position and hold cash for 30 days before re-purchasing the position. The downside here is that you are out of the investment and give up potential returns (or losses) during the 30 day window.

• Sell and immediately buy a position that is similar to maintain market exposure rather than sitting in cash for those 30 days. After the 30 day window is up you can sell the temporary holding and re-purchase that original investment.

• Purchase the position more than 30 days before you want to try to harvest a loss. Then after the 30 day time window is up you can sell the originally owned block of shares at the loss. Being able to specifically identify a tax lot of the security to sell will open this option up to you.

Common mistakes some people make when harvesting:

• Dividend reinvests count!!! So if you think you may employ this strategy and the position pays and reinvests a monthly dividend you may want to consider having that dividend pay to cash and just reinvest it yourself when appropriate or you will violate the wash sale rule.

• Purchasing a similar position and that position pays out a capital gain during the short time you own it.

• Creating a gain when selling the fund you moved to temporarily that wipes out any loss you harvest. Make the loss you harvest meaningful or be comfortable holding the temporary position longer.

• Buying the position in your IRA. This will violate the wash sale rule just like if you bought it in your taxable account. This is identified by social security numbers on your tax filing. So any accounts held under those same tax payer IDs are not allowed to purchase the security in that 30 day window of harvesting the losses.

Personal circumstances vary widely so it is critical to work with your tax professional and financial advisor to discuss more complicated strategies like this!

Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Third Quarter Investment Pulse

Contributed by: Angela Palacios, CFP®

Special conference edition! September brought not only the beginning of school and cool evenings but also the Morningstar ETF conference. Jaclyn Jackson and I were able to take a few days away to attend some enlightening sessions full of hearty debate, idea sharing, and new information during the first week of September. Some of my key takeaways follow!

Key takeaways from the Morningstar ETF conference:

• The Sustainable investing (ESG or socially responsible preferences) space has grown rapidly in the past 5 years. 80% of companies in the S&P 500 published sustainability reports in 2015 verses only 20% in 2011. Sustainability reports discuss a variety of issues for the firm including pollution mitigation, water use, and best practices for attracting a diverse workforce. Institutions, women and younger investors have been driving this demand. To learn more click here.

• There is more than meets the eye when performing due diligence on index holdings and exchange traded investment options. A low expense ratio isn’t the bottom line of costs associated with an investment. Stocks that make up the index and how an index is built and changes over time can greatly impact unseen costs. Also the experience of the people trading the portfolio can have a large impact. 

• Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, shared her views on Central Bank Policies, recession probability, sluggish growth, and interest rates. She feels the risk of recession remains low. She also sees higher interest rates as a positive more than a negative. Savers are better for the economy then the spenders, according to Ms. Sonders, so it is time to give them a chance!

• Behavioral investing rounded out the sessions. Sarah Newcomb Ph.D., Behavioral Economist, rolled out Morningstar’s new tool kit on behavioral investing. In rocky markets we have a tendency to want to do something. Anything to make us feel better. Much like a soccer goalie during penalty kicks, the best thing they can do is to stay in the middle and do nothing, rather than try to anticipate and move in the wrong direction. Fans don’t like this though; they would rather see the goalie do something. In investing the best thing to do during turbulent markets is often to do nothing, but that goes against our own nature. Bottom line, we need to make a plan during calm times to prevent ourselves from making bad decisions in the moment.

Stay tuned all this week for more investment, market, and quarter three updates!

Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Investing involves risk and investors may incur a profit or a loss. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.

Finding the Right Asset Allocation

Contributed by: Jaclyn Jackson

Most delicious meals start with a great recipe.  A recipe tells you what ingredients are needed to make a meal and, importantly, how much of each ingredient is needed to make the meal taste good.  Just like we need to know the right mix of ingredients for a tasty meal, we also need to to know the asset allocation mix that makes our investment journey palatable.

Determining the Right Mix

Asset allocation is considered one of the most impactful factors in meeting investment goals.  It is the foundational mix of asset classes (stocks, bonds, cash, and cash alternatives) used to structure your investment plan; your investment recipe.  There are many ways to determine your asset allocation.  Asking the following questions will help:

• What are my financial goals?

• When do I need to achieve my financial goals?

• How much money will I be investing now or over time to facilitate my financial goals?

Seasoning to Taste

Now, suppose equity markets were down 20% and your portfolio was suffering.  Would you be tempted to sell your stock positions and purchase bonds instead? Figuring out an asset allocation based on goals, time horizons, and resources is essential, but means nothing if you can’t stick with it.  For certain ingredients, a recipe may instruct us to “season to taste”. In other words, some things are subjective and our feelings greatly influence whether we have a negative or positive experience.  For asset allocation, understanding your risk tolerance helps uncover personal attitudes about your investment strategy during challenging market scenarios.  It gives insight about your ability or willingness to lose some or all of your investment in exchange for greater potential returns.  When deciding our risks tolerances, we must understand: 

• The risks and rewards associated with the investment tools we use.

• How we deal with stress, loss, or unforeseen outcomes

• The risks associated with investing

Following the Recipe

When we follow a recipe closely, our meal usually turns out the way we expected.   In the same way, committing to your asset allocation increases the likelihood of meeting your investment goals.  Understanding your risks tolerances can reveal tendencies to undermine your asset allocation (i.e. selling or buying assets classes when we should not). Fortunately, there are a few strategies you can employ to help stay on track.  

• If you are risk adverse, diversifying your investments between and among asset categories can help to improve your returns for the levels of risks taken.

• If you find yourself buying or selling assets at the wrong time, routinely (annually, quarterly, or semi-annually) rebalancing your portfolio will force you to trim from the asset classes that have performed well in the past and purchase investments that have the potential to perform well in the future.

• If you find yourself chasing performance or buying investments when they are expensive, buying investments at a fixed dollar amount over a scheduled time frame, dollar cost averaging, can help you to purchase more shares of an investment when it is down relative to other assets (prices are low) and less shares when it is up relative to other assets (more expensive).  Ultimately, this can lower your average share cost over time.

Finding the right asset allocation for you is one of the most important aspects of developing your investment plan.  Luckily, getting clear about investment goals, time horizons, resources, and risks tolerances can help you mix the best recipe of asset categories to make your investment journey deliciously successful.

Jaclyn Jackson is an Investment Research Associate at Center for Financial Planning, Inc.® and an Investment Representative with Raymond James Financial Services.

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This information is not a complete summary or statement of all available data necessary for making an investmentdecision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and are not necessarily those of RJFS or Raymond James. Every investor’s situation is unique and you should consider yourinvestment goals, risk tolerance and time horizon before making any investment or investment decision. Investing involves risk, investors may incur a profit or loss regardless of strategy or strategies employed. Asset allocation and diversification do not ensure a profit or guarantee against a loss. Dollar-cost averaging does not ensure a profit or protect against loss, investors should consider their financial ability to continue purchases through periods of low price levels.

3 Reasons Discretionary Investment Management could be Right for You

Contributed by: Angela Palacios, CFP®

We all have busy lives. Whether you are getting down to business or enjoyingyour retirement to the fullest who wants to worry about missing a call from their advisor because something in their portfolio needs to be changed? Perhaps cash needs to be raised to meet that monthly withdrawal to your checking account so you can keep paying your traveling expenses. Or money has to be deposited to your investment account, if you are still saving, and needs to be invested. Regardless of your situation, many investors find it difficult to make time to manage their investment portfolios. We argue this is far too important to be left for a moment when you happen to have some spare time. 

What is Discretionary Management?

It is the process of delegating day-to-day investment decisions to your financial planner. Establishing an Investment Policy Statement that identifies the guidelines you need your portfolio managed within is the first and arguably the most important step. Investment decisions are then made on your behalf within the scope of this statement. It is kind of like utilizing a target date strategy in your employer’s 401(k). You tell it how old you are and when you are going to retire and all of the asset allocation, rebalancing and buy/sell decisions are made for you.

3 reasons this can be a suitable option for investors:

1. Frees up your time to do what you love most. Time is the resource we all struggle to get our hands on. Need I say more?

2. Markets move quickly and sometimes portfolios must also to respond. Changes can happen in a timely fashion whether you are within reach on your cell phone or not.

3. May reduce the potential for poor investor behavior. Let those not emotionally charged by fluctuations in the market make decisions on your behalf.

If you have questions on whether or not this is right for you and your portfolio don’t hesitate to contact us.  We’d be happy to help!

Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Second Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®

Ever heard of the Chinese curse?  “May you live in interesting times.”   We certainly have the interesting part covered this year! 

Voters are showing that around the world they are fed up with the status quo. Donald Trump became the presumptive nominee as the republican candidate for President of the United States while David Cameron, Prime Minister of the United Kingdom, announced he will be stepping down after the UK voted to leave the European Union. 

Unfortunately, “interesting” usually translates to volatility in the markets and this quarter has been no exception. With the S&P 500 up 2.46% for the quarter and 3.84% as of June 30th for the year, the ride has not been as smooth as it may appear on the surface especially during the last trading week of the second quarter.

Brexit

An affirmative vote for the UK to leave the EU, or Brexit, caused a couple of days of uncomfortable downside volatility, but it did not last long. The media has a hay day with these “interesting” events and we find ourselves having to sift through the hype to dig into what an event really has to do with our portfolios. 

Let’s put some perspective around this. The United Kingdom only represents about 4% of the world’s GDP compared to the U.S. contributing 22% according to the World Bank’s Gross Domestic Product figures for 2015. In fact, the separation could take two years, after they invoke an agreement called article 50, to iron out the details and in the end may not even harm the world’s economy.  Article 50 must be invoked by the Prime Minister and likely won’t be done until later this year after David Cameron is replaced. 

The point here is that all is yet unknown and Brexit will certainly continue to cause headlines on occasion over the coming years as well as short term potential volatility. 

Overall, this should not impact long term returns in a significant way for most asset classes outside of the UK, and therefore we aren’t recommending a change to a diversified long-term investment strategy.   Our international holdings remain spread around the world and there are no outsized positions within the UK. These periods of short term volatility may be viewed as buying opportunities for our international portfolio managers.

Interest Rates

The Federal Reserve voted to stay their hand at the June meeting and did not raise interest rates again but left an opening to possibly raise rates at the July meeting. Economic data has come in at its continued slow growth trajectory while inflation has been benign causing the lack of interest rate increases by the Fed. The Fed was also concerned about the Brexit vote occurring one week after their meeting and this may have caused them to hold off as well. 

Bond markets remind us once again why it is important to hold them within a diversified portfolio. As volatility picks up they rarely fail to cushion our overall portfolio returns and this quarter has been no exception with the Barclays Aggregate Bond Index up 2.21%.

Your Plan and Portfolio

While interesting times may lead to volatility you can bet that some portions of your portfolio may outperform others in any year.  At the Center, we monitor the allocation of your portfolio on a regular basis.  When volatility presents an opportunity to rebalance we will act on your behalf or notify you if a change is needed.  Adding money to your portfolio, managing positions, and tax loss harvesting are some of the strategies that we can take advantage of during periods of volatility. We also anticipate future cash needs so funds are available regardless of market returns.

Here is some additional information we want to share with you this quarter:

Checkout Investment Pulse, by Angela Palacios, CFP®, summarizing some of the research done over the past quarter by our Investment Department.

Investors often avoid that which they don’t understand despite the diversification or return benefits an asset class may provide. Check out Investor Ph.D .

This month Nick Boguth, Investment Research Associate, delves into the equities with a primer on investing in common and preferred stocks.

Jaclyn Jackson, Investment Research Associate, discusses some important developments for the Real Estate Investment Trust asset class.

We strive to keep you informed! You may tune in to our webinars for market updates (there is one coming up soon, Summer Market Update: Staying cool while markets are turbulent. Click here for information and to register). These are meant to supplement your conversations with us so don’t hesitate to reach out any time you have questions or concerns. Thank you for placing your trust in us!

Sincerely,
Angela Palacios CFP®
Director of Investments

Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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Please note that all indices are unmanaged and investors cannot invest directly in an index. An investor who purchases an investment product which attempts to mimic the performance of an index will incur expenses that would reduce returns. Standard & Poor’s 500 (S&P 500): Measures changes in stock market conditions based on the average performance of 500 widely held common stocks. Represents approximately 68% of the investable U.S. equity market. US Bonds represented by Barclay’s US Aggregate Bond Index a market-weighted index of US bonds. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Angela Palacios and not necessarily those of Raymond James.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Please note that international investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.

Investor Ph.D. Series: ADRs, and REITs …Oh My!

Contributed by: Angela Palacios, CFP®

Dorothy risked everything and traveled into the unknown when going into the haunted forest on her quest to return to Kansas.  At the Center, we prefer to walk in with our eyes wide open. Our Investment Department and Investment Committee conducts thorough research before recommending securities for your portfolio. Investors and advisors tend to stick with what they know when building their portfolios. In doing so, they can overlook opportunities to potentially increase returns or add diversification.  In other cases, investors may jump into less familiar asset classes at the wrong time.

In this installment of Investor Ph.D. we want to take you beyond just investing in domestic equity and preferred securities explained by Nick Boguth. Following are some assets we have considered that may not be at the forefront of your mind.

REITs

REITs or Real Estate Investment Trusts can offer the benefits of diversification, income stream and capital appreciation to an equity portfolio. A REIT is a company that owns income producing real estate. REITs can trade similarly to a stock traded on a stock exchange and be highly liquid or they can be private, non-liquid investments. They pay out all or most of the income they receive from their properties as dividends to investors and, in turn, investors pay the taxes on those dividends. Typical REITs can own commercial or private real estate including apartments, shopping malls, hospitals, hotels, nursing homes, industrial facilities, infrastructure, offices, student housing, storage centers, and timberlands.

A REOC or Real Estate Operating Company is similar to a REIT. The distinction that separates them is a REOC will take the earnings and income streams from their investments and reinvest into the business rather than paying it out to the shareholders. An investor would not expect an income stream from this type of investment, only capital appreciation.

ADRs

ADRs, or American Depository Receipts, are shares of a foreign company that trade on an American stock exchange. ADRs make investing in foreign securities much easier than having to factor in currency exchanges, costs, and logistics of trading on a foreign stock exchange. A bank purchases a block of shares from the foreign company, bundles them, and reissues on a domestic exchange denominated in U.S. dollars. The U.S. investor avoids foreign taxation while the foreign company enjoys increased access and availability to the wealthy North American markets. Once the ADR is listed on the U.S. stock exchange its price is driven by supply and demand. This can result in pricing of the security here to not follow exactly the pricing of the security in its home market. When this happens there is an arbitrage opportunity if the price is too high or too low when you translate its value back into the value in the home country’s currency and exchange. ADRs offer diversification and capital appreciation for investors by adding an international component to portfolios.

We have owned these types of investments for our clients through some of our money managers. We tread carefully into these spaces as many investors have been reaching for yield causing these investments to appear richly valued compared to their historical valuations.

Utilizing these types of securities doesn’t have to be as scary as it was for Dorothy to travel into the haunted forest. Arm yourself with knowledge and a good Financial Planner to help make the best decisions for your financial plan!

Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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The information contained in this post or blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Andrea Palacios and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. Investing involves risk and you may incur a profit or loss regardless of strategy selected. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.

Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Investor Basics: Stocks 101

Contributed by: Nicholas Boguth

Earlier in the Investor Basics series, we went over the basics of bonds. Now we’re going to switch gears to the equity side of the investment universe, and gain a better understanding of the basics of stocks.

What is a stock?

A stock is a claim on a company’s assets, or in other words, a share in ownership. If you own a stock, then you own a piece of the company.

The major difference between stocks and bonds is that bonds have a contractual agreement to pay interest until the bond retires, while owners of stocks have a claim to assets so they hope to make money on capital or price appreciation and/or dividend income. Another major difference between stocks and bonds is that owners of stocks do not get paid in the event of a company’s bankruptcy until after all the bond holders are paid. For these reasons, stocks are typically considered “more volatile” investments.

What are the different types of stock?

There are two main types of stocks – common and preferred.

When hearing people talk about stocks in everyday conversation, it is usually safe to assume that they are talking about common stock. Common stocks are much more prevalent in the market. The major difference in characteristics of common stocks and preferred stocks are – 1. Common stocks do not have a fixed dividend, while preferred stocks do, and 2. Common stocks allow the investor to vote on corporate matters such as who makes up the board of directors, while preferred stocks do not.

Voting rights depend on the number of shares that you own. If you own 1000 shares, you have 1000 votes to cast. Most companies allow votes to be cast by proxy, so the individual investor does not have to be present at things like annual meetings in order to cast a vote. Proxy votes can typically be sent in by mail, or nowadays it is common that you will be alerted via email that you are able to vote on a company’s policy and you may cast it quickly online.

Preferred stocks may not allow the investor to vote on policies, but they do have a fixed dividend that is typically higher than the dividend of a common stock, and in the event of liquidation will be paid before common shareholders (but after bond holders). You may note that a fixed dividend sounds a lot like the fixed interest payment of a bond. This is true, but there is no contractual obligation to pay the dividend on stocks. These similarities typically make preferred shares act like something in between a stock and a bond – something that does not participate in the price movement of a company as much as a common stock, but receives a fixed dividend similar to the interest payment of a bond.

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc. and an Investment Representative with Raymond James Financial Services.

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This information does not purport to be a complete description of the securities referred to in this material, it is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. Investing in common stocks always involves risk, including the possibility of losing one's entire investment. Dividends are subject to change and are not guaranteed, dividends must be authorized by a company's board of directors.