Investment Perspectives

Investor Basics: Stocks 101

Contributed by: Nicholas Boguth 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.


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.

Second Quarter Investment Pulse

Contributed by: Angela Palacios, CFP® Angela Palacios

We’ve been busy with research this quarter. We listened to discussions on everything ranging from interest rates, to the current state of the economy, to social investing. Here’s a peek into what we’ve been learning! 

Jeff Sherman of Doubleline

Jeff is Doubleline’s head of macro asset allocation and a lead portfolio manager. He shared his thoughts on the fixed income markets as well as some interesting insight into the automotive industry.

Jeff feels yield is a good predictor of 12 month returns so if you want to know what types of returns you will get from your bond portfolio you need not look past its yield. Unfortunately, yields are very low right now.

Is there a catalyst for higher rates?

The simple answer, they think, is no. There has to be pressure from somewhere in the economy for rates to rise. GDP (gross domestic product) growth, a general rise in the price of goods (inflation), or wage inflation could trigger rates to rise. They don’t see any of these scenarios happening in the economy right now leading them to believe rates will be on the rise anytime soon. 

Automotive industry worries

They are worried about the automotive market because there have been a lot of subprime loans given to consumers to buy cars. Car dealerships are even starting to lease pre-owned vehicles—because inventories are very high—which has never been done before. Inventories are unusually high right now because cars are lasting longer and Uber is taking over and replacing the need to own a car in many markets. These factors spell trouble for the industry. 

Benjamin Allen of Parnassus

Social investing has been an area of focus for our research over the past couple of years. The process of incorporating a social or ESG overlay to our portfolios for those interested has many more options and research available now. Ben spoke about their process that starts with fundamental research just like any other asset manager. What makes them different is they also apply a lens for social factors including environmental and corporate governance. Their company is 32 years old, completely independent and employee owned. He discussed the importance of this independence in being able to develop their own personal edge for clients which has been a big driver of their success. It sounds like a little company I know…The Center! Our very own 30 year history as independent and employee owned.

Brian Wesbury, Chief Economist for First Trust Advisors

While attending a financial planning conference recently, Matt Trujillo, CFP®, had the opportunity to listen to Brian Wesbury speak. Often seen on CNBC, Fox News, and Bloomberg TV he always has an interesting viewpoint. He touched on two prevalent topics: inflation and current American lifestyles.

On Inflation

He noted that banks are holding onto large excess reserves and that’s why we haven’t seen much inflation and growth because they aren’t lending the money out. He referred to the M2 money supply which has grown very little over the last 10 years. M2 is a measure of money supply that includes cash and checking deposits (M1) as well as “near money.” “Near money" in M2 includes savings deposits, money markets, and other time deposits, which are less liquid and not as suitable as exchange mediums but can be quickly converted into cash or checking deposits.

On Lifestyle

Brian talked about how there has been very little wage growth but that our lifestyles have still grown due to dramatic innovations in technology. In 1995 if you wanted to purchase 1 Gigabyte of hard drive space it would have cost you $45,000. Then he pulled out his iPhone and said he had 64GB of space, which would have been worth $2.8 Million back in 1995! Another example is Facebook, the world’s most popular media owner, creates no content. Does this increase in lifestyle makeup for the lack of wage increases? He is not the first economist we have heard refer to this phenomenon. I believe that much research is to come on this topic.

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


This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios and are not necessarily those of Raymond James. This information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Raymond James is not affiliated with and does not endorse the opinions or services of Jeff Sherman, Benjamin Allen, Brian Wesbury or the companies/organizations they represent. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Past performance is not a guarantee of future results. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

BREXIT—What the Separation Means for You

Contributed by: Nicholas Boguth Nicholas Boguth

In case you missed it, Great Britain voted to leave the European Union yesterday. Here’s a recap of why this vote took place, what the arguments were on each side, and what the vote means for you, the U.S. investor.

It costs Great Britain nearly $10 billion to be a member of the European Union. What does a country like Great Britain gain from the $10B membership fee? The EU spends its budget on economic stabilization, job creation, and security for European citizens. Its members also get the benefit of being a part of the largest trade bloc in the world.

This vote took place now because David Cameron, Prime Minister of Great Britain, campaigned on the promise that he would negotiate better terms of Great Britain’s membership to the European Union. Great Britain has been at a divide for the past few years when it came to key issues related to the European Union. Proponents of leaving the EU cited issues such as the price tag of membership, weak borders as a result of the EU’s immigration and free movement of people policies, and the limit of business growth because of strict general lawmaking. The argument of those who wanted to remain in the EU was centered on the economic benefit of the trade bloc that allowed for free trade between Great Britain and the other members.

Now that Great Britain has voted to leave the EU, they will begin a two year negotiation to determine the details of the separation - the largest of issues being the details of trade between the now independent Great Britain and the remaining EU member countries.

This vote contributed to investor uncertainty in the previous months, and the decisions that are made over the next couple years will undoubtedly contribute to investor uncertainty as media outlets continue to make noise as they do all too well. The key for investors is to be able to filter through the noise to make well informed decisions. Events such as Brexit are great examples of systematic risk that contributes to volatility and risk in portfolios, something that we continually monitor in our portfolios 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.


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. 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.

Webinar in Review: Aligning your Values with your Investments

Contributed by: Clare Lilek Clare Lilek

In the investment world and in our conversations with clients, there has been a lot more talk about Socially Responsible Investing (SRI), Impact Investing, and Environment, Social, and Governance (ESG) based investing practices. But what does it all mean? Laurie Renchik, CFP®, partner and lead planner, and Angela Palacios, CFP®, Director of Investments, hosted a webinar on the blossoming social investing trend and how to align your values with your investments. Basically, how you can use your investment dollars to support and directly impact your social values in a sustainable long term approach without diminishing returns.

First, Angela described the difference between SRI, Impact, and ESG investing, which all get thrown around when talking about aligning your values with your investments. Check out the chart below for a quick, and helpful, recap on the various terms:

Currently, ESG Investing is the direction the market could be heading, which breaks down in Environment, Social, and Governance related factors. Social factors can include labor policy practices; governance looks at the diversity of leadership and point of view on company boards; and environment refers to the environmental impact a company’s production has. ESG is a lens through which to evaluate a company and is a positive screen to identify certain behaviors that not only align with particular investor values, but can also be a guide to help reduce costs and help to increase business (potentially less law suits, less environmental cleanup necessary, diverse boards creating better business practices, etc).

When attempting to align your values with your investing dollars, Laurie emphasized the importance of setting priorities. She suggests writing down your values and seeing where they most strongly lie, whether that is in social innovation, environmental stewardship, corporate governance, or perhaps a combination of all three. Once you prioritize your values, you and your financial planner can discuss risk potential and growth options to find a portfolio that most effectively aligns your interests with your ultimate financial goals. Taking a holistic approach to your social financial planning, by matching your financial goals with your social values, can be implemented more easily with the help of an Investment Policy Statement. Using an Investment Policy Statement can provide a blueprint for future investments and their trajectory, while simultaneously acting as a report card for past performance. Laurie reviewed a particular example to further explain the concept.

Overall, the webinar provided clarity for the various terms and definitions floating around for this blossoming social trend, while providing real tools for assessing sustainability and performance. For more information on this topic, please watch the entire webinar via the link below, and feel free to contact Angela or Laurie with specific questions or if you want help aligning your values with your investments.

Clare Lilek is a Challenge Detroit Fellow / Client Service Associate at Center for Financial Planning, Inc.


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. 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. 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 Laurie Renchik and 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.

The Most Hated Bull Market

Contributed by: Angela Palacios, CFP® Angela Palacios

Investors seem to be skeptical of the second longest bull market run since World War II. For a refresher, a bull market is when share prices consistenly rise. Below, we see a comparison of the longest bull markets since World War II. The green line is our current bull market run. We have now surpassed the duration of the run in the early 1950’s but aren’t even close to the longest run that occurred through the 1990’s. 

The past 18 months have brought a fair share of hiccups in the market exhausting bullish sentiment, which is the percent of investors who have a bullish outlook for the coming six months. The S&P 500 has rallied strongly since the lows reached in February erasing negative returns for the year as of the writing of this piece. The following graph illustrates market sentiment among investors. The red line represents the S&P 500 while the blue line represents the percent of investors who are bullish (expecting upward price movement in the market). What’s unusual is that despite the recent rally investors remain skeptical and this usually isn’t the case. When markets rally this strongly bullish sentiment usually rises.

Market peaks don’t usually happen when bullish sentiment is this low.

Bull markets don’t simply die of old age.

Regardless of whether this market is loved or hated, the Center’s investment team  continues to monitor the markets and the economy closely for signs of recession while remaining committed to a diversified investment strategy.

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


Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Investing involves risk and investors may incur a profit or a loss.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. 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.

Diversification does not ensure a profit or guarantee against a loss. 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. 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.

Political Parties and their Impact on Your Portfolio

Contributed by: Jaclyn Jackson Jaclyn Jackson

Primary season could be worrisome for some investors as they try to figure out who will become our next president, how that person’s political ideologies will influence stock markets, and ultimately how that may impact their investment portfolio performance. I’ve explored the most common myth about political parties and its effect on the US stock market - the result is pleasantly surprising. 

Myth:  Big government ideologies held by Democrats make them worse for the stock markets while small government and small business driven ideologies make Republicans best for the stock markets. 

Bust:  Whether a Democrat or Republican is elected, historical data indicates that it has no statistically significant bearing on US equity markets. Illustrated below, both parties have experienced a similar amount of presidential terms with positive equity returns based on the Dow Jones Industrial Average from 1900-2012. 

Sources: Bloomberg, Oppenheimer Funds. As of 12/31/14.

Sources: Bloomberg, Oppenheimer Funds. As of 12/31/14.

 

Even though Democrats edge out Republicans by return percentage, there really isn’t much difference once you adjust for the normal variation in stock market returns. The results are reassuring; markets aren’t largely swayed by the president’s political party. 

Tips for Politic-Proofing Your Portfolio

While political parties don’t necessarily dictate market performance, they do generate policy plays that influence the economy. Divergent policy priorities around issues like individual taxes, the environment, healthcare, financial regulation, Fed policy, etc. could affect specific market sectors (i.e. healthcare, energy, utilities, and financials). 

Yet, investors can be confident in deploying two key strategies to help armor their portfolios against sector specific market fluctuations: diversification and long term investing. Diversification works to improve portfolio risk return characteristics by spreading investment exposure across different asset classes. In other words, it can assist in buffering your portfolio from concentrated portfolio swings to help achieve better risk-adjusted returns. Likewise, long term investing generally guards against short term sector movements by providing those who stick to their investment strategy less volatile returns over time. When you have a well suited, diversified long term investment strategy, you don’t have to fall into the trap of investing based on the political climate.

For more information of the benefits of diversified investing, click here.

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


This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Jaclyn Jackson and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Past performance is not a guarantee of future results. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. 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. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Diversification does not ensure a profit or guarantee against a loss. Holding investments for the long term does not insure a profitable outcome.

Sell in May and Go Away, Revisited

Contributed by: Angela Palacios, CFP® Angela Palacios

Questions arising during this election year have prompted me to revisit an old topic. This election year seems anything but average (or at the very least entertaining), but what happens when you layer in the old debate of whether it is a good idea to, “Sell in May and go away.” Will this election year be different? 

Markets tend to have their stronger performance between October and May, which, despite a major bump in the road during January and February this year, has certainly held true in the past year. 

This chart is for illustration purposes only.

This chart is for illustration purposes only.

There are many theories as to why this could be true:

  • Investors tend to fund their IRA accounts either early or later in the year.
  • There could be lower summer productivity for business.
  • And the most obvious, people prefer to be outside rather than inside investing their money (especially in Michigan).

However, this year could be different. If you look at monthly returns in Election years the above picture is contradicted.

This chart is for illustration purposes only

This chart is for illustration purposes only

Strategies involving the short-term timing of the markets usually end up hurting investors rather than preserving or boosting returns, so take caution.

I am often asked if investing should be held off until after the election during years like this. However, I believe experience teaches us that we are better off if we keep our voting and investing decisions separate.

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


Source: The Big Picturehttp://www.ritholtz.com/blog/

Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Investing involves risk and investors may incur a profit or a loss.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. 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.

First Quarter 2016 Investment Commentary

Contributed by: Angela Palacios, CFP® Angela Palacios

The relatively benign appearing performance year-to-date of the S&P 500 of 1.35% does not tell the full story of the storm beneath.  Markets started out the year spooked by China and the prospects of four interest rate increases being projected by the Federal Reserve (the Fed).  Recessionary fears seemed to spike mid-February and then recede as economic data such as retail sales, manufacturing, employment, and consumer sentiment came in slightly better than expected or at least didn’t surprise to the downside. 

Janet Yellen, chair of the Fed, ended the quarter with a noticeably dovish speech justifying the Federal Open Market Committee’s lower path for rate increases by citing global growth risks.  The Fed now anticipates only two interest rate increases this year instead of their original four.  Meanwhile, interest rates overseas pushed farther into negative territory while the Bank of Japan introduced their own negative interest rate policy leaving the U.S. as one of the few havens in the world that is still providing yield. 

Last Year’s Losers are this Year’s Winners

2015 positive market returns were driven very narrowly by just a handful of stocks.  This year has turned on a dime with the worst performing companies of 2015 being the best performers in 2016.  The below chart breaks the S&P 500 up into 10 groups based on 2015 performance.  Group one represents the best performing stocks in 2015 and group ten represents the worst performing stocks in 2015.  The green and red bars represent performance from each of these groups during the first quarter of 2016.

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Moderation in the U.S. Dollar

The dollar slowing its steady advance has helped to ease some of the headwinds for commodities, namely oil, as well as emerging markets debt and equities.  The dollar has given up some of its gains from 2015, due to lowered expectations of the Fed hiking rates.  It is quite common for currency markets to over-react to the monetary policy differences that we are seeing between the U.S. and other countries (negative interest rates overseas versus interest rate increases here at home) so we may yet see the dollar move back into slow strengthening mode.

Summer Real Estate Sizzles

Current housing markets seem to have a severe lack of supply of single family homes similar to the late 1990’s and early 2000’s.  Yet new homes being built are at much lower levels then they were during those years.  Prices will likely continue their upward trend of the past few years as demand continues to exceed supply.  Mortgage rates continue to be low especially after the Fed decided to put on the brakes of raising rates.  All of these factors should equate to a favorable market for home sellers. 

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

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

In honor of the Game of Thrones premier, Angie Palacios, CFP®, has also discovered a Game of Negative Interest rates that’s playing out in our world right now. Check out Investor Ph.D.

Confused by interest rates and interbank lending? Nick Boguth, Investment Research Associate, breaks it down for you in Investor Basics by using Game of Thrones.

It’s tax season, which also means refunds may be coming your way! Check out these scenarios from Jaclyn Jackson, Investment Research Associate, and see what the smartest plan for your refund is!

Quarters like this one remind us of the importance of diversification.  While a well-diversified portfolio will likely never generate the highest returns possible it also shouldn’t generate the lowest returns.  The primary goal is to manage your risk and keep the end goal of your financial plan at the forefront.  The key to success in investing is developing that plan with realistic goals and then sticking to it even during times like February when it is tempting to deviate. 

We thank you for your continued trust in us to help you through all types of markets to reach your goals.  If ever you have questions, please, don’t hesitate to reach out to me, your planner or any other members of our staff.

Angela Palacios, CFP®
Director of Investments
Financial Advisor

Angela Palacios, CFP® is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well as investment updates at The Center.


The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index. 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.

First Quarter 2016 Investment Pulse

Contributed by: Angela Palacios, CFP® Angela Palacios

We hit the ground running in the New Year with great insight from outside experts on a wide array of topics ranging from fixed income research to how to conduct a more successful investment committee meeting and nearly everything in between!  Here is a summary of some of the highlights.

Chris Dillon, a global fixed income portfolio specialist with T. Rowe Price

An hour spent listening to Chris was one of the most informative yet exhausting hours of the quarter!  He spent much of his time explaining global complexities within the fixed income markets and how they could affect investors in the coming months.  Of particular interest was a discussion on negative rates and his opinion that we will likely look back on these negative interest rate policies around the world as being completely ineffective.  Also discussed was the coming money market reform here in the U.S. with the formation of Prime Money Markets that will have floating pricing (Net Asset Values).  While these will mostly affect institutional level investors his recommendation was not to purchase these, but they could create a fundamental change in the market place presenting interesting opportunities for short term bond investors.

Bob Collie, Chief Research strategist, Americas Institutional, Russell Investments

Bob discussed the difficulty of working in committees as it isn’t something that comes naturally to most people.  He offered many questions to ask ourselves to understand how our own investment committee measures up to others.  These answers helped identify areas to focus on improving.  Since our investment committee meets at least once a month you can imagine the agendas are usually very packed.  We need to make the most of our time together overseeing portfolios.  Areas we are focusing on improving after listening to Bob have been visioning (what does success of committee work look like), dynamic discussions, and pre-reading of agenda items and background research so we all have time to formulate our points for the discussion ahead of time.  We have already noted improvements during the meeting and outcomes from the meetings.  Hopefully even more improvements are on the horizon!

Jeremy Siegel, Ph.D., Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania and Senior Investment Strategy Advisor, Wisdom Tree

"Bubble, the most overused word in finance today."

He believes the market has an aggregation bias, if there are a few stocks or a sector that has large losses, like energy does now, the entire market can look skewed.  The energy sector is biasing the P-E index of the market upward making it look more expensive as a whole than it really is.  He thinks fundamentals have driven interest rates to zero rather than artificial means, the FED has simply followed suit reducing interest rates along the way.  Economic growth and risk aversion are the most important determinants of real rates.  Increased risk aversion, aging investors, a desire for liquidity and the de-risking of pension funds has increased demand for bonds forcing their yields lower.  Jeremy has always had a very bullish view on the markets and now seemed no different.  He feels returns over the coming years will fall in line with long term averages.

Angela Palacios, CFP® is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well as investment updates at The Center.


This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Raymond James is not affiliated with and does not endorse the opinions or services of Chris Dillon, Bob Collie, Jeremy Siegel or the companies/organizations they represent. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Past performance is not a guarantee of future results. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

Investor Basics: Bank Loans, Interest Rates, and Game of Thrones

Contributed by: Nicholas Boguth Nicholas Boguth

In the spirit of preparing for season six of Game of Thrones, this set of Investor Basics and Investor Ph.D blogs is aimed to discuss bank loans and interest rates with respect to the increasingly popular adventure/fantasy television series. Check out our Director of Investment’s blog “A Game of Negative Interest Rates” HERE.

There are three types of bank loans – 1: Central Bank Loans, 2: Interbank Loans, and 3: Consumer Loans. Each loan is between different parties and has a different interest rate.

Central Banks require commercial banks to meet reserve requirements to ensure their liquidity. At the end of every day, after all of a commercial bank’s clients deposit and withdraw money, if that bank has less than the reserve requirement then it has to borrow money to raise its reserves.

If it has to borrow money to raise its reserves, it has two options. It can either borrow from the Central Bank at the discount rate, or borrow from a fellow commercial bank that has excess reserves at the end of its business day. Commercial banks borrow from each other at the federal funds rate. Currently the discount rate is 1% and the federal funds rate is 0.5%. Obviously, commercial banks prefer to borrow at the lower rate, so interbank lending is much more common than borrowing from the Central Bank. Borrowing from the Central Bank is more of a last resort for commercial banks.

The third interest rate that banks deal with is the bank lending rate. This is the rate that we, the consumers, see when we walk into a commercial bank and ask for a loan. The discount rate and federal funds rate affect banks’ lending rates, but it is also influenced by how creditworthy the customer is, the banks’ operating costs, the term of the loan, and other factors.

For all you Game of Thrones fans, you can think of the Central Bank like the Iron Bank of Braavos. It is the most powerful financial institution in the world, but it only lends to those that can repay debts (e.g. the Central Bank only lends to commercial banks). Not just anyone can borrow from the Central Bank, but the Lannister’s can because “A Lannister always pays his debts.”  SPOILER ALERT coming for anyone who has not made it through season 5: Remember back to season 5 when the Iron Bank is forcing the Iron Throne to repay one-tenth of their debts? Lord Mace offers that House Tyrell could lend the Lannister’s some money so that they could meet the Iron Bank’s “reserve requirement” of one-tenth. This is interbank lending! Thankfully for us, the cost of borrowing money in real life is only the interest rate, whereas in Game of Thrones it could be one’s life.

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


This material is being provided for information purposes only. Any opinions are those of Nick Boguth and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.