PORCH CHAT – Reflections from the Front Porch
Frankenberry Three Xbox Four Sixty By Michael Franks, CFP®, CRPC® I am a fan of the comedic stylings of Frank Caliendo. He is a master impressionist who rose to fame with his dead-on imitations of George W. Bush, Robin Williams and of course, sportscaster John Madden. Over the last few years it seems he is specializing in sports figures. Right before the Super Bowl last year he did a skit in which he interviewed ESPN football announcer, Jon Gruden, as Jon Gruden. They poked fun at many things, not least of which is the overly complex lingo and terminology used in modern football. At one point, fake Jon Gruden asks real Jon Gruden to draw up a play called, “Tarantula Two Beryllium Phosphate.” As soon he starts, fake Jon Gruden shouts, “No! No! That’s Frankenberry Three Xbox Four Sixty!” Ridiculous lingo… every industry has it, including financial services. It is possible that in the last year I could have uttered the following: “The REIT ETF has outperformed its benchmark by 20 basis points and is currently above NAV. I recommend we sell it to satisfy this year’s RMD from your IRA.” It makes perfect sense to me; it might be all “Frankenberry Three Xbox Four Sixty” to you. I would like to take some time to define these and other often thrown-around financial terms and abbreviations.
Security – a financial asset that trades, like a stock or bond.
Equity – fancy word for a stock. The holder owns a fraction of the company. Ownership entitles them to a portion of the profits, often paid out as dividends, and the right to sell their ownership whenever they desires at the company’s current price.
Fixed Income – fancy word for a bond. The holder loans money to a company and is entitled to a set interest payment for a set period of time. Once that time period is up the investor gets the loaned amount, or principal, returned.
Diversification - the act of spreading your dollars among several different investments or securities to help manage your risk.
REIT (Real Estate Investment Trust) - a security that invests in physical real estate, but trades on an exchange like a stock. This is a more liquid way to invest in real estate. The REIT would typically have a specialty, such as office buildings, apartments, storage spaces, etc. REITs are required to pass along income to shareholders and usually pay out high dividends.
Liquidity – how quickly an asset can get sold and turned into cash.
Basis Point – 1/100th of a percent. 100 basis point is 1%. Sometimes referred to as a bip, beep, or once by an annoying co-work, a beeper.
Benchmark – a standard with which securities’ performance is compared. You want “like” things compared to “like” things - large company compared to other large companies, not small companies.
RMD (Required Minimum Distribution) – Once a participant has reached age 70½ the IRS requires that they start to take money out of their IRA. Each year they must make a withdrawal based on 1) the value of all IRAs at the end of the prior year and 2)their age. The withdrawal will be taxed at the participant’s ordinary income tax rate.
IRA (Individual Retirement Account) – an account in which individuals save for retirement. Depending on income levels and availability of retirement plans through their employer, contributions may be tax deductible. Investments grow tax deferred until withdrawn, at which point they are taxed at ordinary income rates.
Fbo (For the benefit of) – used when doing an IRA rollover. Checks should go from financial institution to financial institution to avoid taxation to the client. Checks should also be made out the receiving financial institution fbo client’s name.
ROTH IRA - a different flavor of IRA. There is no tax deductibility on contributions. Investments still grow tax deferred, but withdrawals are tax free. There are income limits on who can invest in a ROTH.
AUM (Assets Under Management)- This is the amount of money a mutual fund or investment advisor controls. It is often used in fee pricing. For example, the advisor could charge you a percentage of AUM, like 1% (or 100 beepers, ugh!). If you invest $100,000 with the advisor, you would pay $1,000 in annual fees.
Net Worth – a measure of financial strength that subtracts everything you owe from everything you own.
To quote another Frank Caliendo character, Charles Barkley, “This is Ridiculous.” There is so much financial lingo. Every definition seems to lead to two more words that need to be defined. I’ll stop here, but feel free to send me any idea, abbreviations or words you would like to have explained. While it is funny for Frank Caliendo to pick on NFL offenses, it isn’t funny for you to be confused or intimated by financial lingo. Make sure you ask questions and always understand what you are buying.
For more information about managing your money, please visit www.frontporchfinancial.com or call (262) 236-9022. Front Porch Financial Management LLC is a separate entity from LPL Financial. Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor and Member of FINRA/SIPC. www.sipc.org
Michael Franks, CFP®, CRPC® is a CERTIFIED FINANCIAL PLANNER™ certificant (CFP®), a designation award by the Certified Financial Planner Board of Standards, Inc., and a Chartered Retirement Planning Counselor™ (CRPC), a designation awarded by the College of Financial Planning. He began his career in New York in 1994, working for 12 years as an Institutional Salesman, selling equity ideas to mutual funds, hedge funds, banks and insurance companies. In 2006 he transitioned to working with individual investors, a move driven by his desire to have a more positive impact on individuals’ lives. Over the last several years he has helped clients navigate some of the most challenging markets of our lifetime. Mike earned a B.S. in business management from Cornell University.