EXPLORING INVESTMENTS
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The information present in this section is not designed as investment advice, but is simply a set of considerations that might prove helpful to local church leaders as they prepare their financial and investment guidelines. Local church leaders are encouraged to seek the advice of trained, professional investment advisors in their local community who can assist them in making wise investments and wise decisions on financial and investment policy.
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Investment Categories – Defined
- Very Short Term
- Monies set for immediate expenditure
- Short Term
- Monies set for expenditure within the year or up to 3 years
- Intermediate Term
- Monies set for expenditure within 3-5 years
- Long Term
- Monies set for expenditure in more than 5 years.
- Endowment funds for long-term investment where it is anticipated that the principal will never be spent.
Investment Objectives – Factors To Consider and Questions to Raise
- Risk Tolerance:
- How much risk can we tolerate in order to achieve the
rate of return desired over the period of time it takes to realize that rate of return?
- No Risk:
- Will we need the fund right away? We might not
want any rate of return that brings any level of risk
- Minimum Risk:
- Can we tolerate a little bit of risk in order to
achieve a minimum rate of return, and are we
prepared to leave our money in an investment for a specified period of time, such as 3 months to one year, in order to achieve that minimum rate of return?
- Mid-level Risk:
- Are we prepared to accept some risk in order to
achieve a higher level of return over specified or unspecified periods of time? Generally speaking, the longer the time we invest, the more the danger of risk might be outweighed by our satisfaction with the return.
- Relatively High-Risk:
- Do we understand that this investment will
have times when its rate of return will vary from period to period, perhaps even a good deal? Are we, then, prepared to weather such fluctuations in the expectation of higher levels of return than could be obtained from vehicles of lower risk?
- High Risk:
- Are we not averse to tolerating a good deal
of risk to principal in order to achieve yet higher rates of return? Do we understand that it is possible that we may, especially in the short run, run the risk of losing the principal completely, and are willing to take that risk to achieve what we believe, over time, will be a desirable rate of return?
- Volatility
- Is the investment vehicle we anticipate using subject to wide, quick
swings between highs and lows, or is it more likely to produce more narrow swings over longer periods of time? What is the relative rate of return for the volatility incurred?
- Yield (see Glossary)
- What is the income an investment vehicle in which we might plan to
invest can be expected to yield?
- Average Annual Return
- What has been the average annual rate of return for our investment vehicle over the past year, the past 3 years, the past 5 years, the past 10 years, and for the life of the fund? The figures for the past year and 3 to 5 years may demonstrate what the fund manager can do in the present economic circumstances. The 10-year and life-of-fund figures may show what the fund can do in different economic situations or over a longer span of time.
- Investment Manager’s Performance in Class
- What has been the performance of the investment vehicle we anticipate using with respect to all the vehicles of a similar nature; and over what periods of time?
How does this investment vehicle’s essential characteristics and objective match other similar vehicles; and what has been the comparative results of these vehicles over similar time periods?
Would we want a fund, for example, that was managed better than 50% of funds similar to it; or better than 75% of similar funds; or better than 95% of similar funds? This would be one measure of the relative competence of the fund manager and their ability to handle various economic climates effectively..
- Socially Conscious Portfolio
- In what kinds of business does our investment manager invest? Are they the kinds of businesses whose stock we ourselves, as individuals, would purchase? Do we consider such businesses those whose stock a church organization, particularly the United Methodist Church, should buy? The United Methodist Social Principles caution us from investing in businesses whose main work is the production of alcohol, tobacco, firearms, nuclear power, and gambling; and whose main work is providing munitions and other means of defense for war.
- Fees Charged for Investment Services
- What fees are charged by the managers of the vehicle in which we hope to invest? Are there fees associated with getting into the fund? A re their fees for stock sales and purchases? Are there other administrative and management fees? Are there fees associated with getting our money out of the fund when the time comes? These fees will have the effect of reducing our level of return, so it may be important to minimize fees wherever possible. However, it also must be understood that fees, like risk, may be acceptable in come kinds of investments in order to achieve certain rates of return.
- Depth or Breadth of Investment
- Does the fund in which we contemplate placing our money give us a breadth of exposure to the market, and therefore the forces that work in the market to reward retard business activity? If we are to be exposed to a narrow breadth of exposure, are we prepared to accept, and knowledgeable about, the forces that might affect those sets of business activity? Additionally, does the investment vehicle we anticipate using give us depth in investment types? Do we anticipate achieving a return from lending to the bank, business and the government as well as from investing in business? How many different types of investment are embodied by this vehicle?
- Facts About Funds that one might take into consideration
- What are the objectives of the fund?
- Are these objectives consistent with the church’s objectives
for monies of this type?
- When was the fund or other vehicle started?
- How long has it been in existence?
- Who is the fund manager?
- Where did that manager achieve their credentials?
- How much money does the fund manager manage?
- What are the fees involved?
- What are the relative levels of expenses of the fund?
- What is the relative volatility of the fund?
- How is the money in the fund allocated over various vehicles?
- For example: How much to stocks, bonds, cash, etc.?
- What business sectors are represented in this fund?
- What type of growth may we expect from this fund?
- Growth through income? Capital gain?
- How does this fund’s performance compare to the S&P 500?
- How does the performance compare to other performance indices?
Investment Examples:
- Passbook savings
- Issued by banks as a savings account which will bear a
set level of interest per year as long as the account
remains open.
- Certificates of Deposit
- Issued by banks as an investment vehicle where there is a set
rate of interest for a stipulated period of time. At the
end of the time, the investment is returned to the lender.
- Money Market Funds
- Funds created from currencies which pay market level returns
for as long as the account is open.
- Mutual Funds
- Funds in which a broad mixture of securities are held and managed
on behalf of the investor, as opposed to the investor
personally holding each security and making individual
decisions about the portfolio.
- Bond Funds: Short Term, Intermediate, Long-Term
- Funds that are invested in a series of bonds "laddered" out over
time to produce a composite result. There is some risk, in that the bond market will move up and down periodically.
These bonds may be vehicles of lending to local, municipal, state or
federal governments, or may be vehicles of lending to various types of business enterprises.
- Equities Funds: "Growth", and "Value"
- "Growth " style emphasizes small- to medium-capitalization stocks
- "Value" style emphasizes mostly large-capitalization stocks
- Funds that produce their growth largely through capital gains.
- Funds that are invested in the stocks of business enterprises.
- Balanced Funds:
- Funds that have a mixture of equities (for capital gain and some
dividends) and bonds (for income).
Glossary of Terms
[These terms are not to be construed as investment advice, but are offered
in the hope that they may be helpful. They are taken from the
"1997 Independent Guide to Fidelity Funds" published by the
Mutual Fund Investors Association. They are used without permission.]
- Asset
- Something with a monetary value, e.g., stocks, real estate, accounts payable. Net assets are assets minus liabilities.
- Average Maturity
- Related to a bond fund’s volatility, the average maturity is the weighted average of the maturities of all the fund’s bond holdings. (The maturity of a bond is the amount of time until the bond is paid off.)
- In general, the longer a fund’s average maturity, the greater the price fluctuation when interest rates change. Shortening the average maturity is one way a fund manager can defend share value when he anticipates a rise in interest rates.
- Average Annual Return
- The annual return which, when compounded over a number of years, equals the Total Return for the same period. This is the average amount per year you would have made on the fund.
- Balanced Fund
- A mutual fund which includes both equities (stocks or convertibles) and fixed-income securities (bonds) in its portfolio, thereby attempting to gain both capital appreciation and income in varying degrees.
- Bond
- A security issued as evidence of indebtedness. The bondholder is generally entitled to interest payments on specified dates and repayment of the amount of the loan on maturity. A bond is a claim on a nominal sum of money; it is not an ownership interest in the company. Since bondholders are creditors, they are paid before stockholders.
- Bond Fund
- A mutual fund that invest primarily in bonds.
- Capital Appreciation
- An investment objective adopted by some mutual funds. The aim is to buy stocks (or bonds) and sell them at a profit, without relying on dividends.
- Capital Gain
- The profit made on the sale of property or securities. A short-term capital gain is made on holdings held less than a year; a long-term capital gain on those held for more than a year. Since 1987, short-term capital gains and long-term capital gains have been taxed at the same rate. That rate, since 1991, has been 28%. [Local Churches do not have to be concerned with capital gains tax as they are charitable organizations and, as such, are exempt from paying capital gains tax.]
- Diversification
- A technique for reducing investment risk. An investor diversifies by investing in several different areas. Disaster in one area doesn’t affect an investment in the others. To diversify effectively, the investor must be certain that the areas are genuinely independent. A broad-based growth mutual fund is diversified in one sense, because it covers many different sectors, but not in another, because its performance depends on that of the overall stock market.
- Dollar Cost Averaging
- A plan that calls for investing equal dollar amounts at regular intervals, regardless of price levels. This method assures that more shares will be bought at low prices than at high prices.
- Equity
- Ownership interest in a corporation, represented by shares of common stock. An equity is not a right to some nominal sum of money; it is a portion of the company’s net worth. Contrasts with Bond. An equity fund is a mutual fund investing primarily in common stock or securities convertible into common stock.
- Expense Ratio
- The percentage of a fund’s total assets expended for the operation and management of the fund during a year. Everything else being equal, a higher expense ratio reduces the fund’s total return.
- Growth Fund
- A mutual fund which seeks Capital Appreciation, that is, to make its shareholders’ capital grow over time by investing primarily in stocks that increase in value. Dividends are a minor consideration.
- Growth and Income Fund
- A mutual fund which seeks to make shareholders’ capital grow and also provide income. There can be wide variations in the relative emphasis on these two objectives.
- Income
- In mutual fund parlance, the money paid as stock dividends or bond interest. An income distribution is a return to shareholders of income paid on the underlying holdings of a fund. Income funds concentrate on earning interest or dividends, rather than increasing share prices.
- Investment Objective
- The aim of f fund; what it proposes to do for its shareholders. Examples might be high current income, long-term growth of capital, or growth plus income. Investors should choose funds whose stated objectives match their own.
- Money Market
- The markets in which short-term obligations are traded. Short-term obligations are relatively stable assets such as Commercial Paper, certificates of deposit (CDs), bankers’ acceptances, and U.S. Government and agency obligations.
- No Load Funds
- Mutual funds whose shares can be purchased or sold without any Sales Charge.
- Preservation of Capital
- An investment objective for some funds and investors (usually paired with some income). The aim is not merely to keep the same nominal amount of capital, but to keep the capital growing at least at the rate of inflation.
- Relative Volatility
- A statistical measure of the volatility or risk of a fund. It is the standard deviation of a fund’s monthly total returns over a 36-month period divided by the standard deviation of the monthly returns of the S&P 500 stock index over the same time period. The S&P 500 has, be definition, a relative volatility of exactly 1.00. Relative volatility figures greater than 1.00 indicate funds which have proven riskier (more volatile) to hold than the S&P 500 index stocks.
- S&P 500 Index
- A capitalization-weighted index of the stocks of 400 industrial companies, 25 transportations, 25 financials and 50 utilities.
- Total Return
- The most meaningful measure of investment performance. Total Return is calculated by adding yield (dividends or interest) to capital appreciation. Total Return tells you how much year investment has grown.
- Yield
- Income from an investment in the form of dividends or interest. Does not include capital appreciation or depreciation. The current yield on a bond is the amount of yearly interest divided by the current value of the bond. A more useful measure of yield is the yield to maturity, which takes into account the fact that bonds selling at a discount or premium to their Par value will get close to their par value as they near maturity. The SEC now requires that funds report (and advertise) yield to maturity.
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