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In wealth management, this simulation is used to predict the probability of financial independence. The random variables in this scenario are your specific financial data (i.e. income, savings, assets, liabilities, spending habits, & goals). With this data, a large number of various market return scenarios are simulated to produce millions of potential future outcomes that provide a probability of success. Mutual Fund A mutual fund is an investment fund that that holds a large number of other securities within it, like stocks or bonds, leading to greater diversification. As opposed to an ETF, a mutual fund can only be traded once (at the market's close) each day, while an ETF can be traded intra-day on stock exchanges (like a stock). Non-Cyclical Stocks Non-cyclical stocks tend to demonstrate relatively stable performance, regardless of the current state of the economy. Examples of industries with non-cyclical stocks might include household/personal products, food/beverage, utilities, and health care. Non-Qualified Deferred Compensation Non-Qualified Deferred Compensation (NQDC) plans allow an employee (typically an executive) to defer part of their compensation, and the income tax on it, until a later date. Non-qualified plans are not protected by the Employee Retirement Income Security Act (ERISA), like 401(k)s and other qualified plans are. Therefore, if the plan sponsor runs into financial trouble, the deferred compensation could be forfeited. Non-Qualified Stock Options Non-qualified stock options (NSOs or NQSOs) are the right (but not the obligation) to buy shares of company stock at a predetermined price (the "strike price"). If the employee "exercises" their right and buys the shares, then turns around and sells them at a profit on the open market, the profit is typically taxed as a mix between ordinary income and capital gains. Payable on Death Placing a Payable on Death (POD) designation on assets names a beneficiary to receive the assets upon the death of the owner, thus avoiding probate. POD designations are commonly placed on bank accounts. Power of Attorney A Power of Attorney (POA) designation gives one the authority to act on behalf of another person in legal, financial, or medical matters. Price-to-Earnings Ratio The Price-to-Earnings (P/E) ratio is a calculation that divides a company's share price by its earnings per share (EPS). Primary Bond Market The selling of newly issued bonds to the public – most of the money received in the sale goes to the issuer. Principal, Interest, Taxes and Insurance PITI is the sum components of a mortgage payment, including your principal amount, interest payment, and what is owed for taxes and insurance. Private Mortgage Insurance Private Mortgage Insurance (PMI) is typically required for conventional loan borrowers when a down payment of less than 20% is made at the time of closing. This is because the loan is considered "riskier" to the lender without a sufficient downpayment, so PMI acts as a safeguard to the lender in these instances. Probate Probate is a legal process in which the validity and authenticity of a will are determined in court. It can also refer to the general administration of a deceased person’s estate, if they die without a will. Beneficiary designations, joint titiling, and trust provisions are some ways to avoid assets going through probate. Qualified Birth or Adoption Distribution A QBOAD is a type of distribution from retirement accounts that allows withdrawal of up to $5,000 without penalty within 1 year of a birth or adoption. Qualified Charitable Distribution A Qualified Charitable Donation (QCD) allows those older than 70.5 to donate to a charity directly from their Individual Retirement Account (IRA). The advantage of doing this is that the dollars leave the IRA tax-free if they go directly to charity, whereas a normal (non-charitable) distribution from a traditional IRA would otherwise be taxed as ordinary income. QCDs can be used to satisfy part (or all) of one's Required Minimum Distribution (RMD). Required Beginning Date The Required Beginning Date (RBD) is the date an account holder is required to take their first Required Minimum Distribution (RMD). Required Minimum Distributions A Required Minimum Distribution (RMD) is the amount of money that must be withdrawn from retirement accounts on an annual basis, once the account holder reaches a certain age. For accounts into which pre-tax income was previously deferred, like a traditional IRA or 401(k), RMDs occur so tax on this income isn't deferred forever. RMDs are calculated each year based on the prior year account balance & a life expectancy factor. Roth Individual Retirement Account A Roth IRA is an investment account you set up yourself (hence "individual" retirement account), and can make after-tax contributions up to an annual maximum, until your retirement. The advantage of a Roth IRA is that, since after-tax dollars go in and the tax is already paid, the funds can grow tax-free indefinitely. Restricted Stock Units A Restricted Stock Unit (RSU) is a type of equity compensation where a company awards shares of stock to an employee (a "grant"). Pieces of the grant then "vest" according to a schedule, meaning blocks of shares are released to the employee incrementally over time. At each vest, the shares released are taxed to the employee as ordinary income. Revocable Trust A trust that can be altered during the grantor's lifetime (the grantor being the person who sets up the trust). Revocable trusts typically do not have any special income/estate tax advantages while the grantor is alive, and the primary purpose is to avoid probate at death. Standard & Poors 500 Index An index that tracks stock performance of the 500 largest companies in the United States. It is commonly used as one of the main proxies for the performance of the domestic stock market, as well as a benchmark for both passive and active investment managers. S&P Indices Versus Active S&P Indices Versus Active (SPIVA) are semi-annual reports that compare the performance of active managers (investment managers that try to beat the market) to the benchmark they are trying to beat (typically the S&P 500). Secondary Bond Market Bonds bought from and sold to other investors Self Canceling Installment Notes Self-Canceling Installment Notes (SCIN) are a unique form of promissory note that allows buyers and sellers to securely transfer real estate, business interests, and other assets while helping to optimize income, gift and estate taxes. Simplified Employee Pension A Simplified Employee Pension (SEP) is a retirement plan option for small business owners and their employees. Employer contributions, made on a discretionary basis, are tax deductible. Contributions limits are typically higher than traditional IRAs, and employees receive immediate vesting of their employer's contributions. Standing Letter of Authorization A Standing Letter of Authorization (SLOA) authorizes a client's financial advisor to instruct their qualified custodian to distrubute funds and transfer securities on the client's behalf. Tax-Deferred The payment of taxes on contributions into an investment account is postponed, with the understanding taxes that will be paid under certain conditions in the future. For instance, a person makes pre-tax contributions into a traditional IRA, thus deferring taxes on their contributions until later in life when they have to start withdrawing from the account by way of Required Minimum Distributions. Tax-Advantaged A term to describe any investment account that provides tax benefits. These benefits could take place when you contribute money into the account (i.e. deferring pre-tax income into a traditional IRA), when the money grows within the account (i.e. no capital gains within an IRA, 401(k), or HSA), and/or when you take money out of the account (i.e. tax-free withdrawals from a Roth IRA). Transfer on Death Placing a Transfer on Death (TOD) designation on assets names a beneficiary to receive the assets upon the death of the owner, thus avoiding probate. TOD designations are commonly placed on non-cash assets, such as brokerage accounts or vehicles. Trustee A trustee is a person or firm that holds and administers property or assets for the benefit of a third party. Uniform Transfers to Minors Account A Uniform Transfers to Minors account (UTMA) allows a "custodian" (often a parent or grandparent) to place assets into the account, for the benefit of a minor (often a child or grandchild). When the child reaches the "age of majority" (i.e. no longer a minor), assets are released to them outright. Zero-Coupon Bonds Zero-Coupon Bonds are issued at a deep discount, and interest payments aren't made until the bond matures. The bond makes a single payment at maturity that is higher than the initial purchase price. 401(k) A 401(k) is a type of employer-sponsored retirement savings account. Employees can choose to contribute a percentage of their income, and employers may match some or all of the contributions. The employee can then choose different investment options for the account, usually mutual funds or ETFs. 401(k)s provide tax advantages, by way of either tax-deferred contributions if a traditional 401(k), or tax-free growth if a Roth 401(k). 403(b) A 403(b) is a type of employer-sponsored retirement savings account. Its properties and advantages are nearly identical to a 401(k), but a 403(b) is designed for employees of public schools and other tax-exempt organizations. 529 Plan 529 Plans are tax-advantaged accounts designed to help pay for education. Contributions are made pre-tax, investments within the account grow tax-free, and withdrawals are also tax-free if used for qualified education expenses. Many states also offer an income tax deduction for making 529 contributions. Qualifying Disposition A qualifying disposition in an ESPP refers to the purchase, sale, or transfer of eligible stock 24 months after the beginning of the Offering Period and 12 months after Purchase Date. Disqualifying Disposition A disqualifying disposition in an ESPP refers to the purchase, sale, or transfer of eligible stock before 24 months after the beginning of the Offering Period or 12 months after the Purchase Date. Target Date Funds Target Date Funds simplify retirement investing by adjusting asset allocation from aggressive to conservative over the years as you approach your chosen retirement date, or ‘target date.’ Time-Weighted Rate of Return
The time-weighted rate of return is a measure of the compound rate of growth in a portfolio. Because this method significantly reduces the distorting effects created by inflows of new money, it is used to compare the returns of investment managers.
Internal Rate of ReturnThe internal rate of return is the average rate earned by each and every dollar invested during the period. This rate is influenced not only by the movements in financial markets and decisions made by portfolio managers, but also by the timing and size of the cash inflows and outflows and the beginning and ending book or market values.
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