Asset Class Overview:
Below are all the asset class categories that Traphagen actively researches, monitors, and allocates for our client portfolios. Since asset allocation determines the vast majority of total investment returns we invest a large amount of time and effort analyzing the probable future returns, risks, and correlations of all the below categories. A brief description of all asset classes is below.
- US Large Cap Equity- American based large capitalization companies ($3B or more in total size)
- US Small Cap Equity- American based small capitalization companies (less than $3B in total size)
- Emerging Markets Equity- Companies based in emerging markets (China, India, Brazil, Mexico, etc.)
- Developed Foreign Markets Equity- Companies based in developed foreign markets (Europe, Japan, Australia, etc.)
- Real Estate- American and foreign based trusts/corporations that derive all of their income through owning real estate or mortgage debt
- Commodities- American and foreign based corporations that derive all/most of their income through mining/refining/producing commodities and/or investment vehicles which mimic the straight price movements of different commodities
- Market Neutral/Hedge Funds/Managed Futures- Investments which are generally uncorrelated with the equity or fixed income markets that produce positive long term returns while reducing risk within your portfolio
Fixed Income Classes:
- High Yield Bonds/Preferred Equity- Bonds and Preferred equities issued by corporations that produce high cash flow yield (generally 6%-9%) but exhibit greater credit risk than most other bonds.
- Investment Grade Corporate Bonds- Bonds issued by corporations that produce moderate cash flow (generally 3-5%) and exhibit low to moderate credit risk
- Treasury/Government Bonds- Bonds issued or backed by the US government. These include treasury bonds, mortgage backed, and agency bonds. These bonds exhibit nominal or no default risk.
- TIPS- Bonds issued by the US government that are indexed to inflation. These hold no default risk.
Traphagen also invests in gold, emerging market debt, and municipal bonds although these are not considered separate asset classes.
Investment Term Glossary:
Below you will find the definitions of several important investment concepts that you will see throughout this site and throughout the financial industry.
- BETA: Measure of risk within an individual stock or investment portfolio relative to the stock market as a whole. For example, if a portfolio has a BETA of 0.5, the portfolio has on average 50% as much risk as the stock market (as the stock market by definition has a BETA of 1.0)
- Standard Deviation: Measure of risk/volatility within a security or investment portfolio. The S&P 500 historically has had a standard deviation of around 19%. You can interpret this as in any given year there is about a 70% chance that the actual return will be between +19% or -19% of the average yearly return. Therefore if you take 8% as the average annual return on stocks, the market overall in any given year should produce returns between -11% and +27% seventy percent of the time.
- Duration: Measure of a fixed income security/portfolio’s sensitivity to interest rate changes. This metric takes both maturity and cash flow yield into account. A duration of 5 means the portfolio or bond will increase (decrease) 5% in value for every 1% the general level of interest rates fall (rise) in a year. The longer the duration of the bond the more return potential exists along with increased interest rates risk.
- Correlation: The degree to which two or more securities movements are related to one another. A correlation of 0 means there is absolutely no relationship between the two securities, while a correlation of +1 means the two securities move together perfectly. The search for true diversification involves finding low, non, or negatively correlated assets.
- MVO (Mean Variance Optimization): A process by which an ‘optimal’ asset allocation is obtained through a statistical analyses of asset class projected returns, volatility (measured by standard deviation), and correlations given a set level of risk. This is a major factor in how Traphagen determines how to allocate portfolios among asset classes
- ETF (Exchange Traded Fund): An investment fund which holds a diversified basket of stocks, bonds, or commodities which trades throughout the day. It is similar to a traditional mutual as it provides instant diversification by holding many different individual securities in the fund. The advantages of ETFs over mutual funds include increased liquidity, much lower investment fees, and greater tax efficiency.
Professional Credential Overviews:
Below you will find a detailed overview of professional designations that TFG team members either hold or are actively pursuing.
CPA® (Certified Public Accountant)
The statutory title of qualified accountants in the United States who have passed the Uniform Certified Public Accountant Examination and have met additional state education and experience requirements for certification as a CPA. This credential is dually administered by the American Institute of Certified Public Accountants (AICPA) and the National Association of State Boards of Accountancy (NASBA).This designation is generally regarded as the gold standard for income tax, accountancy, and audit education for tax professionals. In addition is it one of the oldest professional credentials dating from April 1896.
To learn more: http://www.nasba.org and http://www.aicpa.org
CFP® (Certified Financial Planner)
A professional certification conferred by the Certified Financial Planner Board of Standards, Inc. (CFP Board). This designation is generally regarded as the highest level of broad based financial planning education an advisor can obtain. The CFP® requires extensive study within 7 areas including the general principals of financial planning, insurance planning, employee benefits planning, investments and portfolio management, income taxation, estate planning, and retirement planning. In addition to the education and exam requirements a minimum of 3 years of applicable industry experience is required to obtain the CFP®.
CFA® (Chartered Financial Analyst)
The (CFA) Program is a graduate level self study program offered by the CFA Institute (formerly AIMR) to investment and financial professionals. This designation is generally regarded as the highest level of security analysis and portfolio management education a financial professional can obtain. The CFA requires extensive study in the areas of economics, financial reporting & analysis, ethics, quantitative methods, portfolio management, security analysis, and corporate finance. In addition to 3 rigorous exams a minimum of 4 years of applicable industry experience is required on obtain the credential.
PFS (Personal Financial Specialist)
The PFS is a designation conferred by the American Institute of Certified Public Accountants (AICPA). This designation is only offered to active CPAs who have studied in specialized areas of financial planning including retirement planning, insurance planning, estate planning, and investment analysis. In addition to the comprehensive tax/accountancy exams needed to obtain the CPA designation, an additional exam focused on financial planning is required.
CITP (Certified Information Technology Professional)
The CITP designation is awarded by the American Institute of Certified Public Accountants (AICPA) and is only available to active CPA holders. CITP holders must exhibit significant experience and knowledge in the following areas: technology strategic planning, IT architecture, business process enablement, system development, systems security & audit, and IT governance & regulation.
AEP (Accredited Estate Planner)
The AEP designation is awarded by the National Association of Estate Planners & Councils to estate planners who have completed two graduate-level courses administered by The American College, meet specific professional requirements and who practice as one of the following: attorney, CPA, trust officer, CLU, CFP® certificant or ChFC.
CCPS (Certified College Planning Specialist)
A Certified College Planning Specialist is a financial professional who has demonstrated the skills necessary to assist families in preparing for the financial cost of sending children to college. The CCPS is trained to identify the most economically advantageous methods to save and pay for college. Each applicant must meet one of the following requirements to enter the CCPS certification program.