Understanding Your Financial Terms

You are likely to encounter terms that you do not understand. These terms will be helpful to understand, so you don’t end up missing something you should know, or veering away from your financial goals. And it never hurts to know the basics.

Jeff Powell, CIO, Managing Partner & Founder of Polaris Wealth & Jeremy Witbeck, Partner at Polaris Wealth, expand their discussion on investment terms you might want to have in your investing  arsenal.

Jeff Powell

Jeff Powell

Jeremy Witbeck

Jeremy Witbeck

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Jeremy Witbeck:
Welcome everyone to our Polaris Podcast. I am Jeremy Witbeck, a partner, the Polaris Wealth Advisory Group. And we have with us today, Jeff pal. So Jeff is our chief investment officer and managing partner. Jeff, great to talk to you today.

Jeff Powell:
Thanks for having me, Jeremy.

Jeremy Witbeck:
So Jeff, we got a lot of feedback on the financial literature podcasts that we did a little while back. And the remarks were it was great. The way that you broke down the terms, certainly helped explain things in a way that people hadn’t heard before, and gave them information regarding some of these terms that have been thrown around. And maybe they were just too embarrassed or just didn’t take the time to look up on what they really meant. And so on that theme, people have asked that we kind of take a step even further back and go through some of the terms that we throw out there very loosely expecting everyone to fully understand what they mean, and realizing that not everyone understands fully what they mean. And so I’m hoping that in our conversation today that we can break down some of these more common terms to make sure everyone understands fully what’s being referenced when we talk about them. And so to start off, that, probably one of the most used terms and most spoke about is common stock. So Jeff, what is a common stock.

Jeff Powell:
So when you’re, when we’re talking about common stock, you’re you’re actually purchasing equity in a company. So what it’s just as simple as saying that you’re going to be a business owner, so to speak. So when you buy shares of say, McDonald’s or Coke, or you know, Amazon, Microsoft, whatever, you’re a physical owner of that company, and as the company does better with with earnings or you know, has more sales or whatever, will drive the stock price up. If they don’t do as well, the stock price will go down, but you’re physically a shareholder in a company by buying a common stock, which is also referred to when you hear us talking about equity, and stock. Those are are interchangeable phrases within the financial industry.

Jeff Powell:
Yeah, and, and certainly, why when we invest in them, we’re looking for companies that upside and growth. The other thing that I think is interesting is that word common, I don’t know that a lot of people understand that that’s actually referencing, where your place hold is if the company were to go through financial difficulty, so common stocks at the bottom of that totem pole, meaning that they would first pay off their debt and their preferred stock. And then finally, the common stock. So that means that common stocks, your riskiest, but also hopefully your highest returning as well. And Jeff, on that similar note, we have preferred stock, so a little bit different than common stock, what is a preferred stock?

Jeremy Witbeck:
Well, preferred stock is kind of a hybrid, if you really want to throw it out there have a common stock, and bond. So so it’s basically shares of a preferred stock have a specific dividends that I will always get during the lifetime of it, it’s got a maturity date to look at it as a price that the the actual preferred stock will mature with. So it’s it’s kind of a debt instruments, typically providing higher income. But as you said, in the, in the big scheme of things, a common shareholder gets to vote, proxy votes, things of that nature to vote on bigger decisions, a preferred stock holder does not. And the preferred stock holder is down the chain. If the company were to file for bankruptcy, it’s below a debt holder. So it’s kind of in between. With regard to the risk levels, you typically get a higher income as a result of that. But you also don’t see the price appreciation if the company does as well.

Jeremy Witbeck:
Yeah. And with the preferred stock. Does the company have to make the interest payments like they do for a bond? Well,

Jeff Powell:
I mean, the answer is No, they don’t. It would be rare for them not to, but it certainly has happened. And so obviously, when a company is having financial difficulties, you’ll find that a preferred shareholder is at much greater risk to lose out on income stream than a debt holder in those circumstances, but it’s a pretty rare thing for a preferred stock not to pay, but it certainly certainly happens.

Jeremy Witbeck:
Yeah, gotcha. makes less sense. And on a similar thread, the last one, that’s something that we could talk about is an American depository receipts or an ADR Jeff, what is that? What is why do people have ADR show?

Jeff Powell:
The the nav bar again, as it was a little bit of In your question, when you talk about American depository receipt, so what this is, is foreign companies, well, let’s just use Sony as an example. Sony is obviously a Japanese company, but they want their shares to be traded on our markets. So making it easier for Americans to buy the stock because a will be trading when our markets are open, not when their markets are open, and also tends to hedge Not always, but tends to hedge the currency risk that’s involved between owning a foreign company. So American depository receipt, in this situation is basically foreign stock deposited in US organizations, and then the re issued new shares of that, as a American depository receipts.

Jeremy Witbeck:
Gotcha. And what’s interesting is, I think a lot of people may have actually held an ADR and not really realized it, because it looks and it trades just like any other stock, but technically, it’s an ADR not a common stock. Yeah, and just to kind of go on the other side. So we’ve talked a lot about more of the common equity type holdings, um, if you don’t mind sharing, or shedding some light on some of the fixed income type holding, so the most common being a pot, Jeff, what does a bond.

Jeff Powell:
So we have bills, notes, and bonds. All that means is the duration of the actual debt holding that you have. So if you’re talking about a treasury bill, versus a treasury note versus a treasury bond, when it really comes down to it, you’re talking duration. So a bond being the longest of no being intermediate term, and a bill is short term. And so again, when we talk about, you know, again, just pure definitions, bonds are debt. So the company is borrowing money from investors, that can be the US government, whenever the US government is issuing treasuries, they’re borrowing money. So when you hear about us having a deficit, that deficit has to be filled. So again, when we when we, as a country spend more money than we’re actually receiving, that creates debt through a deficit situation. And they’re issuing treasuries as a means to pay for that. And I owe you so to speak, corporations, municipalities, all do the same thing, just like you going out and getting a mortgage. And so again, if you’re going out getting a mortgage, they’re going to look at your credit rating. And so when we’re looking at that, you know, obviously the US government is considered to be the most risk free thing. So you’re going to see those tending to be the lowest yielding. And again, we talked a little bit about clipping coupons and some of our past areas and so on. Well, again, Treasury or all bonds have coupons. coupons are the actual payments themselves for that fixed income product. So and again, when you talk, you said fixed income, early Germany, fixed income and bonds, just like we were saying common stock and equity, those are interchangeable things. The reason why it’s called fixed income, is that if you have issued a bond, that’s going to pay a specific dollar amount, every single year, until that bond matures, and that’s why it’s called fixed income, because the income is fixed, incomes not going to change, the price can change, because the value of that underlying payment can become more or less valuable, depending on where interest rates are. But the fixed income marketplace, again, is as big as the stock market, most people don’t realize it. And you have as much trading there, as you do on the equity markets to just the prices don’t move as much. And it’s less sexy to talk about, you know, when you’re turning on CNBC, or something along those lines to sit there say, Oh, the bond market moved three basis points today. That’s that’s not an exciting news story. And just with the yield thing, so low on what bonds pay something that’s received a lot of attention are high yield bonds. And so what are high yield?

Jeff Powell:
So when we go back, we were talking before about how, you know, different people getting mortgages and, and, and so on, you know, if you’ve got a credit rating of 800, you’re gonna get a much lower interest rate from a bank than someone that has a 500, Ficus or FICO score. So high yield. We in the financial industry like to retitle things at times, but high yield is simply talking about junk bonds, from days past and the 80. So these are your least credit worthy companies. So investment grade, is considered to be anything that’s triple B and above so it starts off at triple A, but it’s on a double is single, a triple B. Those are all Considered to be investment grade, when you get below triple B rated. So double B and below is considered to be high yield, you’re getting paid a lot more money, but you’re getting paid a lot more money, because the person or the company that you’re investing, or lending money to really specific way is more likely doesn’t mean it’s gonna happen but more likely to default on our debt than a more creditworthy company. So you get to get paid more for that. And that’s why they call it a high income bond, rather than just a regular corporate bond.

Jeremy Witbeck:
Yeah, and Jeff, um, with that understanding of these are your quote unquote, higher risk companies because they have a lower credit rating. I think the other thing that’s interesting when we look at is we’ll notice that high yield bonds tend to lose value if the economy starts sputtering or start stalling. Much like equities, as opposed to you’re more conservative or you’re safer bonds, your investment grade bonds tend to go up in value when the economy starts sputtering in anticipation of interest rating decreases. So it’s been really interesting to watch how those behaviors play out, and how even in the bond market can have very different reactions based on the type of qualities that they have. Well,

Jeff Powell:
let’s talk about that for just a minute, Jeremy, because it is an important distinction of what you’re bringing to the table. So if the economy is slowing down, for example, you know, obviously, stocks are going to sputter because if we were to go into a recession, for example, there’s less money to go around to all the companies that are publicly traded. So the way I kind of like to think about it is, though, imagine that you and I are sitting at a table, there’s two glasses of water, and we remove one, okay, doesn’t mean that we’re both going thirsty, but it means there’s less water to go around. And so in that situation, or the average company, and the stock market’s gonna go down. But also, if you’ve got higher risk companies that are going to have higher risk of financial trouble, then that increases the chance of them not being able to pay their debt, and, and defaulting on their their fixed income. So that’s one of the reasons why they tend to be, you know, strongly correlated to the market is, you know, good economy, good stock market means a lower risk of high yield defaulting, because the economy is doing great. So these more risky companies are doing fine within those market environments. But when the economy turns south, or it becomes more questionable, that, you know, the, the outlook is, is less, you’re less able to read it, then yeah, things get riskier. And then what are people going to do? They’re gonna fly to safety. And find the safety oftentimes, is US Treasuries, being, you know, oftentimes intermediate or long term where they’re saying, okay, you know, I’m going to take a break from the stock market, right now, I’m going to move I’m going to park my money for a little while. And these, you know, really risk free things are called treasuries. When you’ve got more buyers than sellers there, the price is going to go up, and the yields are going to go down, but you get a big push, and price so that it will first end. So the stock market’s dropping, but Treasury prices are going up. So I’m making money in a bad market. And you get more and more and more people pushing into that, then it gets even more frothy at the tops within the Treasury markets, you can see the Treasury market all over the place. I mean, in fact, if you look at the Great Recession, long term, treasuries were the only out of 40 different investment groups, was the only area of the market that made money in 2008 was long term treasuries. And that was it. So we really want to be smart about how we are investing money and making sure that we understand correlations of our investments. So you don’t want to sit there and have a high risk equity portfolio. And think that, you know, by buying high yield, fixed income, that you’re lowering your risk, you’re really not is a highly correlated investment, and will move up and down with your equities. Yeah, and

Jeremy Witbeck:
I think that’s an important point. And one of the mistakes I’ve seen a lot of people make is that they will think that by moving from common stocks to high yield bonds, that they’re doing themselves, a favor in terms of the market sells off. And in reality to your point, because they’re so highly correlated, you haven’t really removed that that market risk that you’re trying to, you’ve just shifted from one asset to another, that’s going to participate.

Jeff Powell:
That’s exactly right. And there’s other products, other things called mortgage backed securities, other things of that nature that act like bonds, you get income from it, that are also very highly correlated to the equity marketplace. And again, certain things that people really don’t understand the risk levels of them until that risk shows up and starts really hammering the overall value of their portfolio. So it’s one of these things that you really I truly need to understand what the underlying investments that you’re involved with are doing and understand the correlation of the different assets that you have within your portfolio. Otherwise, you might wake up and really, financially harmed yourself without really realizing the risk that you were taking within your portfolio.

Jeremy Witbeck:
Yeah, yeah, definitely. And so Jeff, on that theme, so there’s some broader market terms that we use. The first one being a bull market, what is a bull market?

Jeff Powell:
bull market simply means that the markets are going up bear markets. So the current the the Contra statement there are that the markets are going down. The only thing that I’ve tried to look at history of both of these, and I’ve heard a lot of different speculation to them. But essentially, again, me being a word nerd and liking to understand word derivations. When you’re looking at something like this, typically, you know, a bull’s horns go slightly up. So that was kind of the thought process of using a ball. Not really sure where the bear came from. I mean, maybe it’s just that, you know, most people don’t like bearish because they don’t want to be chased by one or something along those lines. But I really don’t have heard a lot of different speculation on where both both those terms came from, but simply bull market going up, you know, we like bulls, bears bad. You know, we don’t like bears, they simply mean that the markets are generally going down in value.

Jeremy Witbeck:
Gotcha. And so on that note, there are secular trends, and then there are cycles. And I know, this is something that we talked a lot about in Polaris marketing literature. And in webinars, Jeff, what is the difference between a secular trend versus a cycle.

Jeff Powell:
So we got to be careful with secular command a lot of things secular obviously has a religious connotation to it. But it also the the true derivation of what we’re talking about with definition here is length of time. So when we’re talking about secular, we’re talking long term bull market or long term bear market. And generally a secular bull market means that it doesn’t mean that there’s not recessions, it doesn’t mean there’s not corrections, it means that the long term trend of the market is up. Whereas a secular bear market typically means that it’s sideways to down. So the last secular bear market we had was from 2000 to 2013, where have you invested in 2000, and you woke up in 2013, you made no money whatsoever. And there were two major corrections during that time period. We are right now in a secular bull market. And that secular bull market again began in 2013. Some people would argue that it began in 2009, definitionally, it can’t have happened that way. Because you basically have had to break into new highs in order to start a secular bull market. So that’s why we’re using a 2013 date, our 2009 date. But the last one that we had was from 1982 to 2000 was an 18 year time period in which the markets went up.

Jeremy Witbeck:
Yeah, and and what’s really interesting about this, Jonathan, something that I don’t think is understood enough is that understanding the secular trend really gives you a good idea of where things are headed. And to your point, there’s going to be a lot of cycles within those secular trends. But certainly you want to invest differently in a secular bull market than a secular bear market. Do you mind going into a little bit of how that influences investment decisions and why we pay attention to those types of things?

Jeff Powell:
Yeah, that’s absolutely so I mean, if we’re talking about let’s just use a secular bear market that we had started off in 2000. You know, first drop the first cycle, the down cycle, so we had a secular bear market, but we had a bear cycle, inside of a secular bear market. So from 2000 to 2003, secular bear market, what what also bull cycle are bear cycle inside of a secular bear market. And then from 2003 to 2007, we had a bull cycle inside of a secular bear market. So generally up market, even inside of it. So again, if you look at what went on with the last secular bear market we had prior to that was 66 to 82, there were five major downturns, and then they rebounded, and then a fall again, and then rebounded. This last one, we just had two major downturns, we had the 2000 to 2033 correction, and we had the fall of 2007, to the spring of 2009, great recession. In a secular bear market, we are going to have to be much more tactical, we’re going to have to really understand the short term cycles, what’s going on with that, um, how to find so we need to be and then really, again, shifting Yours in order to take advantage of the good times, because again, if you just sat there and were buying hold from 2000 to 2013, you made no money, what you did do was lost your buying power. If you’re talking about having an average inflation rate in this country, historically, around 3%, you want a decade and a half, almost without making money, but you lost more than a third of your buying power during that 13 year time cycle. So the only way that you can keep up with that, or even grow your money is to get defensive during the bear cycles, and get aggressive during the bull cycles. And those things again, tend to move in longer trends. So we need to be taking advantage of that. In a secular bull market, we tend to be less tactical. So if you kind of think about sailing, for example, if the wind is coming directly at you, you have to in order to get up wind, you have to tack your ship a lot. So you go off to the side, and then you’re going off to the right for a while, and then you attack and you go to left for a while. But you’re basically going kind of at a 45 degree angle at the wind in order to go up when’s with when the ones that you’re back, you just fill up your jib and you let the wind push you forward. And you really don’t have to make as much changes, yes, you have to make little changes here and there. But the trend tends to stay behind you for a lot longer period of time. That’s where we are right now. We are in a secular bull market. And we are in a bull cycle within a secular bear market. The one thing that we really need to understand also is these trends tend to be long, like I said, the last one was from 1982 to 2000, the average secular bull market last 14 years. And keep in mind, we’ve used this phrase before also is that bull markets climb a wall of worry, we’ve talked about that, and we’ve written about it, there is a reason to not invest every single year. And there’s people that Oh, the markets too high in value, there are this, this and this, you know, there’s always a reason not to invest. But we don’t invest in stock markets, we invest in actual individual stocks. So that’s one thing to kind of keep in mind is that there will always be areas of the market where there’s value, and growth. And so we want to be able to take advantage of both of those things. And so in order to take advantage of it, you need to understand leadership, which is why we are tactical nature to move our portfolios around in order to take advantage of those things.

Jeremy Witbeck:
Yeah, Jeff, that was a great answer. And I really enjoyed the imagery that he gave up the the sailboat with the difference between going into the wind versus having the wind at your back and a great visual representation of the difference between a bear versus a bull secular market. So as always, Jeff, thank you very much for breaking these down. I have a feeling this is going to be another one of our favorite podcasts. Just even talking with you on terms that we throw around. It’s always interesting just hearing not only what they mean but also what were some of the sources of the words come that we just don’t think about anymore since they’ve become second nature to this to discuss but that Jeff thank you for your time and appreciate as always your your expertise in these areas.

Jeff Powell:
Thank you.

Jeremy Witbeck:
And so in to everyone with us. Thank you so much for giving us your time and as always be happy, be safe and be healthy.

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