Financial Goals

How to calculate the holding period return?

The holding period is the amount of time an investor holds an investment. The holding period is the difference between the date an investment is bought or sold and subsequently exited by reversing the trade entry. By definition, the holding period begins when a security is purchased and ends the day it is sold.

The holding period return (HPR) describes the total return relative to the initial investment cost. To calculate the holding period return, subtract the initial cost from the final cost and multiply by the shares or contracts.

For example, if 100 shares of a stock are purchased at $50 and sold at $55 and held for one year, the one-year HPR would be $500 ($55-$50 = $5 x $100 = $500).

The holding period yield describes the percentage return on an investment relative to the initial investment cost.

How do you set financial goals?

Financial goals are the objectives investors prioritize when developing a plan for investing, saving, and spending their money. Financial goals have many factors depending on the individual, including age, time horizon, income, short- and long-term targets, and more.

For an investor to be successful, it is important to identify specific goals and determine how to achieve them within the desired time frame. Investors must assess spending needs and decide how to allocate their capital while ensuring they have cash reserves available to invest in opportunities as they present themselves.

For example, younger investors may benefit from riskier, long-term investments, knowing they have more time to withstand volatility and account drawdowns.

Conversely, as investors age, they may choose to invest in safer assets that exhibit less volatility, as their time horizon is greatly reduced, and a substantial drawdown may be difficult to overcome before retirement income is needed.

How do you preserve capital in retirement?

Preserving capital is a key component of retirement, as income is often no longer generated through employment. Capital preservation strategically protects funds and aims to limit losses. This can be accomplished by allocating funds to safer or less volatile investments, like fixed-income securities, CDs, Treasury bills, and cash.

Money that is not invested cannot be lost; however, it cannot gain much either, and will eventually decrease in purchasing power due to inflation.

Investors that no longer receive employment income will need to set realistic financial goals and spending habits once they reach retirement. 

What is the difference between capital growth and income?

Capital growth is generated by owning assets that appreciate over a long time frame. Multiple instruments provide investment opportunities for capital growth.

Riskier assets, like equities, have the potential to generate larger returns when held for a longer period, but may experience volatile swings in the process.

Safer assets, like bonds, typically provide lower returns but are less volatile investments with consistent cash flow. Income is cash flow that is generated by consistent, anticipatory revenue streams.

Investing for current income looks to take advantage of investments that pay distributions in the short-term, such as dividend, interest, and premium.

Current income also refers to regular deposits such as employment paychecks and proceeds from the sale of goods and services. Current income is focused on the immediate proceeds from investments, not the asset appreciation of capital growth strategies.

What is an example of speculation?

Speculation is the practice of allocating capital to investments with the hope of substantial gain but at the risk of significant loss. Speculative investments typically offer the potential for above-average returns but are more volatile than safer investments. Investors typically allocate a small portion of their account to speculative instruments, hoping that some investments’ long-term rewards will offset the losses of others.

What is the difference between an educational savings account and 529?

Education savings accounts and 529 plans are tax-deferred trusts created by the United States government to assist families in funding minors’ education. Education savings funds can be used to assist families with a variety of expenses involved with education.

The primary difference between an ESA and a 529 plan is that an ESA has a maximum investment of $2,000 per year and can only be used on tuition and fees.

In comparison, a 529 plan has a maximum distribution determined by the program and is often at least six figures. 529 plans can be used for multiple expenses associated with education beyond tuition and fees.

Funds from an education savings account must be used by the time the eligible recipient is 30 years of age or additional taxes and fees will be imposed when funds are withdrawn and has income restrictions.

In contrast, 529 plans have no age, time, or income restrictions. 

How long will my retirement savings last?

The length of time retirement savings will last depends on multiple factors. Investors must calculate their average monthly and annual planned withdrawals to determine how much money will be needed for a defined period of time and decide if deposits will also be made.

There are tax considerations for withdrawals, as well as the potential rate of return and inflationary implications. Each individual investor will have different requirements based on their lifestyle and spending habits and their ability to generate income from investments.

The tools to estimate retirement income typically require the starting amount of the nest egg, how many years of retirement income are desired (10 years, 15 years, 20 years, etc.), an estimated rate of return during retirement, and whether or not the nest egg will be left intact. The longer the nest egg will need to last in retirement and the lower the estimated rate of return, the lower the estimated retirement income per year.

Retirement income estimates that include leaving the nest egg intact, meaning the principal amount is not spent from year to year and only earnings and interest are spent in retirement, will significantly decrease the estimated income in retirement. 

What are the average retirement savings?

The average retirement savings varies for each individual.

For example, while the average retirement contribution rate may be 7%, many individuals do not participate at all in a retirement savings plan. U.S. savings contribution rates tend to increase slightly per decade as individuals approach retirement.

Retirement savings balances vary widely, and average account values do not adequately reflect the significant impact of outliers (low balances and high balances). 

Are 529 plans tax deductible?

Contributions to 529 plans are not deductible at the federal level, but some states do offer deductions for contributions. Earnings in 529 plans grow tax-free when funds are used to pay for qualified education expenses.

What are the three basic strategies to use in planning for taxes?

All investments have tax implications, with multiple factors determining the tax consequences of capital gains, capital losses, dividends, and other distributions.

The length of the holding period, amount of gains or losses, and types of instruments invested in all play a role in how an investor will be taxed on their investments.

Investors need to evaluate the impact taxes may have on their investments and properly plan for the eventual effect taxes will have on their portfolio.