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Asset Allocation - Asset allocation is an approach to managing capital that involves setting parameters for different asset classes such as equities (ownership, or stocks), fixed-income (bonds), real estate, cash, or commodities (gold, silver, etc.). It is generally thought that fact that asset classes usually have different characteristics and behavior patterns, getting the right mix for a specific investor's situation can increase the probability of a successful outcome in accordance with the investor's goals and risk tolerance. For example,
stocks and bonds play a different role in an investor's portfolio beyond the returns they may generate.
Mutual Funds - A mutual fund is a pooled portfolio.
Investors buy shares or units in a trust and the money is invested by a professional portfolio manager. The fund itself holds the individual stocks, in the case of equity funds, or bonds, in the case of bond funds, with the investors in the mutual fund receiving an annual report each year, detailing the investments owned, income generated, capital gains, both realized and unrealized, and more. If you are interested in understanding the mechanics of how one is put together, read How a Mutual Fund Is Structured. Mutual funds do not trade throughout the day to avoid allowing people to take advantage of the underlying change in net asset value. Instead, buy and sell orders are collected throughout the day and once the markets have closed, executed based upon the final calculated value for that trading day.
Expense ratio. It costs money to run mutual funds, so investors can expect to pay an annual fee, expressed as the expense ratio. "That's the percentage of your money that goes to the managers of the mutual fund you're investing in," says Keith Singer, a certified financial planner with a wealth management firm in Boca Raton, Florida. "So the bigger the expense ratio, the less money you're going to make." The expense ratio also covers other fund expenses, such as administrative fees, record-keeping fees and even print or TV ads promoting the mutual fund. In 2013, the average stock mutual fund had an expense ratio of 1.25 percent, according to Morningstar.
Trust Funds - Trust funds are a special type of entity in the legal system that offers tremendous asset protection benefits and, sometimes, tax benefits, if intelligently structured. Trust funds can hold almost any asset imaginable from stocks, bonds, and real estate to mutual funds, hedge funds, art, and productive farms. The downside is that the trust fund tax rates are compressed on income that isn't distributed to the beneficiary as a way to prevent huge accumulations of capital that lead to another aristocracy. That means much bigger bites from the Federal, state, and local governments without some sort of mitigation from prudent planning.
Prospectus. Looking for a go-to source that contains every bit of information about an investment? Ask your financial advisor for a prospectus, or search online to find one. It's a legal document that contains in-depth details about stocks, bonds, a mutual fund or whatever you're planning to invest in. If you're wondering, for instance, what the expense ratio is on your mutual fund, or you would like a list of all the fund's holdings, you'd find it in the prospectus.