401(K) |
A 401(k) plan allows a US worker to save for
retirement while deferring income taxes on the saved money and
earnings until withdrawal. The employee elects to have a portion of
his or her wage paid directly, or "deferred," into his or her 401(k)
account. In participant-directed plans (the most common option), the
employee can select from a number of investment options, usually an
assortment of mutual funds that emphasize
stocks, bonds, money
market investments, or some mix of the above. Many companies'
401(k) plans also offer the option to purchase the company's stock.
For more information see
Wikipedia. |
403(b) |
A 403(b) plan is a tax-advantaged retirement
savings plan available for public educational institution or
hospital, some
non-profit employers (US Tax Code 501(c)(3) organizations), and
self-employed ministers in the United States. It has tax treatment
similar to a 401(k) plan. Employee salary contributions to a 403(b)
plan are made before income tax is paid and allowed to grow tax
deferred until the money is taxed as income when withdrawn from the
plan. For more information see
Wikipedia. |
457(b)
|
A 457(b) plan is a type of tax-advantaged
defined contribution retirement plan that is available for
individual employees of a State and certain non-governmental employees
performing services for the State. The employer provides the plan and the employee defers
compensation into it on a pre-tax basis. There are two primary types
of the plans, governmental and non-governmental. Some governmental
plans were under 457(g) but those plans may no longer be created.
Most governmental and non-governmental plans are 457(b) plans. For
more information see
Wikipedia. |
$CASH |
We use the generic symbol
$CASH in
Buy/Sell when StormGuard wants you to move
to/from the safety of a money market fund. Not everyone has access
to the same money market fund so we use $CASH to mean pretty much
any money market fund you have available to you. |
Algorithm |
An algorithm is a method for solving a
problem or completing a task using a specific sequence of
instructions, the computation of which proceeds through the series
of well-defined steps to arrive at a result. Investment analysis
indicators commonly used to evaluate the suitability of a stock
or fund, such as
RSI,
MACD,
Moving Averages,
and the like, are generated from algorithms. |
Asset Class Indicator |
An asset class indicator might best be
thought of as a market direction indicator that is used to better
control the transition between the higher volatility stock fund
asset class and the very lower volatility money market fund asset
class when the overall market starts to falter. AlphaDroid's
StormGuard feature uses an asset class
indicator for the purpose of asset class rotation. Stocks,
bonds, or cash? See also the
StormGuard Indicator
section of the User Guide page for more information. |
Asset Class Rotation |
The broadest asset classes for investment
include Stocks, bonds,
and cash (money market). Certainly you
can also include annuities, commodities, currencies, derivatives,
real estate, and others. Within the context of AlphaDroid, a
Strategy is typically composed of 4 to 12 stocks, ETFs, or mutual
funds. AlphaDroid additionally uses its
StormGuard
algorithms to determine when a market storm
is brewing and it is no longer safe to be in stocks (which includes
most mutual funds and ETFs), and directs you to move to the safety
of the cash asset class (money market funds,
treasuries, etc) |
Backstop Funds |
When building an AlphaDroid Strategy, one
of the important performance principles is that of handing off from
one fund to another as described
here graphically regarding
sector rotation and asset class rotation. When assembling a set of
sectors or asset classes, it is often good to include a fund like
MDY (S&P Midcap) as a backstop such that if there comes a time when
none of the other funds is doing at least as well as the MDY, then
MDY becomes the backstop for minimum acceptable performance.
Similarly, a long-term treasury fund, such as IEF, TLT, FBLIX, or
VUSTX may also be helpful as a backstop in performance when stock
equities are seriously weakening. |
Bonds |
Bonds enable the issuer to finance long-term
investments with external funds. A bond is a debt security, in which
the authorized issuer owes the holders a debt and is obliged to
repay the principal and interest (the coupon) at a later date,
termed maturity. Bonds and stocks are both securities, but the major
difference between the two is that stock-holders are the owners of
the company (i.e., they have an equity stake), whereas bond-holders
are lenders to the issuing company. For more information see
Wikipedia. |
Diversification |
Diversification reduces risks associated
with any one of investment by averaging it in with numerous other
investments to. Specifically, the impact of a significant loss in
any one investment is compensated for by the gains in other
investments. Conversely the impact of significant gains in any one
investment is diminished by the losses in other investments. Safety
is achieved at the expense of lower returns. Diversification, by its
very definition of owning a little bit of everything, is inherently
a plan for average performance -- just like your mother always
wanted for you... right? See also Post-Surfing
Diversification. See
Wikipedia for more information. |
ETF |
An Exchange Trade
Fund is a basket of
stocks similar to a mutual fund that is
traded in the market just like a stock. Shares can be traded at any
time the market is open, can be bought long or sold short, and
brokerage fees apply. Currently all ETFs must be based on an
index representing a particular region, sector,
or asset class. Thus they are a passively managed collection of
stocks, whereas mutual funds may be actively managed by the fund
manager to attempt a higher return. See
Wikipedia for more information. |
Index |
A market index is composed of a basket of stocks
compiled by news or financial services firms to benchmark the
performance of the broad market as a whole, regional markets, or
specific sectors of the market. The Dow Jones Industrial 30 Index,
for example, is a collection of 30 stocks that together reasonably
well indicate the performance of the US stock market as a whole. The
performance of mutual funds is often
measured against a comparable index, and ETFs are
specifically designed to track a specific index, which exist for
every major market sector and world region. See
Wikipedia
for more information. |
Indicator |
An indicator is a mathematical calculation
(algorithm) based on the price and/or volume history a security for
use in predicting its future prices. Commonly used technical
analysis indicators are the moving average convergence-divergence
(MACD) indicator and the relative strength index (RSI). AlphaDroid
uses proprietary adaptive indicators that automatically optimize
calculation parameters for changing market characteristics. The
sector having the highest indicator value
determines which of the sectors one should be invested in at any
given time. |
IRA |
An Individual Retirement
Account is a retirement plan account that provides
some tax advantages for retirement savings in the United States.
There are a number of different types of IRAs, which may be either
employer-provided or self-provided plans. The types include:
(information from Wikipedia)
-
Roth IRA - contributions are made with after-tax assets, all
transactions within the IRA have no tax impact, and withdrawals
are usually tax-free. Named for Senator
William Roth.
-
Traditional IRA - contributions are often tax-deductible
(often simplified as "money is deposited before tax" or
"contributions are made with pre-tax assets"), all transactions
and earnings within the IRA have no tax impact, and withdrawals
at retirement are taxed as income (except for those portions of
the withdrawal corresponding to contributions that were not
deducted). Depending upon the nature of the contribution, a
traditional IRA may be referred to as a "deductible IRA" or a
"non-deductible IRA."
-
SEP IRA - a provision that allows an employer (typically a
small business or self-employed individual) to make retirement
plan contributions into a Traditional IRA established in the
employee's name, instead of to a pension fund account in the
company's name.
-
SIMPLE IRA - a simplified employee pension plan that allows
both employer and employee contributions, similar to a
401(k) plan, but with lower contribution limits and simpler
(and thus less costly) administration. Although it is termed an
IRA, it is treated separately.
-
Self-Directed IRA - a self-directed IRA that permits the
account holder to make investments on behalf of the retirement
plan.
|
Managed |
A fund is said to be passively managed if it
rigorously maintains its investments to match that of a published
index. A fund is said to be actively managed if
its manager actively changes the relative weighting of its
investments in belief that it will cause the fund' to outperform
other similar funds and reference indices. Many, but not all,
mutual funds are actively managed, while
passive management is required of ETFs. |
Mutual Fund |
A mutual fund pools money from many investors
that a professional fund manager invests in stocks,
bonds, money
market instruments, and/or other securities. The fund manager's
investment choices are constrained by a strategy specified in the
fund's prospectus. Mutual funds are generally only priced at the end
of the day and generally have punitive fees to prevent trading them
more than a few times per year. Most, but not all, mutual funds are
actively managed. See
Wikipedia for
more information. |
Money Market |
A money market fund invests in short term (one
day to one year) debt obligations such as Treasury bills,
certificates of deposit, and commercial paper. The main goal is the
preservation of principal, accompanied by modest dividends. The
fund's Net Asset Value remains a constant $1 per share to simplify
accounting, but the interest rate does fluctuate. Unlike bank
accounts and money market accounts, most deposits are not FDIC
insured, but the risk is extremely low. The biggest risk involved in
investing in money market funds is the risk that inflation will
outpace the funds' returns, thereby eroding the purchasing power of
the investor's money. |
MPT |
According to Modern
Portfolio Theory,
largely developed by Harry M. Markowitz, investors are generally
risk averse, and given two assets that offer the same expected
return, investors will prefer the less risky one. Thus, an investor
takes on increased risk only if compensated by higher returns, and
vice versa. The trade-off between risk and reward will differ
according to individual risk aversion preferences. MPT also proposes
how rational investors can use diversification to optimize their
portfolios; that an asset's return is a random variable; and how to
model a portfolio as a weighted combination of assets. The variance
(standard deviation) of an asset's return over time is generally
defined as its measure of risk. By mixing an asset class having a
particular risk-return characteristic with some proportion of zero
risk and low-return money market instruments, you can produce any
combination of risk and return on a line between the plots of these
two assets on a risk / return chart. See
Wikipedia
for more information. |
Portfolio |
A portfolio is a collection of investments
that one holds. The holdings of a portfolio might include assets such as stocks,
bonds, cash, real estate, commodities. According to
Modern Portfolio Theory (MPT), a portfolio is a part of a risk-limiting
strategy called
diversification. |
Quantitative Analysis |
A financial analysis technique that seeks
to understand and predict the future behavior of a stock or fund by
using complex mathematical formulas on its past price and volatility
market data. In contrast, fundamental analysis uses revenues,
earnings, future growth, return on equity, profit margins and other
data to determine a company's underlying value and potential for
future growth. The claimed advantage of quantitative analysis over
fundamental analysis is that live market data directly incorporates
the analysis opinion of "the masses" and their emotional responses.
If you conclude that company XYZ is headed for disaster with its new
product offerings and financial condition, but the masses think
otherwise, one's investment accounts are likely to fair better by
investing with the trend set by the masses versus by one's own
narrow view of "what should happen." Market price movements and
volatility are the direct results of what the masses are thinking
and feeling. |
Sandbox Strategy |
The lower list of Strategies on the My
Strategy page are called Sandbox Strategies. This list is your
"Strategy Evaluation Playground." No subscription fees are charged
for these Strategies, but you will not receive email Trade Alerts or
be able to see the most recent trade. This is where you can develop
and monitor Strategies without charge until you are fully ready to
make use of them |
Sector |
In economics and finance a
market sector describes a set of businesses that are in direct
competition with one another. The performance of a given company's
sales, cost of goods sold, debt, earnings, and other financial
measurements are most meaningful when measured in relation to others
in the same market sector. Owning a sector fund has the benefit of
reducing the volatility and risk associated with individual stocks
while still providing upside potential when the sector outperforms
the general market. Yahoo's
primary market sectors include: Basic Materials, Conglomerates,
Consumer Goods, Financial, Healthcare, Industrial Goods, Services,
Technology, and Utilities. These then may have sub-sectors. |
Sector Rotation |
Data from the National Bureau of Economic
Research going back to 1845 has shown that not all sectors of the
economy perform well at the same time and that there is a rotation
through various sectors from one economic cycle to the next. A fund
manager may then rotate (shift) investment assets from one sector of
the economy to another in an attempt to improve the investment
return performance. AlphaDroid practices what we call True
Sector Rotation, which i s the act of owning the one, and the only
one, trend leader from among a set of up to 12 candidate funds in a
Strategy. True Sector Rotation is also
referred to as Serial
Diversification , where over time one owns many funds, but
just one of them at a time. |
Serial Diversification |
The act of owning many funds, but only one
of them at a time. Serial Diversification is an advanced form of
diversification that does not mindlessly require owning of asset
classes or sectors just to satisfy the traditional "diversification
gods" to reduce risk, but instead selectively avoids risk by owning
only the trend leader and avoiding the trend laggards. To execute
Serial Diversification requires a
trend-following indicator
and trading system. Its effectiveness will depend on the
quality of the trend signal. |
Statistical Data |
Statistical analysis computes summary
information about a set of data, such as its average, its standard
deviation (wiggliness), or its correlation to another set of data.
These are important measures for understanding the character of a
set of data - such as the performance of a mutual fund. However, in
the process of performing the analysis, all time domain information
is lost, thus making it impossible to use such statistical data to
make anything other than a buy-and-hold investment decision. See
Wikipedia
for more information. |
Strategy |
A Strategy, in the context of
SectorSurfing, is a combination of a
set of up to 12 mutual funds or
ETFs along with an indicator
algorithm
to evaluate the performance of the funds to determine which one, and
only one, of the (up to) 12 funds is currently
demonstrating leadership and should be owned in your account. A
Strategy typically has a "themed group of funds," such as market
sectors, socially responsible funds, or country funds. You might use
multiple Strategies, each one being assigned to manage the money in
one of your
account positions in your Portfolio. You can
browse the performance characteristics of numerous Example Strategies
we have assembled by clicking
HERE, or you can create your own Custom Strategy using the funds
of your choice, or as offered to you in a company administered
retirement plan, such as a 401(k). |
Stocks / Shares |
A share of stock means a share of ownership in a
corporation. In the plural, stocks is often used as a synonym for
shares especially in the United States, but it is less commonly used
that way outside of North America.[ Stock typically takes the form
of shares of either common stock or preferred stock. As a unit of
ownership, common stock typically carries voting rights that can be
exercised in corporate decisions. Preferred stock differs from
common stock in that it typically does not carry voting rights but
is legally entitled to receive a certain level of dividend payments
before any dividends can be issued to other shareholders. For more
information see
Wikipedia. |
StormGuard
TM |
AlphaDroid utilizes a special
asset
class indicator to examine the general direction of the market and
help AlphaDroid judge whether to put more or less weight toward
stock funds versus bond funds or money market funds. The StormGuard
feature is largely responsible for the flat zones in the return
charts during generally down years in the overall market. The
overall impact is to reduce the probability of loss of real money
during these periods with little or no sacrifice in long term
performance of the Strategy. See the
StormGuard section
of the User Guide page for more details. |
Taxable |
Your investment accounts are always eventually
taxable. However, a taxable account is usually used to refer to an
account that does not have any tax deferral status that allows it to
grow tax-free such as IRA, 401(k),
403(b) and 457(b) accounts.
Taxable accounts are taxed annually according to their investment
returns and should only be used for short term investments or when
contribution limits are reached for tax-free investments. |
Temporal Data |
Temporal data incorporates the dimension of
time. The price chart of a stock has a vertical dimension of price
and a horizontal dimension of time. All temporal information is lost
in statistical analysis where such things as
standard deviation,
correlation coefficients, and averages are computed. Temporal data
may also include trend indicators and volatility indicators that
change over time. |
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