GET EMAIL UPDATES FROM POWERTOFLY
By signing up you accept the Terms of Service and Privacy Policy
BROWSE CATEGORIES
GET EMAIL UPDATES FROM POWERTOFLY
Thornburg Investment Management

The First Law of Investing

There are only three ways to earn returns.

Below is an article originally written by Jan Blakeley Holman, CFP®, CIMA®, ChFC, CDFA, CFS, GFS®, Director of Advisor Education at Thornburg and published on April 21, 2021, in Thornburg's blog. Go to Thornburg's company page on PowerToFly to see their open positions and learn more.

In 2004, Congress designated April "Financial Literacy Month". In celebration of financial literacy month, this is the first of four articles that focus on the four laws of investing.

In 1650, François de la Rochefoucauld wrote that "the only thing constant in life is change." And Rochefoucauld wasn't alone. Even though it predates Monsieur de la Rochefoucauld by over 3,300 years the Code of Hammurabi (now on view at the Louvre) said the same thing. While I didn't know François, I wasn't in the room when the Code was hammered into the stone, and while I don't agree with many of the Code's controversial 282 rules, I do know that throughout the ages, many of the world's greatest thinkers have told us that, in life, change is a given.

On the surface, the same can be said of the investment process, where change and cyclicality are unrelenting. Markets go up and markets go down, economies crest and economies recede, interest rates move higher and interest rates move lower. Yet, amid all of the change in the investment world, four key principles have always remained the same. I call these the four laws of investing.

The first law of investing
There are three ways an investor earns an investment return: interest, dividends, capital gains, or a combination of the three.

Interest
Bank savings accounts, certificates of deposit (CDs) and bonds generate interest. Investors often choose these investments when they are interested in knowing exactly how much they are going to earn on some regular basis (monthly, semi-annually or annually).

Dividends
Stocks, stock mutual funds and ETFs generate dividends. Dividends are attractive to investors because they are a form of current income and offer the potential to increase in the future. At the same time, dividends are not guaranteed and in return for assuming that risk, investors hope to be rewarded with higher dividends and the expectation that the underlying investment will appreciate in price over time.

Capital Appreciation
Investors who want their investment to grow in value choose investments like stocks, stock funds and ETFs that offer capital appreciation. To benefit from an investment that has increased in value, an investor must realize the gain by selling the investment for more than the purchase price.

In addition to choosing the type of desired return, identifying the investment options that produce said desired return, and choosing the investment, investors must also choose the account in which the investment will reside.

Asset Location
Asset location refers to the place an asset (investment) is held. Asset location affects how income or gains from the investment are taxed. Because of that, in identifying the investments that have the potential to generate the type of returns they are seeking, an investor must also be strategic about where each investment will reside.

For example, let's say an investor is interested in buying shares of a company that she believes has significant appreciation potential. If she purchases the stock in a taxable account and sells it for a profit, she will receive capital gains tax treatment on that profit.

On the other hand, if an investor purchases the same stock in an IRA account, the tax-treatment will be different. Although she will still make a profit on that particular stock in her IRA account, she will not receive the favorable capital gain tax treatment she received in her taxable account. Instead, all of the distributions she takes from her IRA, that have not been previously taxed, will be included in her taxable income, and taxed as ordinary income in the year the distribution is received.

Understanding investment returns and asset location are two of the most important considerations an investor must make. Once they make those decisions, they need to understand how to take full advantage of their investment returns.

___________________________________________________________________________________________________________________Important Information

The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

This is not a solicitation or offer for any product or service. Nor is it a complete analysis of every material fact concerning any market, industry, or investment. Data has been obtained from sources considered reliable, but Thornburg makes no representations as to the completeness or accuracy of such information and has no obligation to provide updates or changes. Thornburg does not accept any responsibility and cannot be held liable for any person's use of or reliance on the information and opinions contained herein.

Investments carry risks, including possible loss of principal.

Outside the United States

This is directed to INVESTMENT PROFESSIONALS AND INSTITUTIONAL INVESTORS ONLY and is not intended for use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to the laws or regulations applicable to their place of citizenship, domicile or residence.

Thornburg is regulated by the U.S. Securities and Exchange Commission under U.S. laws which may differ materially from laws in other jurisdictions. Any entity or person forwarding this to other parties takes full responsibility for ensuring compliance with applicable securities laws in connection with its distribution.

Please see our glossary for a definition of terms.

TL0405

Automattic

27 Companies with Impressive Mentorship Opportunities

January is National Mentorship Month— the perfect time to focus on growing and building important relationships with mentors that will positively affect your professional career.

Research shows that mentorship greatly improves career outcomes by providing professional guidance, skill development, and support through major work and life transitions.

READ MORE AND DISCUSS Show less
PagerDuty

Remote Work Tips: Connect and Engage in a Distributed Environment

Remote Work Tips: Fostering Belonging in a Distributed Environment

💎 We’re living in times when remote work is becoming more and more typical for employees. And many companies have organized hybrid workplaces, with some people coming to the office and some working from home. How can teams foster belonging in this kind of distributed environment?

READ MORE AND DISCUSS Show less
Elastic

Elastic's Diane Tetrault on What Parenting, Scuba Diving, and Product Marketing Have in Common

As an instructor of other scuba diving instructors, Diane Tetrault knows how to convey life-saving lessons in a way that encourages and supports her students. And as it turns out, that skill is highly transferable to two other key roles in her life: manager and mother.

Diane is the Senior Director of Product Marketing at Elastic and is also a mom of two sons. In the water, at work, and with her family, she’s gotten plenty of practice creating the right environment for other people to learn and enjoy.

READ MORE AND DISCUSS Show less
Relativity

How Mentors Can Unlock Your Career: Insight from Relativity’s Karen Klein

Karen Klein wrote her first contract when she was 11.

It laid out how much allowance she would earn for completing certain chores each week. When she got her parents to sign it, she told them that she was going to be a lawyer when she grew up.

READ MORE AND DISCUSS Show less
Capco

Why Capco’s Maleni Palacios Believes in Building Communities at Work

As a kid, Maleni Palacios had a long list of questions that no one could answer for her.

“I started asking myself, ‘Why are some countries rich? Why are some of them “poor”? What is this notion of a country and a nation-state? Why do people have different lines of work? Who chooses that for them?’” remembers the associate consultant.

READ MORE AND DISCUSS Show less
© Rebelmouse 2020