When it comes to retirement plans, individuals have many options. For employees, there are some employer-sponsored plans to which they can contribute. Usually, these include defined benefit and defined contribution plans. These are two different retirement plans according to their composition, returns, and management. Before understanding the differences between these, it is crucial to look at each individually. What is a Defined Benefit Plan?A defined-benefit plan is a retirement plan in which an employee gets defined benefits. These benefits depend on several factors such as their salary, age, and employment period. In essence, these plans provide a fixed income to the employee that is similar to receiving salaries. Similarly, defined benefit plans are qualified plans, implying that the receiver can get tax benefits under the tax laws. As mentioned, the benefits that the individual gets depends on several factors. However, there is no specific method for calculating these benefits. Individuals can either take their benefits as a lump-sum amount or an annuity that provides them with payments throughout their life. Pensions and cash balance plans are primary examples of defined benefit plans. What is a Defined Contribution Plan?A defined contribution plan is a retirement plan in which an employee makes defined contributions to the scheme. The benefits, on the other hand, are not specific. Instead, the employee receives payments based on how the funds perform, managed by the company or the employer. Like defined-benefit plans, defined contribution plans also come with some tax benefits. The employer providing this plan specifies the options offered by it and is responsible for organizing it. The employer can also choose to contribute to the scheme. Each employee gets their own pension account. The amount they contribute to the plan depends on their employment contract or terms. 401(k)s and IRAs are examples of defined contribution schemes. What is the difference between Defined Benefit Plans and Defined Contribution Plans?There are several differences between defined-benefit and defined-contribution plans. Some of these differences are apparent from the explanation above. Some of the aspects in which defined-benefit and defined-contribution plans differ from each other are as below. BenefitsWith defined-benefit plans, employees get a predictable income in the future. As mentioned, this income depends on their employment period, age, the formula used, etc. In defined contribution plans, the benefits that employees receive depend on their contributions. It also depends on their employer's contributions and investment gains or losses. ContributionsFor most defined-benefit and defined-contribution plans, the contributions come from employees' pre-tax contributions. Employers may also choose to contribute to these plans. However, for defined-benefit schemes, these will vary according to the plan design or actuarial valuation annually. For defined contribution plans, the contributions are specific. ResponsibilitiesIn a defined-benefit plan, the responsibility of contributing money and managing investments lies with the employer. If the investments perform adversely, the employee is responsible for funding the defined-benefit scheme. In contrast, these responsibilities reside with the employee for defined contribution plans. If the underlying investments perform adversely, employees get lower compensation. ConclusionDefined benefit and defined contribution plans are employer-sponsored retirement plans. With defined-benefit plans, employees make varying contributions but get a fixed income. Their income depends on several factors mentioned above. With defined contribution plans, this income varies on how the underlying investments perform. However, the contributions are specific. Both plans also differ according to the responsibilities of employees and employers. Post Source Here: What is the difference between Defined Benefit Plans and Defined Contribution Plans?
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Trend following is a popular trading strategy used by Commodity Trading Advisors (CTA) and Hedge Funds around the world. The traded assets are often futures on commodities, FX, fixed-income, and equity indices. We previously demonstrated that stock indices exhibit trending property in the long term, i.e. their returns are positively autocorrelated. We subsequently developed a simple trading strategy exploiting this trending property. We’re now asking ourselves the question: can trend following be applied to single-name stocks? Reference [1] provided empirical evidence that trend following indeed works in the universe of stocks. The evidence suggests that trend following can work well on stocks. Buying stocks at new all time highs and exiting them after they’ve fallen below a 10 ATR trailing stop would have yielded a significant return on average. The evidence also suggests that such trading would not have resulted in significant tax burdens relative to buy & hold investing. Test results show the potential for diversification exceeding that of the typical mutual fund. The trade results distribution shows significant right skew, indicating that large outlier trades would have been concentrated among winning trades rather than losing trades. At this stage we are comfortable answering the question “Does trend following work on stocks?” The evidence strongly suggests that it does. Based on our experience, we believe that it is possible to develop winning trend-following strategies on stocks, i.e. the article’s finding is consistent with our experience. The points below would be, however, an area for further research,
References [1] C. Wilcox, & E. Crittenden, Does Trend-Following Work on Stocks? The Technical Analyst, 14, 1-19, 2005 Article Source Here: Does Trend Following Work on Single-Name Stocks? For individuals in their retirement period, annuities are a decent income stream that provides regular payments. Annuity or annuity contracts are agreements where one party pays another party a steady source of income. These contracts include details about the payments made to the beneficiary. The terms will also state whether it is a fixed or variable annuity. What is a Variable Annuity?Variable annuity represents a type of annuity contract that gets its value based on how the underlying investment portfolio performs. Usually, it includes sub-account portfolios. The receiver, based on the portfolio's performance, may get variable income. If the underlying portfolio performs decently, the variable annuities increase, meaning the receiver will get higher returns. The opposite will apply when the portfolio performs adversely. Variable annuity contracts are prevalent among two parties. The first party is the annuity provider, which is usually an insurance company. The other party is the receiver who enters into the contract with the provider. The receiver, through this contract, purchases the ability to receive a steady income stream in the future for a set amount of time. What are Variable Annuities for retirement?Variable annuities for retirement refers to contracts that retirees use to ensure a steady source of income in their retirement period. Due to the potential endless payments from these contracts, retirees can secure their future with considerable income. Unlike fixed annuities, retirees can't expect a guaranteed source of income. However, they can receive higher than what fixed annuities offer if the underlying investment portfolio performs well. Variable annuity for retirement is a decent option for individuals that have a high-risk tolerance. With variable annuities, these individuals don't have to stick to fixed payments. Instead, they can generate higher returns. However, it also has the potential to backfire on them. Retirees may also get significantly lower income than fixed annuities if the underlying investment portfolio does not perform as expected. How do Variable Annuities work?Variable annuities allow individuals to select between several options for investing their funds in a portfolio. These options may include mutual funds, money market accounts, and other investments. These are known as sub-accounts. By choosing their underlying portfolio, individuals get more control over the process. Similarly, they can benefit significantly if their selected option performs well. Variable annuities consist of two phases. These include the accumulation phase and the payout phase. During the accumulation phase, the variable annuity contract increases in value. It is the period when individuals make contributions to the variable contract. The payout phase is when they get to reap the benefits from the contract. During this period, they can get their payments in monthly or lump-sum amounts. How do Variable Annuities differ from Fixed Annuities?Fixed annuities, as mentioned above, offer individuals a fixed payout. However, this payout is usually lower compared to variable annuities. In contrast, variable annuities come with more uncertainty related to the amount that the receiver gets. However, with these annuities, they have the benefit of receiving higher returns. However, these can also result in significant losses if the underlying investments don't perform well. ConclusionVariable annuities are contracts that allow individuals to get variable income at a steady rate in the future. The amount they receive depends on an underlying investment, which dictates the annuity's value. Individuals can choose the underlying assets, known as sub-accounts. Variable annuities are different compared to fixed annuities, which offer lower but guaranteed payments. Originally Published Here: Variable Annuities for Retirement What is Insurance?The term insurance represents a contract between two parties to protect an underlying asset. The first party is the insured party, which receives the protection. This party owns the underlying asset. Insured entities may include individuals, businesses, organizations, etc. In contrast, the second party is the insurer. This party promises to compensate the insured party in case of damage to the underlying asset. Usually, the insured party makes regular payments to the insurer. This payment is known as the insurance premium. During the insurance contract, the insurer is responsible for reimbursing the insured party for damages to their asset. However, the insurance contract terms must cover the type of damage. In most cases, the contract will specify the types of perils it will recover. Is Insurance Liability or Asset?Insurance can be a liability or an asset depending on the type of entity that accounts for it. Before understanding how it can be either, it is crucial to know what each of these is. What is an Asset?An asset is a resource owned or controlled by an entity and will result in future inflows of economic benefits. Assets include all resources that companies use to generate income. For example, these may consist of property, land, or cash. However, assets don't have to be tangible. Intangible assets such as brand value, trademark, patents also meet the definition of assets. However, they must have measurable values. What is a Liability?A liability is an obligation for entities that result in future outflows of economic benefits. For most companies, liabilities represent a type of finance that they can use to run their operations. These funds may be long- or short-term. Regardless, these are obligations that an entity must reimburse in the future. Liabilities may include loans, accounts payable, accruals, etc. When is Insurance an Asset?Insurance is an asset for the insured party. Any party that makes a regular insurance premium to an insurance provider must recognize an asset. It is because this asset represents a resource that they own or control. Similarly, it can result in future inflows of economic benefits. However, the insured party must recognize an asset until it hasn't consumed the gains from it. In other words, once the party expenses out the insurance premium, they must derecognize the asset. For the insured party, insurance is primarily an expense. In most cases, however, insurance providers require payments in advance. Therefore, any payments made in advance become assets until the provider renders the related services. When is Insurance a Liability?For the insurance provider, insurance is a liability. The insurance provider must recognize a liability in its financial statements because it matches the definition. For this party, insurance is an obligation towards the insured party and can result in future outflows of economic benefits. When the provider provides the related services to the insured party, they will convert this liability to revenues. Similar to the insured party, the insurance provider must recognize a liability for advance receipts. These liabilities are known as deferred revenues or earnings. Once the insurance provider provides the services, they can record the related revenues. ConclusionInsurance is a contract between two parties for the protection of an asset. For the insured party, insurance is an asset. However, once they receive the services, the amount becomes an expense. In contrast, for the provider, insurance is a liability. Once the provider renders the services, the amount becomes revenue. Post Source Here: Is Insurance Liability or Asset? Insurance is a term used to describe any form of protection against financial losses. In the modern day, companies, organizations, and individuals use insurance to mitigate the risks associated with their assets. Based on the type of asset they use, there are several types of insurance they can get. One of these includes property insurance that comes on any real estate they own. What is Property Insurance?The term property insurance can describe one of the many types of insurance that property owners can get on their property. It may also refer to insurance that tenants get on leased or rented properties. Property insurance includes liability coverage for any damages to the underlying property. If there is any damage to the property, the insurance provider will reimburse the property owner or renter. Both parties also agree to the terms for the insurance before its commencement. These terms include the time for which the insurance coverage will be valid, the responsibilities of both parties, the types of damages covered, etc. Usually, the insurance provider is responsible for covering any damages to the property, subject to some conditions. The property owner or renter, in contrast, makes payments in the form of insurance premiums. How does Property Insurance work?Property insurance initiates from a property owner or renter. Usually, these parties contact an insurance provider to insure their property. As mentioned, they can choose between various policies based on which damages they are most likely to suffer. For example, flood insurance can protect houses against water or flood damage. In exchange for the insurance, the property owner or renter makes regular insurance premium payments. These payments may differ according to the type of policy selected, coverage scope, provider’s requirements, etc. Usually, property insurance includes protection against water, electrical, fire, smoke, and other minor damages. Both parties will also agree on the time for which the insurance will apply. During this time, the renter or property owner is responsible for making regular payments. However, if there is any damage to the insured property during this period, the insurance provider will reimburse the counterparty. As mentioned, if the damage is not a part of the insurance terms, then the insurance provider will not provide any compensation. What are the advantages and disadvantages of Property Insurance?Property insurance, like other forms of insurance, can have significant benefits to property owners and renters. Most importantly, it provides them protection against any damage to their property. As mentioned, however, there are some terms that may dictate the coverage scope. Similarly, it can be advantageous for protecting investors against uncontrollable damages. Property insurance can also be beneficial for companies and businesses. Commercial property insurance allows companies to protect their business premises against any damages. For businesses where the risks of theft or damages are high, property insurance can be significantly beneficial. However, there are some disadvantages of property insurance as well. These disadvantages primarily relate to the insurance provider. Some providers may deny claims for valid damages even when provided with proper evidence. On the other hand, some providers may also process claims slowly. On top of that, insurance premiums can also be costly based on the property value. ConclusionProperty insurance refers to a collection of insurance policies that property owners or renters can get on their related properties. If the underlying property suffers from any damages, the insurance provider reimburses the owner or renter. In exchange, the insurance provider receives regular payments in the form of insurance premiums. Post Source Here: How Does Property Insurance Work The term capital represents assets that companies use to generate income. In exchange, companies also incur some costs on it. This capital may include fixed assets, such as property or land, or liquid assets, such as cash, receivables. These are crucial for both long- and short-term operational needs. Based on how companies generate capital, there are several categorizations. What is Human Capital?Human capital represents the capital companies generate through their workforce. These include the employees a company employs, their skills, abilities, experience, etc. While this capital is not measurable and not a part of financial statements, it is still valuable. Human capital can be a distinguishing factor between a company's success and failure. For most companies, human capital is highly crucial. Like any other type of capital, companies can invest in this form of capital as well. This investment usually comes in the form of human resource management policies. These may include policies related to recruitment, training, performance appraisal, promotions, etc. If utilized correctly, human capital can be a significant resource for companies. Unlike other common forms of capital, human capital is not measurable. Therefore, companies cannot assign a value to it and recognize it in their financial statements. For most companies, human capital is an internal resource. External stakeholders cannot evaluate this capital either. Therefore, there is no way for them to gauge a company's value based on human capital. Despite that, human capital can provide significant rewards to companies. The more productive and experienced a company’s employees are, the better its performance will be. This performance translates to higher profits and can also increase a company’s value. Therefore, human capital has an impact on a company’s value, although not directly. What is Financial Capital?Financial capital is different from human capital. Financial capital is a broad term used to describe any capital that has monetary value. Therefore, it represents a company's capital except for its human capital and other non-monetary amounts. Similarly, any capital that does not contribute to a company's revenue-generation process does not constitute financial capital. Financial capital includes both equity and debt finance. Therefore, a company’s total assets represent its overall financial capital. Although most companies and stakeholders prefer equity finance over debt, debt still forms a part of financial capital. Each type of capital may have further classifications. For example, debt finance may include both short- and long-term obligations. The term financial capital implies that the capital has a monetary value. Any stakeholder can measure a company's financial capital through its financial statements. Unlike human capital, financial capital is a part of a company's financial statements, precisely the balance sheet. While it does not directly contribute to financial capital, human capital can also increase overall capital. Overall, the most significant difference between human capital and financial capital is the value. For human capital, companies cannot measure the monetary value. Therefore, this capital also doesn't constitute a part of the financial statements. Financial capital, on the other hand, is the direct opposite. Any capital with monetary value included in the financial statements is financial capital. ConclusionCapital is a term used to describe the resources that companies use to generate income. It may come in various forms. These include human and financial capital. Human capital is the capital that companies get from their workforce. However, it does not have a monetary value. In contrast, financial capital is the capital that companies get from financial resources. Article Source Here: Human Capital Vs Financial Capital Testing and validating a trading strategy is an important step in trading system development. It’s a commonly-known fact that a well-optimized trading strategy’s performance often deteriorates after it goes live. Thus, developing a robust strategy that performs well out-of-sample is quite a challenge. To this effect, we previously discussed a multiple testing framework for validating a trading strategy. A recent article [1] looks at the strategy’s robustness from a different perspective; it attempts to answer the question: why a strategy’s performance decays after going live. To that effect we have proposed two hypothesis. The first one holds that the drop is a pure overfitting effect. In other words, the authors have fine-tuned the (on average) genuine effect to the data used for backtesting in order to make their findings more statistically significant. This finetuning went far beyond what the true effect was and thus only part of the performance is recovered out-of-sample. Second hypothesis posits that once a profitable strategy is disseminated, market participants move in in order to monetize the effect. This in turn weakens or even obliterates the effect going forward. According to the article, the strategy’s decay is due to 2 effects: overfitting and arbitrage. The authors also pointed out that both effects are equally important, In order to be able to tell which (if any) of these two hypothesis is more likely, we have constructed a set of explanatory variables for each hypothesis and use univariate regressions to test each variable separately. We find statistically significant coefficients for several variables from both sets. This suggests that both forces are at work and the decay in performance is a joint effect of these forces. In brief, the article sheds some light on how and why a trading system’s performance deteriorates. However, an important question still remains to be answered: what can we do to mitigate these 2 effects? Let us know what you think. References [1] Falck, Antoine and Rej, Adam and Thesmar, David, Why and How Systematic Strategies Decay (May 14, 2021). Available at SSRN: https://ssrn.com/abstract=3845928 Article Source Here: Why and How Systematic Trading Strategies Decay After Going Live For most individuals, putting money into a life insurance policy comprises a significant financial decision. However, it also allows them to reduce the risks that the future holds for them or their families. While some individuals may consider life insurance as an unnecessary investment, there are some benefits to it. Before understanding why life insurance is necessary, it is crucial to know how it works. How does Life Insurance work?Life insurance allows an individual to support their family after their death. Through life insurance policies, individuals can ensure their family receives funds after their demise. All insurance companies or providers allow individuals to take up life insurance policies. Usually, they need to submit an application and go through the provider’s process to get the policy. There are several types of life insurance policies from which individuals can choose. Each of these has its own benefits and drawbacks. These policies include a term. During this term, if the insured person dies, their beneficiaries can receive the insurance amount. Life insurance policies are accessible to almost everyone, which makes them a great investment for many. Why Life Insurance is necessary?While life insurance is crucial for most individuals to have, a high portion of individuals still doesn't have a life insurance policy. There are several reasons why life insurance is essential. Some of these are as follows. Protecting family or other beneficiariesFor most individuals who have loved ones, they care about, having life insurance is necessary. It ensures that their loved ones will get the required financial support to continue their lives after the insured individual's death. This certainty can provide peace of mind to them and allow them to take care of their loved ones even after their demise. Protecting businessLife insurance isn’t only necessary to protect loved ones. It can also be crucial in saving businesses after the owner or a key employee die. Especially for small businesses, losing key personnel can have severely adverse impacts. By having life insurance on these individuals, it is possible to stop businesses from running into the ground after their death. Supplementing retirementIndividuals can use life insurance to supplement their retirement. By having a life insurance policy, they can ascertain that their retirement savings last for their lifetime. It means that individuals can put money into these policies and expected annuity payments after the insured person's death. Paying off debtsFor individuals who have accumulated debt during their lifetime, having a life insurance policy is also crucial. After their death, their families may have to suffer fulfilling their debt obligations. By having a life insurance policy, they can ascertain that their loved ones can pay off their debt without any issues. Paying funeral costsThe costs related to someone's death can also be high in many countries. These may include expenses such as a funeral, cremation and memorial expenses, and much more. These costs can burden the grieving families even more. Therefore, individuals can get life insurance to ensure that their families don't suffer due to death. ConclusionLife insurance policies can be highly beneficial after a person dies. However, most people still consider it an unnecessary expense. There are several reasons why life insurance is necessary. These include protecting family, loved ones, or businesses, supplementing retirement, paying off debts or funeral expenses. Article Source Here: Why Life Insurance Is Necessary Investors choose investments with the highest returns to generate the maximum income possible. However, they must also consider the tax implications associated with these earnings. Therefore, they must employ tax strategies that allow them to minimize the impact of tax payments. One such strategy that investors use is tax-loss harvesting. What is Tax Loss Harvesting?Tax-loss harvesting is a strategy that investors use to minimize their taxes on capital gains. Usually, the higher an investment value goes, the more capital gains it will generate. While these gains are taxable, they are not similar to income taxes. On top of that, investors can also make capital losses on their investments when their value falls. For these losses, investors can also get deductions and exemptions. Tax-loss harvesting works by using capital losses to offset capital gains to reduce taxes. When investors have high capital gains, they may deliberately sell investments that generate losses. Then, they use these losses to offset the gains from other investments. This way, they can reduce the tax on their returns. In most cases, investors also replace the loss-making investment with similar investments if they expect growth in the future. How does Tax Loss Harvesting work?Unlike income taxes, investors don't have to pay capital gain taxes when they earn them. Instead, investors only account for capital gain taxes when they sell an asset. For most investors, these gains are the primary return they expect from their investment. In some cases, these capital gains may be significantly high. Therefore, investors use strategies, such as tax-loss harvesting, to reduce the taxes they pay on those gains. Once an investor realizes a substantial capital gain on an investment, they may also sell another asset on capital losses. In most jurisdictions, investors can use these losses to offset the capital gains and pay taxes on the residual amount. Therefore, investors can significantly decrease their taxes for such investments. For tax-loss harvesting to be successful, investors need to have investments that realize capital losses. However, no investor deliberately invests in these assets. Most investors keep investments with capital losses with an expectation for future benefits. Therefore, through tax harvesting, they may lose any potential benefits on the capital loss asset. However, some investors reinvest their money in similar investments while still benefiting from the tax-loss harvesting. What are the risks associated with Tax Loss Harvesting?Tax-loss harvesting can be a crucial strategy when it comes to tax planning. However, there are some risks associated with it. If not used properly, tax-loss harvesting can be detrimental to investors. Firstly, investors may risk losing potential gains on the asset they sell to offset capital gains. As mentioned, investors do not reinvest in the same asset as the tax rules prohibit it. It is known as the wash-sale rule. Similarly, there are some limits for how much capital losses investors can use. In some jurisdictions, investors can also carry over their capital losses. However, if they don't utilize those on time, they may risk losing any benefits from such losses. On top of that, selling investments and reinvesting in similar assets may come with costs that investors may need to consider. ConclusionInvestors need to pay capital gain taxes when they dispose of investments that have experienced a growth in value. If these capital gains are significant, they can use tax-loss harvesting to reduce them. Tax-loss harvesting is a strategy in which investors sell an investment with a capital loss. Then, they use these losses to offset the capital gains from another asset. Article Source Here: How Tax Loss Harvesting Works Most individuals looking to plan for retirement funds start investing in specialized accounts. With these accounts, they can get several benefits. However, they must also consider the tax implications associated with such investments. Most of these specialized accounts allow investors to defer their tax payments. However, some may also come with the option to exempt them from taxes. What is a Tax-Exempt Account?A tax-exempt account is an investment that allows investors to get exemptions on their returns. The term tax-exempt refers to any income or earnings that are free from the taxes from the government. While this income is still reportable, investors don’t have to pay any taxes on it and are not a part of tax calculations. Therefore, capital gains from tax-exempt accounts are not taxable for investors but still reportable. Tax-exempt accounts are highly beneficial for investors. These accounts allow them to earn without having to pay taxes for it. Therefore, any benefits they get are wholly theirs. However, any investments in these accounts are after deducting taxes. So, investors can't get an immediate tax advantage from tax-exempt accounts. Instead, they can get their benefits after they earn returns on it. How do Tax-Exempt Accounts work?Tax-exempt accounts allow investors to benefit from the tax exemptions that relate to their returns. When investors put money into these accounts, they come from after-tax income. They cannot contribute to these plans using before-tax earnings. Therefore, the individual investing in these accounts pay for the taxes at the time of the investment. Due to the potential benefits that investors can get from such investments, tax-exempt accounts come with certain limits. However, whether an individual can benefit from these accounts depends on several factors. Usually, investors have the option to choose between tax-exempt and tax-deferred accounts for similar investments. How do Tax-Exempt Accounts differ from Tax-Deferred Accounts?Tax-exempt accounts exempt investors from tax at the time of withdrawal. Instead, tax-deferred accounts still carry a tax liability. However, investors pay those taxes at a later date rather than when investing. Investors consider several factors when investing in these accounts. Usually, investors prefer tax-deferred accounts because they control when they can pay their taxes on the returns. Whether an investor chooses tax-exempt or tax-deferred accounts for investments depends on several factors. While both can be advantageous, there are certain variables that may make one account better in some circumstances. Investors need to contemplate whether paying taxes at the time of investment or later is the best option for them. Based on that, they can choose between these two accounts. What are the benefits of Tax-Exempt Accounts?The benefits that investors can get on tax-exempt accounts depend on the type of tax-exempt account they select. Similarly, their tax planning strategy also plays a role in it. However, tax-exempt accounts can be advantageous when investors anticipate long-term gains. Unlike tax-deferred accounts, withdrawal from tax-exempt accounts is exempt. Therefore, it is beneficial for low-earning individuals that expect to fall into higher brackets in the future. ConclusionTax-exempt accounts allow investors to avoid paying capital gains taxes on their earnings in the future. However, they need to make after-tax contributions to the accounts. Tax-exempt accounts are different from tax-deferred accounts. The benefits that investors can get from tax-exempt accounts depend on several factors, as stated above. Post Source Here: What Is a Tax Exempt Account? |
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