The term Equity represents any ownership rights over an asset’s cash flow generation potential. As an asset class, there is no guarantee of a return on your investment, it is the most speculative of assets classes and is the only asset class that can have its intrinsic value brought to zero. But because it is ownership without end, and a right to the value in perpetuity, it is also the source of the greatest returns. The math looks like this: The most common sources of Equity are stocks, your home, and other real estate assets. But equities can also include ownership in a business through your own formation, or as the result of a private placement and they also include art, royalty agreements, or leasing agreements.  Other terms for Equity are shareholder value, book value, or stake.

Asset Allocation is how we discuss the percent of assets in one of the four main asset classes. It is the balance of risk and reward and is the most reliable leading indicator of the intermediate and long term trajectory of a portfolio. The Asset Allocation is the first place we can adjust to a client individual’s goals, risk tolerance, and investment horizon. Asset allocation is often displayed as a pie chart and discussed in terms of the ratio. For example, the “60/40” is a shorthand reference to a portfolio that is 60% allocated to equities, and 40% to debt. These are used by many firms to place clients into a suitable collection of investments. The four assets classes we define in Asset Allocation are Equity, Fixed Income, Cash, and Precious metals.

Framing effect is the use of language to frame a question in a positive or negative way. Stating the same question with the right spin allows the inquirer to impart some direction on the inquired. A great example of this: Would you rather: Approve the 20% chance of killing 100 patients. Approve the 80% chance of saving 400 patients. These might be two consequences of the same decision, but they frame in a way the bleeds an emotional context into an otherwise utilitarian calculation. For investors, framing is often used to manipulate a person’s relationship to risk.  Would you rather own a 99% chance to have a 10% upside, or a 1% change to lose everything. People are more likely to spend a smaller amount of money several times, then say a large sum of money once. By framing the total costs as being something smaller, more people are likely to buy it. A great example of this is your subscription services. Very few people will sign on to a Netflix or Hulu subscription for $150/year, but have little to no problem paying $13/mo despite the irrationality. We see this routinely when a stock splits, investors unwilling to buy a single share at $1,000 have no problem buying 10 shares at $100. Framing can often be used to contaminate an investors relationship with risk. They will routinely buy and sell shares based on how the risk is framed. In fact, many investors will disproportionately reward high risk companies, higher valuations as a result of framing.