KEY CONCEPTS

INVESTING: The process of trying to earn additional money on money already accumulated. Investing involves lengthy time frames and various types of risk, and results are generally related to economic and political factors. Investing differs from gambling, which is also an attempt to earn money on accumulated money, but subject to risk based on chance and typically decided over very short time frames.

LIQUID INVESTMENTS: Investments such as stocks and bonds that are easy to buy or sell in an organized market, typically with little time delay, small price variations from one transaction to the next, and low transaction costs. Illiquid investments such as real estate typically take a long time to sell and incur high transaction costs.

STOCKS: Stocks represent an ownership interest in a business. Investment gains derive primarily from price increases, and secondarily from dividends. Stocks carry the risk of price declines, which can produce significant losses.

BONDS: Bonds represent a loan to a company or governmental entity for a specific period of time, or maturity. Investment gains come predominantly from interest paid by the borrower. Bond prices can rise and fall prior to maturity, but typically with much less severe, or volatile, ups and downs as compared with stock prices.

MUTUAL FUNDS: A way of investing in stocks and/or bonds that combines the money of many investors into one investment vehicle, providing diversification, professional management, and reasonable costs.

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INVESTMENT ADVICE/PHILOSOPHY

Asset Allocation: PPA's investment strategy focuses initially on determining an appropriate mix of stocks, bonds, and cash equivalents that has a reasonable expectation of meeting our client's financial goals. Stock investments are typically directed toward long-term capital appreciation, while bond and cash investments are intended to provide ongoing income with significantly less price volatility than stocks.

PPA weighs several factors in determining appropriate asset allocations, including when the client is likely to need to use invested assets and the client's ability to tolerate the risks associated with market declines. We focus on long-term results consistent with our client's objectives. We do not try to anticipate, or "time", short-term market price movements.

Implementation: Once we have established the broad asset allocation appropriate to each client, we recommend specific investments to implement the allocation. PPA uses indexed rather than actively-managed investments for the following reasons:

• Indexed investments seek to provide returns comparable to the index being used, while minimizing fees and tax effects. A wide variety of indexes are available for both stocks and bonds, which allow for the creation of well-diversified portfolios
• Actively-managed investments, on the other hand, seek to outperform a particular segment of the stock and bond markets. Potential problems with this approach include the difficulty inherent in "beating the market" over an extended period of time; the possibility of underperformance in the quest to outperform; and higher costs, in terms of management fees, frequent transactions, and, in taxable accounts, taxes generated by those transactions.
• Given PPA's focus on establishing asset allocations appropriate to each client's long-term goals, and the difficulty of outperforming the markets over the long term, we strongly favor indexing.
• Another important implementation activity is the selection of stock and bond investments most appropriate for each client's accounts, given the differing tax treatment of taxable accounts and tax-deferred retirement accounts.

PPA's Investment Policy Statement, which describes our advice process and philosophy in more detail, is available in PDF format by clicking the adjacent link. (Download the PDF)