30:["$","$L31",null,{"category":"$32","relatedArticles":[{"id":"cG9zdDoyNjU0NjU=","databaseId":265465,"postId":265465,"author":{"node":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/47938df052bf0a5283bd6b77ab786737?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1417,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTQ5MQ==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19491,"categoryId":19491,"link":"https://smartasset.com/beginner-investing/articles","name":"Investing for Beginners","postCount":{"pageInfo":{"offsetPagination":{"total":561,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"beginner-investing","ancestors":{"nodes":[{"name":"Investing","slug":"investing","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Investing","id":"dGVybTo1MzE4","slug":"investing","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$33","date":"2024-10-17T16:05:35","excerpt":"

Short-term cash investments are useful when saving for an upcoming expense and aiming to maximize returns without tying up your money for too long. These investments offer different levels of liquidity and risk, from high-yield savings accounts to money market funds and short-term bonds, each with its own benefits. A financial advisor can help you […]

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","

1. Money Market Accounts

","

Money market accounts offer both security and liquidity. Compared to regular savings accounts, money market accounts typically provide higher interest rates. They also offer the convenience of check-writing privileges and debit card access, making it easier to manage your funds while still earning interest. These accounts often require a higher minimum balance to open and maintain.

","

Funds in money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor and per bank. This provides peace of mind. Meanwhile, the competitive interest rates can help your savings keep pace with inflation, preserving your purchasing power. Take note of any fees associated with maintaining the account, as these reduce your overall returns.

","

2. High-Yield Savings Accounts

","

High-yield savings accounts offer significantly higher interest rates than traditional savings accounts. They are typically offered by online banks and credit unions. These accounts are also usually federally insured, ensuring that your deposits are protected up to the legal limit.

","

When considering high-yield savings accounts, compare the annual percentage yields (APYs). Rates at different financial institutions can vary widely. They can also fluctuate based on market conditions, but selecting an account with a competitive APY can significantly enhance your returns.

","

Many online banks offer fee-free accounts with no minimum balance. At others, it’s best to be mindful of any fees or minimum balance requirements.

","

3. No-Penalty Certificates of Deposit (CDs)

","

No-penalty certificates of deposit (CDs), also known as liquid CDs, provide a somewhat different combination of security and flexibility. Traditional CDs impose a penalty for early withdrawal. No-penalty CDs let you access your funds before the maturity date without incurring any fees. This can be an important feature if you think you may need to access your money unexpectedly.

","

These CDs pay higher interest rates than regular savings accounts, although rates are generally lower than traditional CDs. When considering a no-penalty CD, compare terms and interest rates offered by different financial institutions. Some banks may offer promotional rates or additional features, such as the ability to add funds during the term. Additionally, make sure that the CD is FDIC-insured.

","

4. Short-Term Bonds

","

Short-term bonds have maturities ranging from one to three years. They are generally considered less risky than long-term bonds because they are less sensitive to interest rate fluctuations. This stability makes short-term bonds suitable for individuals who may need access to their funds in the near future.

","

Investing in short-term bonds offers several advantages, particularly in uncertain economic climates. These bonds provide a predictable income stream through regular interest payments, which can be appealing for investors seeking steady cash flow. Additionally, because they mature quickly, investors can reinvest their principal in new bonds at potentially higher interest rates if the market conditions improve.

","

5. Treasury Securities

","

Treasury securities are government-issued debt instruments backed by the full faith and credit of the U.S. government, making them one of the safest investment options available. They come in various forms, including Treasury bills (T-bills), Treasury notes and Treasury bonds, each with different maturities and interest rates.

","

T-bills are short-term investments that mature in one year or less, making them an attractive option for those looking to park their cash temporarily while earning a modest return. The interest earned on Treasury securities is also exempt from state and local taxes.

","

A primary benefit of these securities is their liquidity. They can be easily bought and sold in the secondary market, providing investors with quick access to their funds if needed. Returns may be lower compared to other investment vehicles, but their stability and reliability make them a prudent choice for conservative investors or those looking to diversify their portfolios with low-risk assets.

","

Bottom Line

","

","

Each short-term cash investment option has features that may be more or less suitable depending on your financial goals and risk tolerance. Choosing the right one can help you manage your cash flow while still allowing for growth. As you explore these options, balance both the risks and rewards for your portfolio.

","

Investment Planning Tips

","$4a","

Photo credit: ©iStock.com/yasindmrblk, ©iStock.com/Dragos Condrea

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The Treynor ratio is a tool in portfolio analysis that helps investors assess how well a portfolio compensates them for taking on market risk, also known as systematic risk. This portfolio ratio shows how much return an investor can expect for each unit of market risk. It offers insight into how efficiently a portfolio’s manager is balancing risk and return and can be useful for comparing portfolios or funds that might have different risk levels. Due to some limitations, it is often used in conjunction with other performance metrics.

","

If you want to build an investment portfolio, a financial advisor can help you analyze and manage investments.

","

What Is the Treynor Ratio?

","

The Treynor ratio is a risk-adjusted metric that evaluates portfolio performance in relation to systematic risk, also called market risk. Named after American economist Jack Treynor, this ratio is calculated by dividing the excess return of a portfolio over the risk-free rate by its beta.

","

A high Treynor ratio figure suggests that the portfolio is delivering strong returns for its level of risk, while a lower ratio may indicate underperformance relative to market volatility. Note that this metric specifically isolates market-related volatility while ignoring diversifiable risk, making it particularly useful for portfolios that are already well-diversified.

","

By focusing only on systematic risk, the Treynor ratio allows investors to assess how much return they are getting for each unit of market risk taken. It can offer a clearer view of risk-adjusted performance for portfolios that track broader markets.

","

How to Calculate It

","

The Treynor ratio is calculated by subtracting the risk-free rate such as a government bond yield from the portfolio’s return, then dividing this figure by the portfolio’s beta. Beta measures how sensitive the portfolio is to market movements, providing a way to quantify systematic risk.

","

The formula is:

","

Treynor Ratio = (Portfolio Return – Risk-Free Rate) / Beta

","

A higher Treynor ratio suggests the portfolio is delivering more return per unit of market risk, while a lower ratio could indicate insufficient compensation for the risk taken. This calculation is particularly useful for comparing portfolios with similar betas.

","

Let’s say a portfolio has an annual return of 12%, a risk-free rate of 3%, and a beta of 1.2. To find the Treynor ratio, first subtract the risk-free rate from the portfolio’s return (0.12 – 0.03 = 0.9), then divide this result by the portfolio’s beta (0.9 ÷ 1.2 = 0.75). The Treynor ratio of 0.75 means that for every unit of market risk, the portfolio delivered 7.5% in excess returns over the risk-free rate. This suggests that the portfolio is effectively compensating for the systematic risk it carries.

","

What Is a Good Treynor Ratio?

","

","

A good Treynor ratio typically reflects a higher return relative to the portfolio’s exposure to market risk. In general, a positive Treynor ratio indicates that a portfolio is earning more than the risk-free rate per unit of market risk, which is considered favorable. Ratios greater than 0.5 are often seen as strong, while those closer to 1.0 suggest exceptional performance in relation to risk.

","

However, what qualifies as a good Treynor ratio can vary depending on market conditions and the investment strategy. For example, in bull markets, higher Treynor ratios are expected, as returns typically exceed risk-free rates by a larger margin.

","

With bear markets, on the other hand, lower ratios might still be acceptable if they demonstrate risk-adjusted returns. Ultimately, comparing the Treynor ratio of a portfolio to similar investments or benchmarks provides a more accurate gauge of performance.

","

Limitations of the Treynor Ratio

","

While the Treynor ratio offers valuable insights into a portfolio’s risk-adjusted returns, there are several limitations to consider. Understanding these drawbacks can help investors use the metric more effectively in evaluating their investments. Here are four to consider:

","$62","

Using the Treynor Ratio

","

The Treynor ratio is most effective when evaluating a well-diversified portfolio that is primarily exposed to systematic risk. In these cases, unsystematic risks, like company-specific or sector-specific volatility, are assumed to be minimized or eliminated. The Treynor ratio helps investors assess how well the portfolio compensates for market risk alone, making it useful for portfolios driven by their beta, or sensitivity to broader market trends.

","

Investors also use the Treynor ratio for comparing portfolios with similar beta values. This allows for an apples-to-apples comparison of how well each portfolio performs relative to its exposure to market movements. When two portfolios have similar market sensitivity but varying returns, the Treynor ratio helps determine which one is delivering better risk-adjusted performance relative to the market.

","

Bottom Line

","

","

The Treynor ratio can offer valuable perspectives on risk-adjusted returns. This ratio focuses on systematic risk, making it useful for evaluating diversified portfolios that are primarily exposed to market volatility. Its limitations include not accounting for unsystematic risk and being dependent on the risk-free rate. It is mostly effectively used in conjunction with other risk-adjusted performance metrics.

","

Tips for Investing

","$63","

Photo credit: ©iStock/Jinli Guo, ©iStock/Sean Anthony Eddy, ©iStock/eepak Sethi

"],"experts":null,"link":"/beginner-investing/treynor-ratio","published":{"datetime":"2024-10-24","readable":"October 24, 2024"},"shareInfo":{"title":"How to Use the Treynor Ratio: Definition and Formula","origin":"/investing/treynor-ratio"},"isNewsArticle":true},{"id":"cG9zdDoyNjQ3Mzk=","databaseId":264739,"postId":264739,"author":{"node":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/47938df052bf0a5283bd6b77ab786737?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1417,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTQ5NA==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19494,"categoryId":19494,"link":"https://smartasset.com/growth-focused-investing/articles","name":"Growth Investing","postCount":{"pageInfo":{"offsetPagination":{"total":47,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"growth-focused-investing","ancestors":{"nodes":[{"name":"Investing","slug":"investing","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Investing","id":"dGVybTo1MzE4","slug":"investing","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$64","date":"2024-10-09T16:32:34","excerpt":"

\n","featuredImage":{"id":"cG9zdDoyNjQ3NTc=","databaseId":264757,"altText":"A business owner delivers a pitch in front of an angel investor and his team.","date":"2024-10-09T13:58:00","fileSize":44404,"mimeType":"image/jpeg","modified":"2024-10-09T13:58:46","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/10/iStock-582286586-modified-1fbb6474-a576-4bbc-80a4-e12d3178d8af.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-10-9","readable":"October 9, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjo3Ng==","databaseId":76,"userId":76,"avatar":{"url":"https://secure.gravatar.com/avatar/ff1d12e3cebfaa1fe2b25aef26174d63?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Becca Stanek is a graduate of DePauw University. Becca is an experienced writer/editor who serves as a retirement expert for SmartAsset. She's passionate about helping people understand the sometimes daunting ins and outs of personal finance. 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Angel investing is a form of funding where individuals, known as angel investors, provide capital to early-stage startups in exchange for equity or convertible debt. Unlike venture capitalists, who typically manage pooled funds, angel investors use their personal finances to back companies they believe have growth potential. This type of investing often occurs during the startup’s early stages, when it may be difficult for the business to secure loans or attract venture capital. Angel investors typically seek high returns, understanding that the risk of startup failure is significant.

","

Whether you need help with your personal portfolio, tax strategy or business plan, a financial advisor can be a valuable resource. Connect with a fiduciary advisor today.

","

What Is Angel Investing?

","

Angel investing involves individuals providing financial backing to startups or small businesses in their early stages, typically during initial fundraising rounds before access to traditional financing like bank loans or venture capital. Startups present their business plans to potential investors, and if an investor believes in the company’s growth potential, they offer funding in exchange for equity or convertible debt, giving them a share of ownership or the possibility of future returns if the business succeeds.

","

Angel investors generally focus on startups that show promise but also carry significant risk, as many early-stage companies do not succeed. However, when a startup thrives, angel investors can see substantial returns on their investment.

","

Who Are Angel Investors?

","

While many angel investors have significant wealth and business experience, not all of them are required to be accredited investors. According to the U.S. Securities and Exchange Commission (SEC), an accredited investor is someone who meets certain financial criteria – either earning at least $200,000 annually ($300,000 with a spouse or partner) or having a net worth of over $1 million, excluding their primary residence.

","

While being accredited offers a level of financial sophistication, it’s not a strict requirement for all angel investors. Some startups may accept funding from non-accredited investors, but these opportunities tend to be limited. In most cases, angel investors are accredited because the high-risk nature of investing in startups often necessitates a level of financial stability and experience in managing investments.

","

Angel investors come from a variety of backgrounds. Some are entrepreneurs themselves, looking to support emerging businesses, while others may be professionals, such as lawyers or doctors, with an interest in backing innovative ideas. Although angel investors are typically driven by the potential for high returns, many also value being involved in the growth of a new company, providing mentorship, guidance or industry connections.

","

How Angel Investing Works

","

The process of angel investing begins when a startup seeks funding to grow. Typically, a company will prepare a business plan, financial projections and a pitch to present to potential investors. The goal is to demonstrate the company’s potential for growth and profitability.

","

Once an angel investor is interested, negotiations begin. The investor evaluates the startup’s business model, market opportunity and team. If they see promise, the investor offers funding in exchange for equity or convertible debt. The terms of the deal, including the amount invested and percentage of ownership, are agreed upon by both parties.

","

For example, imagine a tech startup developing a new app to help small businesses manage their finances. The founders pitch the idea to an angel investor, offering 15% equity for $100,000 in funding. The investor, intrigued by the app’s potential and the team’s experience, agrees to invest. In return, they own 15% of the company and may provide ongoing support, offering advice or connecting the founders with key contacts.

","

After the deal is finalized, the startup uses the investment to grow, while the angel investor benefits from their equity if the company succeeds and increases in value.

","

Angel Investing vs. Venture Capital

","

Angel investing and venture capital both provide funding to startups, but they operate in different ways. Angel investors typically use their own personal funds to back early-stage companies, while venture capitalists (VCs) manage pooled funds from multiple investors through a firm.

","

Here’s a breakdown of the key differences:

","$76","

How Companies Find Angel Investors

","

Companies can connect with angel investors in several ways, often depending on the startup’s stage and the investor’s network. This may include:

","$77","

Bottom Line

","

","

Angel investing provides a vital source of funding for startups seeking to grow in their early stages. By offering financial backing in exchange for equity or convertible debt, angel investors help entrepreneurs bring their ideas to life. The process, which can begin through connections made anywhere from personal connections to online platforms, offers startups multiple avenues to secure capital.

","

While both angel investing and venture capital provide significant support to businesses, they differ in their methods and stages of involvement. Angel investors take on higher risks but often play a hands-on role, helping startups navigate the complexities of early growth.

","

Tips for Managing Your Portfolio

","$78","

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The liquidation value of a company represents the total value of its assets if the company were to go out of business and liquidate its assets to pay off debts. For investors, understanding a company’s liquidation value can provide insights into its financial health and potential risk level. In certain cases, companies with a stock […]

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As a certified educator in personal finance, he edits and writes content that focuses on retirement, investments, home buying and other financial topics.\r\n\r\nArturo is a bilingual native in English and Spanish, and also writes as a freelance journalist for NBC News, among other publications. 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","

If you need help managing your investment portfolio, consider working with a financial advisor.

","

The Liquidation Value of a Company

","

The liquidation value of a company is an estimate of the total value that would be available if the company’s assets were sold off to pay creditors. This metric assumes a worst-case scenario where the company ceases operations and liquidates its physical and financial assets.

","

Unlike market value, which reflects the value of a company as an ongoing concern, liquidation value is typically lower due to the discounted prices assets may fetch in a quick sale. The primary components considered in calculating liquidation value are tangible assets, such as real estate, machinery and inventory, while intangible assets, like goodwill, are generally excluded or heavily discounted.

","

Liquidation value is often relevant for companies facing financial distress, as it provides creditors and investors with a realistic picture of asset recovery potential. Investors who focus on value-based strategies use liquidation value to identify “deep value” opportunities, as they seek out companies trading at prices below the worth of their tangible assets.

","

While not a comprehensive measure of company value, liquidation value offers valuable insights into asset-backed security, particularly for industries with substantial physical assets.

","

How to Calculate the Liquidation Value of a Company

","

","

Calculating liquidation value involves assessing the fair market value of a company’s tangible assets and subtracting any outstanding liabilities. Here are four general steps to help you calculate the liquidation value:

","$8b","

Formula for Liquidation Value

","

Liquidation Value = (Total Tangible Assets – Inventory and Receivable Discounts) – Total Liabilities

","

If a company has $10 million in tangible assets and $2 million in liabilities, but the inventory and receivables have been discounted to $1 million, the liquidation value would be:

","

Liquidation Value = $10 million – $1 million – $2 million = $7 million

","

This $7 million represents the amount theoretically available to shareholders if the company liquidated its assets and paid off all debts.

","

Why the Liquidation Value of a Company Is Important

","

Liquidation value is an important metric for investors and creditors alike, as it helps evaluate the financial stability of a company.

","

For investors, particularly those in value investing, a company trading below its liquidation value may indicate a buying opportunity, especially if the market has undervalued its tangible assets. In situations of potential acquisition or restructuring, liquidation value provides an estimate of asset recovery potential.

","

Liquidation value is also relevant for creditors assessing risk when lending to or investing in a company, as it indicates the amount they might recover in the event of bankruptcy. If a company’s market value falls significantly below its liquidation value, it could be a red flag, indicating possible financial distress.

","

Investors can use liquidation value to identify undervalued stocks, seek higher levels of asset security or better understand the risk profile of companies they are considering for their portfolios.

","

Frequently Asked Questions

","

What Is Liquidation Value Used For?

","

Liquidation value is used to assess the worth of a company’s tangible assets if it were to close and liquidate its holdings. Investors use this metric to identify undervalued stocks or evaluate risk in distressed companies.

","

How Does Liquidation Value Differ from Book Value?

","

Book value is a method of investment analysis that reflects the value of a company’s assets on its balance sheet. Liquidation value, on the other hand, considers discounted asset prices in a quick sale. Liquidation value is often lower than book value due to the urgency of asset disposal.

","

Are Intangible Assets Included in Liquidation Value?

","

Typically, intangible assets are excluded or heavily discounted in liquidation value calculations, as they can be difficult to sell and may lose value quickly in a liquidation scenario.

","

Bottom Line

","

","

Liquidation value shows the tangible worth of a company’s assets in a worst-case scenario. Investors can spot opportunities in companies trading below this value, while creditors use it to evaluate lending risks. This metric helps assess financial security and asset stability, guiding investment decisions.

","

Investment Planning Tips

","$8c","

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