Investing
When you put your hard-earned money into investmentvehicles, such as stocks, bonds or mutual funds, you take on certainrisks—credit risk, market risk, business risk, just to name a few. But theprimary risk of investing is not temporary price fluctuations (volatility), itis the permanent loss of your capital. Otherwise known as investment risk,permanent loss of capital is the risk that you might lose some or all of youroriginal investment, if the price falls and you sell for less than you paid tobuy.
All types of investments carry inherent risk(s): a stockprice may drastically decline; the issuer of a bond may default; even cashinvestments (U.S. Treasury bills or money market funds) may lose ground toinflation. So, you are probably asking yourself, “Why would I risk losing someor all of my money?” No matter what investment vehicle you choose, theobjective is always the same: to generate more cash for yourself in the futurethan you have today. If you keep all your money under your mattress, for example,your balance will never grow beyond the amount you save. By investing yourmoney, the potential exists for you to come out ahead—perhaps even far ahead.
Risk vs. reward
Typically, an investment that carries higher risk has thepotential to generate a higher return (the risk-return tradeoff). In otherwords, the greater the amount of risk you are willing to take, the greater yourpotential reward could be. For example, a U.S. Treasury bond is considered oneof the safest investments there is; therefore, it provides a low potentialreturn. Stocks, on the other hand, are much riskier than Treasuries and, thus,have the potential to deliver higher returns.
In light of this risk-return tradeoff, you must determineyour personal tolerance for risk when choosing investments for your portfolio.Taking on some risk is often the price you must be willing to pay if you wantto achieve higher returns.
How do I determine my tolerance for risk?
Your answer will primarily depend on:
- Your age: Generally, the younger you are, the more risk you may be willing to take because you have more time to make up for any losses you might experience along the way.
- Your current financial responsibilities (risk capital): If you are the primary earner for your family, for example, you may want to take on less risk than you would if you were single.
- Your current financial resources (net worth): The larger your investment pool, the more willing you may be to take on risk. Just make sure you can still manage comfortably if you experience any big losses.
- Your time frame: When do you plan to withdraw the money? The markets are subject to short-term fluctuations. If you invest money you plan to use soon, you could be forced to sell when the price is down.
- Your timeline: How long will you need the money to last? As you get closer to retirement, it is often recommended you move at least some of your assets out of more volatile stocks and/or stock funds into income-producing bonds and/or bond funds. You may want to consider leaving at least a portion of your investments in equities (with growth potential) in case you live longer than you expected.
Are there things I can do to help manage risk?
Invest for the long term
Try not to dwell on short-term performance. If you invest ina company with strong business fundamentals, short-term price fluctuations maynot affect the long-term value of the company. Short-term periods of volatilitycan even present a great time to buy more, if you still believe in the company.
Diversify
Diversification simply means investing in a variety ofassets, with the hope that positive performance of some investments willneutralize any negative performance in others. The goal of diversifying is tobuild a portfolio that includes investments that react differently to the sameeconomic factors, limiting the risks associated with “putting all your eggs inone basket.”
Beyond just assets classes, you can diversify even furtherby allocating your money to different subclasses. For example, within the stockcategory you can choose subclasses based on different market capitalizations:large companies, mid-sized companies and some small companies. You might alsoinclude securities issued by companies that represent different economicsectors. If you're buying bonds, you might choose bonds from different types ofissuers: corporations, the U.S. government, etc.
Many retail investors have a limited investment budget,making it difficult for them to put together a diversified portfolio on theirown. Buying shares of a mutual fund can provide a readily available source ofdiversification.
Be honest with yourself about your tolerance for risk.
You may find that the more you learn about how investmentswork, the more comfortable you feel about taking risk. If not, remember thatthere are professionals who can help you. Consider investing in an activelymanaged mutual fund, or hiring a knowledgeable financial advisor to help leadyou on the right path. In the long run, the cost of investing your hard-earnedmoney in something you don't really understand can be much higher than the costof hiring a professional to do it for you.
Remember, a loss isn't truly “locked in” until you sell.
The reason you purchased an investment vehicle in the firstplace is because you believed in its potential for growth (its value wouldincrease). If your reasoning has changed, or if the investment isn't performinglike you thought it would, you may want to consider selling. But before yousell a losing investment, take a moment to decide whether the downturn issimply a short-term blip (maybe even an opportunity to buy more) or whether itis truly a permanent risk to your capital.
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Index Definitions
The following indices are used as benchmarks for the various mutual funds offered by Weitz Funds. Index performance is hypothetical and is shown for illustrative purposes only. You cannot invest directly in an index.
Bloomberg 1-3 Year U.S. Aggregate Index
The Bloomberg 1-3 Year U.S. Aggregate Index is generally representative of the market for investment grade, U.S. dollar denominated, fixed-rate taxable bonds with maturities from one to three years.
Bloomberg 5-Year Municipal Bond Index
The Bloomberg 5-Year Municipal Bond Index is a capitalization weighted bond index generally representative of major municipal bonds of all quality ratings with an average maturity of approximately five years.
Bloomberg U.S. Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market.
ICE BofA US 6-Month Treasury Bill Index
The ICE BofA 6-Month Treasury Bill Index is generally representative of the market for U.S. Treasury Bills.
Morningstar Moderately Conservative Target Risk Index
The Morningstar Moderately Conservative Target Risk Index is an asset allocation index comprised of constituent Morningstar indices and reflects global equity market exposure of 40% based on an asset allocation methodology derived by Ibbotson Associates, a Morningstar company.
Russell 1000® Index
The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership.
Russell 1000® Value Index
The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values.
Russell 2500® Index
The Russell 2500 Index measures the performance of the small to mid-cap segment of the U.S. equity universe, commonly referred to as “SMID” cap. The Russell 2500 Index is a subset of the Russell 3000 Index. It includes approximately 2,500 of the smallest securities based on a combination of their market cap and current index membership.
Russell 3000® Index
The Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market.
Russell 3000® Value Index
The Russell 3000 Value Index measures the performance of the broad value segment of the U.S. equity value universe. It includes those Russell 3000 companies with lower price-to-book ratios and lower forecasted growth values.
Russell Midcap® Index
The Russell Midcap Index tracks the performance of the 800 next-largest U.S. companies, after the 1,000 largest U.S. companies.
S&P 500® Index
The S&P 500 is an unmanaged index consisting of 500 companies generally representative of the market for the stocks of large-size U.S. companies.
CPI + 1.00%
The CPI + 1% is created by adding 1% to the annual percentage change in the Consumer Price Index (“CPI”) as determined by the U.S. Department of Labor Statistics. There can be no guarantee that the CPI will reflect the level of inflation at any time.
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Glossary of Terms
30-Day SEC Yield
30-Day SEC Yield represents net investment income earned by a fund over a 30-day period, expressed as an annual percentage rate based on the fund's share price at the end of the 30-day period.
Active Share
Active share indicates the proportion of portfolio holdings that are different than the benchmark. A higher active share indicates a larger difference between the benchmark and the portfolio.
Alpha
Alpha measures the difference between a fund’s actual returns and its expected performance, given its level of risk as measured by beta.
Average Coupon
Average coupon is the weighted average coupon rate of each bond in the portfolio.
Average Effective Duration
Average effective duration provides a measure of a fund's interest-rate sensitivity. The longer a fund's duration, the more sensitive the fund is to shifts in interest rates.
Average Life Progression
Average Life Progression is a measure of repayment speed for a collateral pool (for example, a collection of mortgages may serve as the collateral pool for an issuance of mortgage-backed securities).
Beta
Beta measures volatility in relation to the fund's benchmark. A beta of less than 1.0 indicates lower volatility while a beta of more than 1.0 indicates higher volatility than the benchmark.
Distribution (12b-1) Fees
12b-1 fees represent the annual charge deducted from fund assets to pay for distribution and marketing costs.
Downside Capture
Downside Capture Ratio measures performance in down markets relative to the benchmark.
Effective Long
Effective Long is the sum of the portfolio’s long positions (such as common stocks, or derivatives where the price increases when an index or position rises).
Effective Net
Effective Net is the Effective Long minus the Effective Short.
Effective Short
Effective Short is the sum of the portfolio’s short positions (such as, derivatives where the price increases when an index or position falls).
Gross Expense Ratio
The gross expense ratio reflects the total annual operating expenses of a mutual fund, before any fee waivers or reimbursem*nts.
Information Ratio
Information ratio is a portfolio’s excess return (over its benchmark), divided by the amount of excess risk taken relative to the benchmark.
Investment Grade Bonds
Investment Grade Bonds are those securities rated at least BBB- by one or more credit ratings agencies.
Market Capitalization
The market capitalization of a company represents the current stock-market value of a company's equity. It is calculated as the current share price times the number of shares outstanding as of the most recent quarter.
Net Expense Ratio
The net expense ratio reflects the total annual operating expenses of a mutual fund after taking into account any fee waiver and/or expense reimbursem*nt. The net expense ratio represents what investors are ultimately charged to be invested in a mutual fund.
Non-Investment Grade Bonds
Non-Investment Grade Bonds are those securities (commonly referred to as “high yield” or “junk” bonds) rated BB+ and below by one or more credit ratings agencies.
Portfolio Turnover
Portfolio turnover is a measure of how much buying and selling of securities a portfolio does during a particular period. A turnover of 100 percent means the portfolio has sold the equivalent of every security in its portfolio and replaced it with something else over a set period.
Redemption Fee
A redemption fee is a fee charged to an investor when shares are sold from a fund. This fee will be charged by the fund company and then added back to the fund.
Relative Results
Relative Results are the difference between the Fund’s performance and the performance of the reflected benchmark.
R-Squared
R-Squared is a measure that represents the percentage of a portfolio’s movements that can be explained by movements in a benchmark. A measure of 100 indicates that all of the return can be explained by movements in the benchmark.
Sales Charge
Also known as loads, sales charges represent the maximum level of initial (front-end) and deferred (back-end) sales charges imposed by a fund.
Sharpe Ratio
Sharpe Ratio is a risk-adjusted performance statistic that measures reward per unit of risk. The higher the Sharpe ratio, the better a fund’s risk adjusted performance.
Standard Deviation
Standard Deviation measures the degree to which a fund’s performance has varied from its average performance over a particular time period. The greater the standard deviation, the greater a fund’s volatility.
Upside Capture
Upside Capture Ratio measures performance in up markets relative to the benchmark.
Yield to Maturity (YTM)
Yield to Maturity (YTM) is the total return anticipated on a bond portfolio if the bonds are held to maturity.
Yield to Worst (YTW)
Yield to Worst (YTW) is the lowest potential yield that can be received on a bond portfolio without the issuers actually defaulting.
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Mailing Address
Regular Mail:
Weitz Funds
P.O. Box 182785
Columbus, OH 43219
Overnight Delivery:
Weitz Funds
c/o FIS Investor Services
4249 Easton Way, STE. 400
Columbus Ohio 43219
