Understanding the “Valuation” Process

Many participants in the equity (or stock) accounts offered by the Ministers’ Retirement Plan may not fully understand the process of how they make money – or lose money – in their equity accounts. While it is rather simple to understand the earned interest concept for the Trustees’ Fund, the idea of net asset value (NAV) and volatility is more difficult to understand when trying to determine why your equity account moves in value.

Hopefully, a brief explanation of the “valuation” process with a few simple examples will be helpful in better understanding how equity funds are valued.

Within the Ministers’ Retirement Fund, valuation occurs at least weekly whether you sell, buy, or hold your funds. For example, assume that you contribute $100 and the entirety of that amount is attributed to the Large Capitalization Equity Fund. On the day that you made the contribution, assume that the net asset value (NAV) was $10 per share. With your $100 dollars, 10 shares will be purchased for your account. Further, let’s assume that a week, a month, or even a year or more later, you are looking at your fund and the NAV has decreased due to market volatility. You still have 10 shares (assuming no additional purchases or transfers out), but the NAV is now, say, $9.75 per share. In other words, your 10 shares, purchased at $100, are now only worth $97.50. Of course, that same process works the opposite way as the NAV rises.

Using this very simplistic example, if you sold your shares (or transferred your funds out of that asset class which would require a sell of your shares) when the NAV was $9.75, you would have a loss of $0.25 per share. If you did nothing and just held on to the shares, your account balance would show an unrealized (or paper loss) of the same $0.25 per share. Of course, the NAV could increase and recover your lost value or it could decline further, depending upon the overall economic conditions and movement of that asset class.

So why does the net asset value (NAV) move? The NAV moves based upon the underlying value of the stocks in the pool of assets you have invested in. For example, the Ministers’ Retirement Plan’s Large Capitalization Equity Fund may have as many as 80-100 different companies’ stocks included in the portfolio. The value of a single company’s stock may move upwards or downwards based upon a number of things, including the overall need for that company’s products, expansion efforts of the company into new markets, the closing of certain markets to the company’s products, a competitor coming out with a better product, changes in leadership of the company, profit margins above the actual cost to produce the product, and a thousand other reasons.

As in sports, though, there are always winners and losers – and both may be contained in the same Large Capitalization portfolio for example. Take for instance, a year ago the price of Apple stock shot upwards. With the release of new I-Phones and I-Pads, as well as other products, Apple surged to be a leader in the technology sector of the market. However, while Apple was gobbling up market share, other technology companies, like Dell and H-P, suffered. A Large Capitalization portfolio might contain all three companies in the same portfolio. Of course, in the past year Apple stock has become one of the big losers. The hope, of course, is that the “gainers” in your portfolio always out-weight the “losers.”

Stock investing is not for everyone, especially the faint of heart. One day the stock market can make you look like a genius and the very next day make you look like a dunce. The goal is to maintain a long-term view and hope that over an extended period of time you will have substantial gains from your investment in growing and prospering companies through your equity investment.

Happy investing!!!

About benefitsboard

Art Rhodes is the President and CEO of the Church of God Benefits Board, Inc. - the administrator of the Ministers' Retirement Plan and the Church Loan Fund, Inc. The corporate offices of the Benefits Board are in Cleveland, TN.
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