Have you ever been in a conversation with someone in which they use several words that you do not understand, and by the third or fourth one that is volleyed at you in the conversation, you feel as though you are listening to a session on Duolingo?
I had this scenario pop up this week when listening to a story on poker. And I cannot be more descriptive than that, because like I said, had no idea what they were talking about.
Now today I'd like to cover a list of financial jargon terms that you may know, but maybe you do not.
Part of my concern in listening to this poker player was not only that I hadn't the slightest clue of what a blind was, but more importantly, was if WE as advisors sound like this to clients.
With no further ado, here is a list that I hope is helpful:
Investments
- Asset Allocation: Your percentage of stocks, bonds, and cash in your portfolio. It's sort of like a snapshot of your portfolio that should be in line with your long-term goals.
- Risk Tolerance: The level of risk you are comfortable taking with your investments. Historically, higher risk means greater opportunity for both gain and loss while lower risk means lesser opportunity for both gain and loss.
- Liquidity: How quickly and easily an asset can be converted into cash without affecting its price. For quick example, "liquidating" your stock is fairly easy, while doing so to your home is difficult given the time and hoops you must jump through in order to do so.
- Diversification: The strategy of mixing a variety of investments within a portfolio to help manage risk. Designed to keep the entire portfolio from crumbling by the underperformance of one company or holding.
- Yield: The earnings generated from an investment, typically expressed as a percentage.
- Leverage: The use of borrowed money to increase the potential return on an investment. It is quite dangerous and should be used only by ninjas of financial matters.
- Index Fund: A type of mutual fund or ETF designed to match the performance of a specific market index. These funds essentially invest in a basket of companies to track an index such as the S&P 500.
- Rebalancing: The process of adjusting the weight of different assets in a portfolio to maintain a desired asset allocation. Sort of like trimming your bushes in order to keep the yard looking healthy so that your wife does not get mad at you.
- Dollar-Cost Averaging: An investment strategy where you invest a fixed amount of money at regular intervals, regardless of the asset's price. I like doing this myself.
- Expense Ratio: The annual fee charged by mutual funds or ETFs, expressed as a percentage of assets under management. Will generally range from .03% to 1% on the high end.
- Principal: The original sum of money invested or loaned, excluding any interest or earnings. Often referred to as your basis as well.
- Net Worth: The total value of an individual’s assets minus their liabilities. Your home counts, but the mortgage on the home subtracts that amount from your net worth.
Retirement
- Qualified Account: An account that gets special tax benefits, usually for retirement, like 401(k)s or IRAs. Taxes are often deferred (see below) until you withdraw money (after 59.5), but the whole amount will be taxed at income tax rates, unlike the NQ account.
- Non-Qualified Account: An investment account that does not receive special tax advantages like qualified accounts, but has more control because it does not have RMDs. Think of your brokerage accounts or a non-qualified company plan. Earnings are taxed annually.
- RMDs: Stands for "required minimum distributions" and is a mandatory withdrawal required by the gov't once you reach a certain age to begin taking money from your qualified accounts. Essentially, the government is making you take money so that they can tax you on it after giving you the tax deferral during your working years.
- Roth Conversion: The process of converting a traditional IRA into a Roth IRA, usually involving taxes on the converted amount. Can be popular for retirees who have recently retired but not yet begun Social Security. Do not do this without consulting your advisor.
- Annuity: A financial product that pays out a fixed stream of payments to an individual, typically used as income during retirement. They are technically life insurance products that allow you to take risk off the table in order to more than likely make a fair bit less than you otherwise would have, but you at least have a guarantee.
- 401(k) Matching: Contributions your employer makes to your retirement account based on the amount you contribute. For example, if your employer matches up to 3%, it means they will contribute an additional 3% of your salary to your 401(k) plan, but only if you also contribute at least that amount. If you contribute less than 3%, your employer will match your contribution up to that amount, but you won't receive the full match. There are also other iterations of how this works, so it's always good to check the company model.
- Rollover: The transfer of funds from one retirement account to another without incurring tax penalties. Again, be sure you consult with your advisor here. You can trip on a tax time bomb if you're not careful.
Taxes
- Capital Gains: The profit earned from selling an asset for more than it was purchased. This is the portion you are taxed on with your regular brokerage or non-qualified account.
- Step Up in Basis: When you inherit certain assets, its value is "stepped up" to its current market value. This reduces the capital gains tax when you sell it, since the gain is calculated from the new, higher value. This is common for inherited houses, NQ accounts, and more.
- Tax-Deferred: Earnings such as interest, dividends, or capital gains that accumulate tax-free until they are withdrawn. This is essentially "kicking the can down the road" as far as paying your taxes to the gov't. It can be helpful for someone in a 32% tax bracket today but in a lower tax bracket in retirement (if only it worked out that smoothly, the world would be a brighter place).
Phew, that was a lot of defining. I'm sure somewhere in there I used jargon...while trying to explain things in a jargon-free way, so please reach out if you need any clarification or have questions.
It can be quite frustrating to be a part of conversations in which terms go over your head, and at worst it can make us feel quite foolish or behind.
I'm here to assure you that even the most literate, term-happy, academic mind has their area where they would also be behind in jargon as well. So if finance is yours...don't sweat it.
CONCLUSION
Good follow up read: While I quite literally just threw an informal dictionary at you above, if you would like to read a more complete, professional dictionary, please click this link to do so.
Action Items: Familiarize yourself with the terms you do not know one at a time. In my experience, I've found that once you pin down one term, others start to stick a lot quicker because they're actually either building off of another or are related in some way.
This content reflects the opinions of the author and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as financial, legal, tax, or investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance is not indicative of future results. All investing involves risk, including the potential for loss of principal. The information contained in the commentaries is derived from sources deemed to be reliable, but its accuracy and completeness cannot be guaranteed. This material does not have regard to specific investment objectives, financial situation, or the particular needs of any specific reader. Any views regarding future prospects may or may not be realized. Neither Asset Allocation nor Diversification guarantees a profit or protect against a loss in a declining market. They are methods used to help manage investment risk.
