The increasing complexity of investment terminology presents a huge challenge for many investors. As a form of verbal shorthand, this “jargon” can speed discussions – but only if you understand it. If you don’t, intelligent decision-making is pretty much impossible -- unless you ask a lot of questions. So my first piece of advice: ask a lot of questions. My second piece of advice: to whatever extent you can, try to learn at least some basic terminology. This Glossary can serve as a brief reference (it will grow in the next release) but there are plenty of online investment dictionaries you can consult. Investor education is one of the core GoldenRetirement.com services, and de-mystifying “jargon” is one of the first steps on that path.
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
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Accumulation
Another way of saying “long-term growth.” By definition, a growth strategy carries greater short-term risk than an income strategy, which aims to generate steady, consistent income (with little potential for short-term fluctuation) rather than long-term growth (with greater potential for short-term fluctuation).
Asset Allocation, or Allocation
The “diversification” of an investor’s money across a range of investment types. The goal of asset allocation is the protection of a portfolio against major losses in any one investment type by spreading the risk across other vehicles that are likely to either hold their value, or rise when other investment types fall.
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Compounding
The process by which the growth of money invested at a rate of interest, or the value of investment earnings, left to accumulate over time, accelerates in real dollars. Example: 3% annual growth on $200,000 adds $6,000 after a year. In the second year, that 3% is applied to the current $206,000. By Year 30, without having added a dime to your original $200k, 3% is earning you over $14,000 a year because the original $200,000 has risen to nearly $500,000. Compounding is wonderful thing, though someone needs to monitor whether growth is outpacing inflation.
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Diversification
“Don’t put all your eggs in one basket“- that’s it in a nutshell. In the investment world, this has been formalized into what’s called “Modern Portfolio Theory” which outlines a method for intelligently spreading your money across different types of investments as a way to balance (aka “hedge”) the different degrees of ups and downs (risk) that affect different kinds of investments at given times. Typically, when one sort of investment does well, another does poorly. There are many levels of diversification; even terms like “investment type” open their own can of worms, as do terms like “asset class,” “risk,” “market cap,” “emerging markets.” Over-diversification offers diminishing returns, and most of us need help in choosing the best personal filters that help lead us to the right kinds of diversification—filters like age, income, net worth, goals, tolerance for risk, etc.
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Fees
In investment terms, this usually refers to the charges attached to mutual funds, financial advice and transactions (i.e. buying or selling stocks, bonds, funds, plus so-called alternative investments -- like commodities, real-estate instruments, hedge funds, etc.)
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Guaranteed Minimum Death Benefit (or GMDB)
A kind of insurance that shares some characteristics with life insurance. It’s often an optional benefit attached to a Variable Annuity, but because it’s expensive for insurance companies to provide, it often costs more than it’s worth.
Guaranteed Withdrawal Benefits (or GMWB)
A guarantee purchased by an annuity investor to ensure that the annuity will pay out a certain level of withdrawals to a beneficiary at the death of the annuitant. Issued as an optional benefit at an additional cost. There are several variations of this type of option.
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Income Annuities
Annuities that start paying the investor a a guaranteed monthly income as soon as 30 days after purchase. Income payments can be for the life of the annuitant (person receiving the income), the annuitant and a joint annuitant (such as a spouse) until both are deceased. In either case, the payments can be guaranteed for a minimum number of chosen years and payable to the surviving beneficiary in the event of prior death of the annuitant(s). Alternatively, fixed period payments for a selected guaranteed number of years can be made to the annuitant (or survivors). Some Income Annuities can be issued with optional cost of living adjusted payments; however, these income payments would start at a lower monthly payment level.
Investment Return OR Earnings
The percentage of growth or actual income delivered by an investment or portfolio over a given time period.
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Laddered Portfolio
By dividing investment dollars among bonds or CDs that mature at regular intervals, such as once a year or every two years (“laddering”), an investor can earn consistent returns at lower risk while maintaining ongoing liquidity (meaning the bonds can be converted into cash if necessary).
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Market Value Annuity (or MVA)
A market value annuity offers a guaranteed interest rate, unless you surrender (or make a withdrawal from) the annuity contract before maturity, at which point the rate is adjusted. As a general rule, if interest rates have increased, the MVA adjustment will be negative and decrease the value withdrawn, and if the interest rates have decreased (typically by more than a minimal percentage rate), the adjustment will be positive.
Maturity
The date on which a bond (which is, in essence, a loan by the investor to the bond issuer) must be repaid.
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No Load
“Load” is a catch-all word for the fees (in addition to investment management fees and expenses) that many mutual funds charge for paying ongoing sales commissions to brokers and covering a fund’s own marketing costs via what’s called a 12b-1 fee. GoldenRetirement almost never recommends load funds because they run counter to our low-fee philosophy. No load funds tend to outperform load funds over given periods. In the case of Variable Annuities using no-loads is even more important, because high fees can defeat the benefits of tax deferral.
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The part of your personal savings that’s not already in a tax-deferred account (a 401(k), 403(b) or IRA), that you’re able to set aside for the long-term.
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Risk Management
The process by which assets are bought and sold so potential gains and losses in a portfolio are kept within a range the investor is comfortable with. The word “potential” is key however – a high-risk portfolio theoretically has the potential to deliver much higher or much lower returns than a low-risk portfolio – so in many cases a low-risk portfolio will ultimately deliver better returns than a high-risk portfolio. This can be due to the relative success of the respective portfolios, but perhaps more importantly due to economic conditions at the time of comparison.
Rollover IRA
The tax-deferred investment vehicle into which 401k investments can be “rolled” when an employee leaves a company. By rolling over his or her 401k, the investor can take advantage of a much greater range of investment choices than most 401k plans allow.
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Tax Deferral
Variable Annuities allow investors to set aside sizeable sums which were once taxable, but now become tax-deferred, like traditional IRAs, 401(k)s and 403(b)s. That means you only pay taxes on your gains when you take money out or when the VA reaches maturity (see “Maturity” above). For investors who want to set aside large sums for retirement, a key advantage of VAs is their very high investment limit of $1mm or more, compared to $5k - $25k annual limits placed on IRAs, 401(k)s and similar plans.
Tax Management vs. Tax Deferral
“Tax management” typically refers to the process by which a financial advisor or investor reduces a given year’s tax load by offsetting investment gains with losses. “Tax deferral” is the process by which certain kinds of assets (such as Variable Annuities) allow an investor to “defer” payment of taxes to a later date (often post-retirement).
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Variable Annuity
An insurance contract which guarantees income for life in return for money that is invested tax deferred in a managed portfolio which retains the potential for higher payments than those of other types of annuities depending on the investment portfolio’s performance.
Volatility
Higher volatility means that a security's price tends to move up or down more often over a given time period; lower volatility means that its price tends to move up or down less often over that time period.
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Wealth Transfer
This is the gifting or inheritance of cash or any investment asset.
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Yield Opportunities
There are a number of kinds of yield opportunities depending on the type of investment. “Yield” is generally defined as the growth generated by a security, expressed as an annual percentage based on the investment's cost, current market value or face value (the “absolute” value of the security).
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Zero Coupon Bond
A bond that doesn't pay interest, but trades at a deep discount, delivering a significant profit at maturity when it’s redeemed for full face value.
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