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Asset Allocation: The process of dividing an investment portfolio among different categories, such as stocks, bonds, commodities and cash. The mix depends on a variety of factors, such as your time horizon and risk tolerance.
Basis Point: This measure is often used in the describing price movements in the bond market. One basis point is equal to one one-hundredth of a percentage point, so 1% = 100 basis points. The abbreviation for the plural is "bips."
Compound Interest: The application of interest to both principal (for either a deposit or a loan) and to the accumulated interest that adds up over the term. The magic of compound interest helps many reach their goals more quickly. That’s why if you are 25 and save $500/month at a 6 percent rate, you can accumulate over $1 million. Check out this fun compound interest tool.
Dollar Cost Averaging (DCA): The process of putting a certain percentage (or fixed dollar amount) of money to work at regular intervals. You are dollar cost averaging when you contribute a certain percentage from your paycheck into an employer-sponsored retirement plan.
Exchange Traded Fund (ETF): A pooled investment, similar to an open-end mutual fund, but one that trades more like a stock, because you can sell it at any point during the trading day. The first ETF in the United States was launched in 1993.
Fiduciary Standard: A standard of care that requires professionals to put a client’s best interests first. Financial pros with designations like CFP, CFA, CPA-PFS, or CPA, operate under the fiduciary responsibility. However, many others are able to sell products that are merely “suitable” for their clients, but that might not be in the client’s best interests.
Growth Mutual Fund: Managers of growth funds attempt to invest in companies that are expected to grow faster than other companies in their sectors or industries. Growth funds are often compared with value funds, whose managers scour the universe for companies whose stock prices may not reflect the “true value,” or at least what the manager believes is true value of the company.
Health Savings Account (HSA): Accounts that are paired with high-deductible health insurance plans (HDHP), which offer lower premiums. HSAs allow you to set aside pre-tax money to pay for unreimbursed medical and health care costs. For 2019, you can contribute $3,500 for an individual and $7,000 for a family, with a catch up contribution of $1,000 for adults who are over 55.
Inflation: When the prices of goods and services rise and as a result, every dollar you spend in the economy purchases less. Inflation over the past thirty years has been relatively low, but it still adds up: today you need $2,078.75 in cash to buy what $1,000 could buy 20 years ago.
Junk Bond: A fixed income asset that carries a low credit rating and therefore has a higher risk of default. Also called “high yield” or “non-investment-grade” bond.
K-1: Not a lot of “K” words in the financial world, but this one refers to a tax document that reports partnership information to the IRS.
Liquidity: The ability to convert an asset to cash quickly, without having a significant impact on price.
Market Timing: The (misguided) strategy that an investor can find the precise moment when an individual security or market will rise or fall. It requires not just one perfect decision, but also two: when to get out and then, when to get back in.
Net Worth: The value of everything you own (assets), minus the total of everything you owe (liabilities).
Options (aka Derivatives): Financial contracts that derive their value from another instrument. Option buyers have the right, but not the obligation, to buy or sell the underlying security, at a fixed price within a specific period of time.
Permanent Life Insurance: Insurance coverage that includes a way to accumulate money over time on a tax-deferred basis. Permanent coverage has different types, including: whole, universal and variable universal or adjustable life.
Qualified Charitable Distribution (QCD): An IRS rule that allows you to direct some or all of your Required Minimum Distribution (see below) to the charity of your choice. You don’t get to count a QCD towards your charitable deduction, but you avoid being taxed on the money.
Required Minimum Distributions (RMD): The amount of money that Uncle Sam requires that you withdraw from retirement accounts after you turn 70 ½, unless you are still working. Withdrawals must occur by Dec. 31st and failure to do so, results in a whopping 50 percent penalty on the amount you should have taken.
Sales Charge (Load): The cost that some mutual fund companies charge to purchase shares from financial salesperson. These charges are calculated as a percentage of the amount you invest and vary among companies.
Term Life Insurance: Insurance coverage for a specific term of time. On the death of the insured, it pays the face amount of the policy to the named beneficiary. Premiums for term insurance are affordable for people in good health up to about age 50. After that age, premiums start to get progressively more expensive.
Unit Investment Trust (UIT): This type of investment company is similar to a mutual fund, with some notable differences. A UIT usually makes only a fixed number of shares available through a one-time public offering and its securities are generally fixed.
Volatility/VIX: The statistical measure price fluctuation within a period of time. The VIX is the most widely used snapshot of stock market volatility. VIX values below 20 generally correspond to low volatility, values greater than 30 are associated with elevated volatility. The VIX’s all-time high was 89.53 on October 24th , 2008, the height of the financial crisis.
Whole Life Insurance: A type of permanent insurance, which remains in force for your whole life, as long as you pay the premiums. In addition to the death benefit, there is an investment component, which is known as the policy’s cash value.
X-Dividend: Ex-dividend date, also known as the reinvestment date, is an investment term involving the timing of payment of dividends on stocks of corporations, income trusts, and other financial holdings, both publicly and privately held.
Yield to Maturity (YTM): The yield of a bond is usually expressed as an annual percentage rate, but that’s just part of the story. The yield to maturity is the overall interest rate earned by an investor, who holds the bond until it matures.
Zero-Coupon Bond: A type of bond that does not pay interest while you own it. You buy a “zero” at a discount to its face value (less than the amount stated on the bond), and when the bond matures, you redeem it for the stated amount.