Investment discussions can make a person dizzy and crazy. Why use a 20-letter word when a simpler phrase would work better? Complicated jargon confuses people and makes them anxious about investing—and that’s not okay! Let’s take a look at a few of those “I think I’ll impress you with my vast knowledge” words and translate them into ordinary language.
Active management [keeping an eye on it] —When a person (like an investment manager) looks after your stocks and buys and sells them based on their value, your funds are actively managed. Passive management means the opposite. Think pilot (active) versus autopilot (passive).
Asset allocation [investment buckets]—Categories that describe your investments: cash, bonds, real estate, or stocks. You don’t want to lump your money into one type of investment.
Bonds [think loans] —Family of James Bond. Just kidding. It’s a loan you make to a company or government agency. You loan $1,000 for at 8% over 10 years. That means you earn $80 every year for 10 years, or $800.
Capital gain [think profit!]—If you sell your stock for more money than its original price, the profit is called a capital gain. But you don’t get that money until you sell the stock.
Core equity holdings [key reliable stocks]—These are the central and most consistent investments in your portfolio. Think of them as the foundation of your investment house.
Equity market [a.k.a. stock market]—The place where pieces of companies are bought and sold.
Expense ratio [cost of doing business]—The percentage of your money that goes to the people managing your mutual funds. The lower the percentage, the more money you make.
Fiduciary [keeper of your cash]—Somebody who manages your money, like an accountant or fund manager. If you need some humor, get your toothless two-year-old to pronounce it.
Large, medium and small-cap [big, average and little companies]—Cap stands for capitalization, which simply means money! To you and me, it means the size and value of a company. Large-cap companies carry lower risk, but you’ll make less money. Medium cap stocks are moderately risky, and small cap stocks are the most risky—but have biggest payoffs.
Portfolio [your financial pie]—What your investments look like when you put them all together. You want your money spread out (diversified) among different kinds of investments (cash, bonds, mutual funds, etc.). Think of a pie with unequal slices. The way your financial pie is divided up will change the closer you get to retirement.
Prospectus [details, lots of details]—Legal tell-all about stocks and funds you can buy. Think of that relative who tells you way more than you ever wanted to know.
Required minimum distribution (RMD) [government in your wallet]—If you have a traditional IRA or 401(k), you must start taking money out when you’re 70 ½ years old. The RMD is the minimum amount of money you can take out. Of course, that money gets taxed, which is why Congress made it legal.
Yield [think growth]—Amount an investment makes over a year. It’s usually a percentage. The higher the number, the more money you’re putting away for retirement.
It’s important for you to know what you’re getting into before you dive in. That’s why it’s important to meet with a financial pro on a regular basis. If you don’t understand, ask questions. A good advisor with the heart of a teacher will patiently coach you until you’re confident.
You control your retirement and your investments. You can’t just leave it up to someone else or ignore the issue. Claiming that you don’t get the lingo isn’t an option anymore. You have to stay in touch with your money and know what’s going on with it. Remember, these investments are not just numbers on a page. They are the financial key to your dreams!