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Have You Heard These 10 Must-Know Terms?

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This post Have You Heard These 10 Must-Know Terms? appeared first on Daily Reckoning.

According to a recent Empower Retirement survey, 66% of respondents said they don’t understand what “rebalancing investments” means.

A similar percentage, 69%, said they don’t know what “asset allocation” means. And the survey found that millennials in particular find financial terms difficult to understand.

I’d say it’s not just the younger generations struggling to understand today’s financial jargon. I see a lot of soon-to-be retirees with the same distinct dear-in-the-headlights look when pressed about “diversification” and “decumulation.”

Planning for retirement should not be hard to understand. Which is why today I want to demystify a few common financial terms that seem to be tripping up a lot of people. You’ll see a lot of financial experts use these terms to sound smart – really they’re just annoying.

Here’s my top 10 list of financial jargon terms everyone you should know:

1. “Asset Allocation”

This is a term used to talk about how you divide your investment portfolio. How much are you allocating to stocks, bonds, cash, etc.?

Financial planners will often ask you how you want to allocate your assets, they’re essentially asking you how do you want to divide your money.

2. “Decumulation”

I know this sounds like a bad thing — it’s not.

It refers to a phase after years of growing (accumulating) your retirement account, where you begin drawing down your savings to fund your golden years. Essentially it’s a shift from saving to spending and there are lots of opinions and strategies on how to decumlate effectively.

3. “Deleverage”

This is a term that became popular after the financial crisis in 2008.

It simply refers to the concept of paying off debt. When you deleverage, you’re typically selling off assets to pay down your debt.

4. “Diversification”

This term is similar to asset allocation in that we’re talking about putting your money into different baskets. Diversifying your wealth is a strategy used to mitigate risk.

By distributing your wealth into different asset classes, you can lower the chance of losing all your money should one asset class tank.

For instance, if you invest all your money in real estate and house prices crash, you’ll lose your nest egg. Whereas if you invest only a portion into real estate, keep some cash, and invest the rest in stocks and bonds, now your money is diversified and better able to manage the good and bad times.

5. “Equities” and “Fixed Income”

These are really just stocks and bonds.

It annoys me when I hear people tell me their financial advisor has been using these terms instead of simply saying stocks and bonds. It creates unnecessary confusion all for trying to sound smart.

6. “Fee-only” and “Fee-based”

These are terms referring to a financial advisor’s fee structure. The difference is fee-only advisors are paid a flat fee, whether that’s hourly or a percentage of assets managed, and fee-based advisors can accept commission on financial products sold as well as whatever fee structure you negotiate.

This can create the potential for conflicts of interest, so it’s best to avoid fee-based planners.

7. “It Has a Great Story”

This familiar phrase simply refers to how well an investment has performed in the past.

It’s a ridiculous saying but you’re going to hear it a lot.

8. “Risk”

A lot of people associate this with losing money. Risk is really just the chance that your investment will not match your expected return (either positive or negative). If a mutual fund has a 6 percent historical return, and the actual return is 18 percent, that’s the good side of risk.

9. “Tax-Loss Harvesting”

This actually has nothing to do with farming or agriculture. It’s the selling of investments at a loss to lower your tax bill for the year. Most of the time, investors will buy a similar investment as a replacement at a lower price. But all this does is delay the tax penalty.

10. “The Market”

This is a term you probably think you know, but I’m going to challenge you to dig a little deeper next time you hear this term. The market is not singular.

Ask yourself or your financial advisor if you’re talking about the stock market or bond market? S&P 500? U.S. or international? You want the conversation to go deeper than just ‘the market.’ Because you’re not trying to meet or beat ‘the market,’ you’re trying to achieve specific financial goals.

My hope is that some of these definitions clear up the confusion around common financial jargon.

When in doubt, look up what terms mean and don’t be ashamed to ask the person using the jargon in front of you what the heck they’re actually talking about.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post Have You Heard These 10 Must-Know Terms? appeared first on Daily Reckoning.

This story originally appeared in the Daily Reckoning . The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.

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