Finance is full of jargon. If you do a quick online search for “investing terms” you’ll find everything from “quadruple witching” to “xenocurrency”.
We’ve decided to go back to school and give you the ABCs on the investing terms we believe are the most important for you to understand. It’s not exhaustive, and rather than put filler we’re skipping some of the letters. But after reading this post, you’ll have a better understanding of the terms we float around.
A group of securities that have similar characteristics and behaviour in the marketplace. Asset classes can include equities (usually shares/stocks), fixed income (term deposits, bonds) or cash/cash equivalents, among others. Asset classes are what makes up different investment funds – such as ETFs (which is what we use at Clover). Learn more about asset classes.
Bonds are best thought of as on obligation to pay a debt – like an IOU. Companies and governments often issue bonds to borrow money. Bonds have something called a “bond yield” which is the return that the borrower will receive after a fixed time period (or maturation date) along with the borrower’s initial investment amount. We use bonds in some of our portfolios.
In common usage, a correction is when the price of a security declines by more than 10%. This is most often associated with shares, as they tend to experience the greatest volatility among asset classes.
Market corrections occur quite often and are almost always accompanied by a media frenzy of doom and gloom. Before you hit the panic button though, be sure to read this post.
Dollar cost averaging
An investment strategy where you buy a fixed amount of whatever securities you’re invested in on a set schedule, regardless of the share price. The idea is that since some of your purchases may be at a higher price and some lower, in the end you should end up averaging out the purchase price. This helps to manage the timing risk and is likely to reduce portfolio volatility. Learn why we recommend it.
Exchange Traded Funds (ETFs)
A type of investment that owns a large amount of individual shares, bonds, real estate or commodities, and is sold in small parcels.
ETFs are popular due to their diversification, low fees and flexibility. In Australia, there’s more than 20 billion dollars invested via ETFs. We use them in all our portfolios at Clover and we think they’re pretty awesome – you can read more about them here.
A fee charged by an investment fund manager intended to compensate them for their time and expertise for building and managing the fund. You should know what you’re paying for and as a Clover customer we’re very transparent about our fees.
The tendency to think that the probability of something occurring in the future is altered by past events, when the truth is that those events have no impact whatsoever. It’s a type of cognitive bias that can have a detrimental impact on investing.
High interest savings account
A savings account offered by some financial institutions (i.e. banks) that offer a rate of return greater than typically found in a “regular” interest account. This can be misleading however, as an era with low-interest rates (like the one we’re in now) can result in these accounts giving low returns that are quickly eroded by tax and inflation.
Index funds are similar to ETFs in that they track a market index and tend to be low cost. Where index funds differ is that they can’t be traded throughout the day like ETFs and publish an end of day value, typically known as Net Asset Value (NAV).
They also tend to have a paper based application and redemption process. Because of the way ETFs are structured, they tend to be more tax efficient than a traditional index fund.
Know your client (KYC)
A process in the financial services industry that verifies the identity of a client. It’s standard for all investment advisers (including Clover) to ensure that clients pass KYC before investing on the client’s behalf. Clover makes this process really easy via our online questionnaire by asking some straightforward questions. No long forms, no need to go to an adviser’s office!
Also akin to “herd mentality” a lemming is an investor who decides on a course of action because lots of other investors decided it was the best thing to do. Can be avoided by being a disciplined investor and sticking to a plan.
A managed fund is a type of investment where your money is pooled with other investors’ cash. A fund manager will then buy and sell assets on your behalf. You’ll typically be paid income or “distributions” periodically. The value of your investment will rise or fall with the value of the underlying assets.
A collection of different asset classes owned by an individual or an institution. The composition of a portfolio depends on many factors, including an investor’s age and risk tolerance. Clover has five different portfolios: Conservative, Moderate, Balanced, Growth, Aggressive. You can learn more about them here.
The profit or loss an asset will deliver over a given time period (e.g. monthly, quarterly, yearly). Clover calculates this for you automatically so no need to break out the abacus!
“Super” as it’s commonly known, is money that is saved and invested for your retirement. It’s really important for your future and is a tax-effective way to grow your nest egg. Just make sure you’re doing everything you can to take advantage of it.
The ups and downs of the returns for a security or a market index. Volatility can be demonstrated with big swings – either gains or losses. Just remember that it’s quite normal for sharemarkets.
Along with Jack Bogle, widely considered one of the greatest investors of all time. Buffett made a famous $1M bet (for charity) in 2007 against hedge managers that a low-cost index fund would out-perform the best actively managed funds over a 10 year period. Spoiler alert – he won!
As we mentioned, we did leave a few letters out – you probably don’t care about the Zeta Model (if you do then it’s likely this post didn’t teach you anything). If you’re keen on learning more investing terms then we recommend visiting the ASIC MoneySmart website.
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