"The individual investor should act consistently as an investor and not as a speculator. This means that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money's worth for his purchase."These are the words of Benjamin Graham, a stock market investor and economist who was famous for remarkable returns from investing in stocks, value investing and influencing Warren Buffet.
It's been said time and time again that the world of investing has its own language, so through the courtesy of Mercer Securities and a little additional help from my friend Jack Friedman, here are eight terms, in alphabetical order, that your clients might consider keeping in the forefront of their minds.
* Annual return. This means the change in value of an investment from one year to the next. Although it's practically impossible to know what the future will yield, reviewing several years' worth of data can certainly afford you an inside view of just how the stock or fund may perform. Is it stable? Is it volatile?
* Asset allocation. This is a method of targeting investments to achieve the highest investment return while minimizing risk. Naturally, investment choices can vary according to market conditions. It is really the proportion of stocks, bonds and other types of assets in your portfolio. It is strongly suggested that any such allocation should factor in certain items, such as how much risk you can tolerate and where you are on the road to retirement.
* Benchmark. This is usually a study to compare actual performance to a standard of typical competence. It is an understatement to say that not all investments perform in the same manner, but by looking at certain benchmarks you can then understand how certain funds might perform. Benchmarks help you decide whether your own investments are performing up to snuff compared with others of the same ilk.
* Bond. Simply put, an investment that represents a loan to a government, corporation or municipality. Bonds usually have fixed, reliable payments and are considered conservative investments because they don't get caught up with too much volatility; thus, they can easily balance certain unpredictable stocks in your portfolio.
* Capital gains. This is the profit that you earn from an investment. People many times ask the advantage of a retirement savings plan like the 401(k) or 403(b). In those instances, capital gains are taxed as ordinary income only after you withdraw your savings in retirement, thereby allowing for maximum compounding of interest over the years.
* Diversification. We all know that swings in the market can cause similar swings in the way your securities perform. That's one of the reasons many experts suggest that you don't put all your eggs in one basket, and that you have a wide variety of investments in your portfolio, so that you can minimize any negative impacts from a single investment.
Of course, as is usually the case, just because you diversify doesn't automatically mean you cannot lose money. It is possible to lose in a diversified portfolio, but the odds are not that great that it will happen.
* Dollar-cost averaging. This means that you invest a certain amount on a regular basis. For example, you buy a mutual fund or security using a consistent dollar amount of money each month (or some other period). Because market slumps produce lower prices, your 401(k) contributions, for example, will buy more shares when the market is down and fewer when it's up. Play this out over any length of time, and you usually will pay a lower average cost than you would if you bought shares in one lump sum.
* Stock. It's not a bond, but rather a piece of a company that you own. In fact, it is ownership of a company represented by shares that are a claim on company earnings and assets. So, if the stock price rises, so does the value of your investment, and conversely so. That's why many consider stocks to be a riskier venture than bonds.
Now, no one can say that just by knowing these terms you will make more money. No. No. However, it can make you a wiser investor - and you know where that leads.
Stuart Kahan is the executive editor of CPA Wealth Provider.
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