Know Your Investment Lingo! 5 Terms Every Soon-to-be Retiree Should Know

Know Your Investment Lingo! 5 Terms Every Soon-to-be Retiree Should Know

Smile and nod…smile and nod, you think as some financial advisor spews jargon about diversification or risk tolerance or ETFs. You begin to realize he’s saying more words that you don’t know than words that you do, and pretty soon his voice starts to sound like Charlie Brown’s teacher. You know he’s offering priceless advice about your portfolio as you transition into retirement, but those little nuggets of gold are buried beneath layers of acronyms and complicated concepts.


There are many soon-to-be retirees just like you. This is why I am here, to translate the foreign language of finance and investments into something a lot easier to understand. Here’s a compiled list of the top 5 terms you are likely to come across on your journey to a secure retirement investment strategy.


1.  Annuity

An annuity is an investment option that puts an insurance company between you and the ups and downs of the market. This insurance company guarantees you an income throughout your lifetime. Or it may guarantee that you will always be able to cash out the amount you place in their care.


However, here’s the catch: you often have to pay higher fees and can rarely take out your money in a lump sum without paying a stiff penalty. That is the trade off. It is not always the best choice (see our blog “Why Annuities aren’t worth it”), but an annuity is an increasingly popular choice for retirees desiring a guarantee.


2.  Diversification

This is best explained by the adage “don’t put all your eggs in one basket.” When investing, it is rule number one. Or maybe rule number two, if you include “buy low and sell high.” The idea is to decrease risk by putting your money in a variety of investments and asset classes, so—if one investment tanks—you won’t be in financial ruin.


3.  Asset Allocation

Have you ever heard these words thrown around at a cocktail party as investors brag about their business ventures: short term bond, large cap growth, small cap value, etc? These terms are categorizations of investments called asset classes, grouped together because they tend to behave similarly in the market.


Asset allocation, then, is just spreading your money among these various asset classes according to your unique financial situation and risk tolerance…which leads me to my next term.


4.  Risk Tolerance

In the game of investments, you have to be willing to risk losing money in order to make money. Some people are conservative—they want to avoid tragic losses even if it means less than impressive returns. Some are more aggressive—they are exactly the opposite.  Yet others are in-between. Your risk tolerance (often expressed as a number) shows where you fall on that continuum.


The driving question to determine your risk tolerance is this: how much are you comfortable to lose in order to gain the possibility of higher returns? Analyzing your risk tolerance helps ensure that you won’t make any poor, fear-based decisions to sell when the market isn’t doing well.


5.  Active vs. Passive Management

Some investors try to outperform the market by forecasting which investments will go up or down in value. They spend a lot of time moving money around, aiming to make big money in a short amount of time. This approach is called active management. Although it can lead to some lucrative gains, it is often dangerous because no one can predict the future consistently (See our blog:  “Investing Fact Check:  No One Can Predict the Future”).


Passive management, then, is the exact opposite. It involves diversifying your portfolio, matching it to your risk tolerance, and then letting the money sit, allowing the steady growth of the market to do its work. Sure, slight changes can be made as needed, but this approach is for people who are in the market for the long haul.


Well, if you have just finished this blog post, your financial literacy just increased! You are one step closer to understanding the jargon-strewn world of investing, and therefore, one step closer to a retirement investment strategy that will help ensure your financial security!


Want a Certified Financial Planner to analyze your portfolio at no cost to you? Call Seniormark at 937-492-8800 for a free consultation.


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