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Understanding Investor Jargon: Key Financial and Investment Terms
Clint Camua, MBA, CFP®, defines common financial terms in plain English and explains why clear advisor-client communication can help support strong...
Clint Camua, MBA, CFP®, defines common financial terms in plain English and explains why clear advisor-client communication can help support strong relationships.
Understanding Investor Jargon: Key Financial and Investment Terms
Investing is complicated enough. Sometimes it is better to leave the jargon out of it or at least take the time to explain it in language clients understand.
Concise, understandable language can make financial conversations more transparent and help build trust. After all, we are here to serve our clients as best we can.
This guide covers terms that come up regularly in conversations between advisors and clients. For each one, I've included a plain-English definition and, where it helps, a note on why the concept may be relevant to your portfolio.
Why I Try to Keep Investment Conversations Simple
Using analogies or telling stories to illustrate the point can be more effective than telling clients we want to add “alpha” to their portfolios.
That does not mean financial terminology should be avoided. These terms appear in investment reports and market commentary. They also come up in conversations with financial professionals.
It is still important to use and explain the jargon so clients can become more educated and less confused when they hear it in the media.
Common Investment Terms You May Hear
Portfolio and Market Terms
Asset Allocation How a portfolio is divided among different types of investments, such as stocks, bonds, and cash. The specific mix is typically based on the investor's goals, comfort with risk, and overall circumstances.
Correlation The degree to which two assets move together. When two investments are highly correlated, they tend to rise and fall in a similar fashion. Lower correlation between holdings is one reason advisors spread investments across different asset types.
Diversification Spreading investments across different asset types and sectors rather than concentrating in a single position. The goal is to reduce the impact that any one holding can have on the overall portfolio. This is related to the concept of correlation above.
Overweight / Underweight Indicates the relative attractiveness of a particular stock or asset class. When an advisor says a portfolio is "overweight" in a certain area, it means the allocation there is larger than the benchmark or target weighting for a particular model or index. "Underweight" means the allocation is smaller.
Rebalancing Adjusting a portfolio back toward its target allocation. Over time, as some holdings grow faster than others, the mix can drift from the original targets. Rebalancing involves trimming positions that have grown and adding to those that have lagged.
Investments and Fund Terms
ETF (Exchange-Traded Fund) A fund that holds a basket of investments and trades on a stock exchange like an individual stock. ETFs often track a specific index and tend to carry lower fees than actively managed funds.
Expense Ratio The annual fee that a fund charges its investors, expressed as a percentage of assets. A fund with an expense ratio of 0.20% charges $2 per year for every $1,000 invested. Lower expense ratios mean more of the investment's return stays in the investor's account.
Indexing An investment approach that aims to replicate the performance of a specific market index rather than selecting individual securities. Using an index approach indicates that an investor is looking at participating in the category the index is representing vs investing in individual stocks. It is considered a passive approach designed to replicate the performance of that particular index vs trying to outperform it.
Valuation and Performance
Alpha is the return an investment generates above or below its benchmark, after accounting for the risk taken.
- Positive alpha: Outperformed the benchmark.
- Negative alpha: Underperformed the benchmark.
Costs and Tax Terms
Basis Points A unit of measurement in finance where one basis point equals 0.01 percentage point. When you hear that interest rates moved "25 basis points," that means they changed by 0.25%. The term comes up frequently in discussions about interest rates and fund fees.
Capital Gains The profit from selling an investment for more than you originally paid. Gains are classified as short-term (held less than one year) or long-term (held one year or more), and each is taxed at a different rate. The distinction can affect the timing of when it makes sense to sell a position and the tax impact of doing so.
Tax-Loss Harvesting Selling investments that are currently at a loss in order to offset capital gains elsewhere in the portfolio. The strategy may help reduce taxable gains in a given year. Proactive tax-loss harvesting can enhance after tax portfolio returns in certain situations.
What These Terms Can Sound Like in Real Life
In an actual conversation with your advisor or in a financial news segment, these terms rarely come with a definition attached. The table below shows what some of them sound like in context, alongside a plain-English translation.
Breaking down and explaining these terms and ideas using real-life examples may be most helpful. For instance, if I mention diversification, I might compare this to putting all your eggs in one basket. Sometimes a simple analogy does more than a textbook definition.
You Don't Need to Speak Wall Street Fluently
You don't need to memorize every term on this page. What is most important is feeling comfortable enough to ask your advisor what something means when it comes up in conversation. A good financial advisor should be able to explain not just what a term is, but why it applies to your specific portfolio and situation.
Choosing an Advisor Who Communicates Clearly
When it comes to hiring an advisor, it all boils down to choosing someone you trust and who will spend the time and energy ensuring you understand and are comfortable with what is being discussed.
That means being able to ask questions without feeling that you are expected to already know the terminology. It also means receiving an explanation of why a particular strategy is being considered and how it relates to your broader financial plan.
At EP Wealth, clear communication is part of how our advisors work with clients. If you are looking for a financial planning relationship built on transparency, connect with an advisor to start the conversation.
Disclosures
- Request an appointment with an EP Wealth Advisor when you have a minimum of $500,000 in investable assets – which includes qualified retirement plans (IRA, Roth IRA, 401(k), taxable brokerage, cash (savings / checking) and CDs. Investable assets do not include your home, vehicles, or collectibles.
- EP Wealth Advisors, LLC. is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission, nor does it indicate that the advisor has attained a particular level of skill or ability.
- The views expressed in this article are the author’s opinions and are provided for informational and educational purposes only. This material is not intended as investment, legal, or tax advice, and should not be relied upon as a recommendation to buy or sell any security or investment strategy.
