Understanding Investor Jargon: Financial and Investment Terms

About the Author

clint camua

true Clint Camua, MBA, CFP®

Regional Director and Partner
West Los Angeles, California

Author: Clint Camua

At a time when investor distrust is already high, many advisors continue to use confusing jargon, which only intensifies the general public’s.

As a Regional Director and Partner at EP Wealth Advisors, I’m aware some advisors throw around such jargon because they feel it actually may make them appear smarter.  Whether they understand it or not is another matter. Despite this trend, it is imperative we, as a community of advisors, shift toward simplifying our communication and language in order to regain trust within the investing public. Mike McGrath, also a Regional Director and Partner at EP Wealth Advisors explains, “The financial services industry seeks credibility, first and foremost, and has mistakenly believed sounding smart impresses people.”  This must change.  Concise, understandable language is key to guarantee transparency and regain trust. After all, we are here to service our clients as best we can.

With movies like “The Big Short”, it is understandable why some cynics insist big shots on Wall Street intentionally use complicated terminology because they *don't* want the average person to know what's going on (i.e. "credit default swaps").

I acknowledge some may have this view, because there is certainly enough “entertainment” that contributes to this belief. However, I, as well as Mike, are not convinced this is the reason jargon is the preferred language of many. Mike points out, “Looking for a phrase or term which encapsulates a complex idea or product is difficult.” But, we as advisors no longer want to tell you, investors, to simply trust us as the financial experts. Trust should never be a given; instead, our job is to foster relationships that result in confidence.

To break down the intimidating wall of Wall Street jargon, we believe advisors must learn to better communicate. It is a lost art. Many individuals know what they want to say but have a tough time expressing their feelings and thoughts.  Therefore, keeping it simple helps bridge the gap between knowing and expressing--clearly and assertively.  I’m a veteran within the financial industry, and as I gain more and more experience, I try harder to explain ideas and strategies more simply to my clients. Using analogies and/or telling stories to illustrate the point is more effective and resonates quicker and more thoroughly than when advisors inform clients they want to add “alpha” to their portfolios.

Although, it is still important to use and explain the jargon, so you, our clients, are more educated and less confused when you hear it in the media.

Let’s take a moment to explain a few confusing terms that investors need to grasp:

  •   1. Correlation = the degree to which two assets move together.
  •   2. Indexing = a statistical strategy that measures change in the economy in order to choose securities. With the advent of robo-advisors or the do-it-yourself market, understanding the various indexes and what they represent is important to portfolio construction.
  •   3. Valuation = a function of a company’s ability to earn, not its price per share.
  •   4. Market Cap = market value of a company's outstanding shares.
  •   5. P/E ratio = the stock's market capitalization divided by its after-tax earnings over a 12-month period .
  •   6.  “Overweight” and “Underweight” = indicates the attractiveness of a particular stock or asset class.

Breaking down and explaining these terms and ideas using real-life examples may be most helpful. For instance, if we mention diversification, compare this to putting all your eggs in one basket.

But, no matter how much an advisor explains terms and ideas, it all boils down, as Mike says, to hiring an advisor whom you trust and will spend the time and energy ensuring you understand and are comfortable with what we discuss and decide about your financial portfolio and approach.


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