The financial services industry is loaded with jargon, definitions and terms that are at times incomprehensible. Spend an hour or two listening to business news on cable and you’ll know what we’re talking about. Throw in all the acronyms and abbreviations and it begins to sound like another language.
Let’s start with a meaningful glossary that breaks it down in a simpler, more meaningful way.
Wealth is defined by Webster’s as an abundance of valuable material, possessions or resources. We believe wealth is freedom – freedom to live a balanced life and support basic needs. Freedom from worry about running out of money or cramping your lifestyle. Freedom to help family members and worthy causes you believe in without always wondering where the money will come from.
The classic definition of money is a medium of exchange, measure of value or means of payment. We believe money provides a cushion between paychecks to pay bills or address emergency situations. Beside your emergency fund, consider setting aside funds in low volatility assets. This should help prepare you for any recessions and market disruptions. It also helps reduce the emotional temptation to sell essential growth investments during temporary, yet inevitable, price declines.
Risk is the possibility of loss, injury or hazard. Our everyman’s glossary suggests risk is the chance your goals won’t be achieved during working years, or worse, running out of money during a 20- to 30-year retirement. Risk is also loss of purchasing power as inflation gradually eats away at your nest egg. Plan to give yourself a modest raise each year during retirement.
Safety describes protection against hurt, injury or loss. We believe the definition of safety is maintaining the value of wealth over time, and maintaining buying power once the effects of taxes and inflation are factored in. Stocks, if diversified properly, provide a degree of safety from loss of purchasing power, and one of the few asset classes shown to consistently beat inflation over long time periods.
Diversification is spreading of risk by putting assets in several categories of investments like stocks, bonds and money-market accounts. Commodities and real estate round out the lineup. The alternate definition is to never own enough of anything to get killed by it, or never enough to make a killing in it. Attempt to avoid concentration, excess borrowing and leverage, and avoid panic selling during normal market fluctuations. This helps prevent permanent loss of capital – capital you can’t afford to lose, which is nearly impossible to recover after a critical mistake.
Performance is the average annual return needed on your money to avoid running out, while maintaining purchasing power during retirement. It is not the endless reporting of price statistics of stocks, funds and indexes spilling forth from your phone, social media and financial news. Short-term prognostication and attribution are futile and easy to manipulate, and they can mess you up emotionally. Figure out what your long-term average return needs to be. Then develop a plan to help achieve that number.
Starting with this glossary, begin to focus on the behaviors you control, and avoid pretending to understand what the so-called experts and prognosticators are telling you. You’ll be more focused, less nervous and more confident as you begin to take charge of your own planning and savings terminology. You’ll become a more knowledgeable investor, more prepared, and less prone to common mistakes and errors made by so many.
Mark Daly is an investment management analyst and a partner in The Perpetua Group. email@example.com