Investing Terms

An accredited investor is a person or entity that meets SEC wealth, income, or professional-credential thresholds — such as $1 million in net worth excluding the primary home — and is therefore allowed to invest in private securities offerings that aren't registered with the SEC.

An annualized return converts an investment's total performance over any period into the equivalent constant yearly rate — the single per-year number that, compounded, would have produced the same result.

Asset allocation is how you divide a portfolio among asset classes--mainly stocks, bonds, and cash--and it is the decision that most shapes how much your portfolio grows and how violently it swings along the way.

Assets under management (AUM) is the total market value of investments a firm manages on behalf of clients. In financial advice, "the AUM model" refers to charging clients an annual fee calculated as a percentage of the assets the advisor manages, commonly around 1%.

A broker-dealer is a firm licensed to buy and sell securities — for customers (acting as broker) and for its own account (acting as dealer). Broker-dealers register with the SEC, join FINRA, and operate under Regulation Best Interest when recommending investments to retail customers.

Capital gains tax is the tax on profit from selling an asset for more than you paid. Assets held over one year get preferential long-term rates of 0%, 15%, or 20%; assets held a year or less are taxed as ordinary income.

Cost of living is the amount of money needed to cover basic expenses — housing, food, transportation, healthcare, and taxes — in a particular place at a particular time.

Discretionary authority is the power a client grants an investment adviser to buy and sell investments in the client's account without asking permission before each trade.

Diversification is spreading your investments across many securities and asset classes so that no single company, industry, or country can sink your portfolio--it removes single-holding risk, though not market risk.

Dollar-cost averaging (DCA) is investing a fixed dollar amount on a regular schedule regardless of market conditions, so you automatically buy more shares when prices are low and fewer when they are high.

An exchange-traded fund (ETF) is an investment fund that holds a basket of securities and trades on a stock exchange like an individual stock, so you can buy or sell shares any time the market is open.

An expense ratio is the annual cost of owning a fund, expressed as a percentage of your investment--a 0.50% expense ratio costs $50 per year on a $10,000 balance, deducted automatically from the fund's returns.

An index fund is a mutual fund or ETF that holds the same securities as a market index, such as the S&P 500 or a total-market index, and aims to match the index's return at very low cost rather than beat it.

Inflation is the broad rise in prices over time, which is the same thing as a decline in what each dollar buys. Measured mainly by the Consumer Price Index, it is the reason a financial plan measured in today's dollars slowly stops meaning what it says.

An investment policy statement is a written document that spells out how your money will be invested — your goals, target asset allocation, rebalancing rules, and the conditions under which anything changes.

Liquidity is how quickly and easily an asset can be converted to spendable cash without losing value in the process. Cash is perfectly liquid; a house is not.

A nominal return is an investment's stated percentage gain or loss in plain dollars, before adjusting for inflation, taxes, or fees — the number quoted on statements, in ads, and in headlines.

Opportunity cost is the value of the best alternative you give up when you choose one use of your money, time, or effort over another. Every financial decision has one, whether or not it appears on any statement.

The real rate of return is an investment's return after subtracting inflation — the growth in what your money can actually buy, rather than the growth in the account balance.

Rebalancing is periodically restoring a portfolio to its target asset allocation--selling what has grown beyond its target and buying what has shrunk--so market moves don't gradually change how much risk you hold.

Risk capacity is your financial ability to absorb investment losses without derailing your goals — determined by your time horizon, income stability, and resources, not your feelings.

Risk tolerance is your emotional and psychological willingness to accept investment losses and uncertainty in exchange for the chance of higher returns.

A robo-advisor is an online service that builds and manages a diversified investment portfolio automatically using algorithms — typically for a much lower fee than a human asset manager, and typically without personalized financial planning.

The Rule of 72 is a mental-math shortcut for estimating how long it takes money to double: divide 72 by the annual rate of return, and the result is the approximate number of years.

Sequence of returns risk is the danger that the order of investment returns, not just their average, damages a portfolio you're withdrawing from. Poor markets in the first years of retirement force you to sell more shares to fund the same spending, and the portfolio may never recover even if returns later improve.

Standard of living is the level of material comfort a person or household can sustain — the housing, food, healthcare, transportation, and leisure their income and wealth actually support.

A stockbroker is the everyday name for a licensed securities salesperson — formally a registered representative of a broker-dealer — who buys and sells investments for customers. The classic commission-per-trade stockbroker has largely given way to app-based trading and advice-branded roles.

Tax-loss harvesting (TLH) is selling an investment in a taxable account for less than you paid to capture the loss for tax purposes, then reinvesting in a similar (but not substantially identical) holding so you stay invested.

The time value of money is the principle that a dollar available today is worth more than the same dollar received later, because today's dollar can be invested and earn a return in the meantime.

Wealth management is a bundled service model in which one firm manages a client's investments and coordinates the planning around them — taxes, estate, insurance, sometimes banking and lending — typically for a percentage of the assets it manages, and typically for wealthier clients.

A wrap fee program bundles investment advice, trading, and account services into one all-inclusive fee — typically a percentage of the assets in the account — instead of charging separately for each trade.