Investing

What should be in place before you invest?

Three things, each for a reason worth understanding rather than memorizing. Investing money you may need next year is a real mistake, and it is a different mistake from not investing at all; the point of the sequence below is to avoid both.

• Any employer match. If a workplace plan offers an employer match , contributing enough to capture it earns a return on the contribution before any investment return happens at all. It is the highest-certainty return available to most working people, which is why it comes first even for someone carrying expensive debt: declining it is declining part of your pay. Most versions of the list pair it with holding a small starter cash buffer, so that a minor emergency does not immediately undo the next step.
• High-interest debt. Paying off a balance charging 22% is a guaranteed 22% return, and no portfolio can promise that. The comparison is not merely about the rate, it is about certainty: one outcome is contractual and the other is an expectation with a wide range around it.
• Cash for emergencies. A full emergency fund is not a competing use of money; it is what protects the invested money. Without it, a job loss or a broken transmission during a downturn forces you to sell at the worst moment, converting a temporary decline into a permanent loss. That reserve belongs somewhere stable and reachable, which is what liquidity means: a high-yield savings account or similar, not the market.

That ordering is the compact version of what planners call the financial order of operations . Treat it as a well-worn general answer rather than a law, because the honest version is a comparison of rates and certainty in your own situation, and the standard list cannot see your situation.

Low-rate debt is where the sequence stops being obvious. Paying extra toward a mortgage produces a certain return equal to the interest rate, adjusted for whether you get any tax benefit from the interest; investing instead offers a higher expected return with no guarantee attached. Reasonable people land in different places on mortgage payoff versus investing, and the deciding factor is usually how much the certainty is worth to the household rather than which expected number is larger.

One more step before any money moves: give every dollar a goal and a date. Money for a house in three years and money for retirement in thirty are not the same money and should not be invested the same way, even if they sit at the same firm. The date is what decides how much risk the money can carry, and attaching one to each pool now prevents most of the errors further down this page. It also makes the opportunity cost of each choice visible, since every dollar committed to one goal is a dollar not working on another.

What can you actually invest in?

Fewer things than the industry's product catalog suggests, and the first thing to get straight is a distinction most beginners are never told: an asset class is what you own; a fund is a container you own it through. An index fund is not an alternative to stocks. It is a way to own hundreds or thousands of them at once. Confusing the two makes the whole menu look more complicated than it is, and it is the reason people end up asking whether they should buy "stocks or index funds," a question that does not quite parse.

The asset classes

Stocks are ownership shares in companies. As an owner you have a claim on the profits and the growth, which is why stocks have historically been the growth engine of long-term portfolios, and why they also fall hardest and most suddenly. Owning one company means your outcome depends on that company; owning the whole market means it depends on business in general.

Bonds are loans. You lend to a government or a corporation, collect interest along the way, and get the principal back at maturity. Returns are steadier and lower than stocks, and high-quality bonds often hold their ground when stocks fall, which is what makes them useful ballast rather than merely a weaker stock. One mechanic surprises people: bond prices move opposite to interest rates, because a bond paying yesterday's lower rate is worth less once new bonds pay more. That is the channel through which the Federal Reserve reaches your portfolio. When the Fed moves the federal funds rate, its main policy lever, in pursuit of its mandate of maximum employment and stable prices, short-term rates follow, and bond prices adjust.

Cash and near-cash covers savings accounts, money market funds, and certificates of deposit. These protect principal, pay modest interest, and lose ground to inflation slowly. Series I savings bonds sit slightly apart: the Treasury sets their rate as a fixed component plus one that resets with inflation, so they are built to preserve purchasing power rather than to grow it, at the price of an annual purchase limit per person and a lockup after you buy. The job of everything in this group is certainty over short horizons, and they are excellent at it and bad at everything else.

The containers

A mutual fund and an exchange-traded fund both pool money and hold a basket of securities, so one purchase buys a slice of everything inside. They differ mainly in how they trade and how they handle taxes, not in what they can hold. Index fund describes a strategy that either container can follow: rather than paying managers to pick winners, an index fund simply buys everything on a published list, such as the S&P 500 or a total-market index, and holds it. That simplicity is what makes it cheap, and cheapness is most of why broad index funds are the least expensive route to diversification available to an ordinary investor. A total-market index fund and a total-market ETF from the same provider hold the same companies; the difference is the container, not the investment.

Real estate

Real estate reaches investors in two quite different forms. A rental property is an operating business: tenants, maintenance, vacancy, usually borrowed money amplifying both the gains and the losses, and an asset you cannot sell quickly. A real estate investment trust, or REIT, is a company that owns income-producing property and trades like a stock, which gives you the exposure without the plumbing calls. They are not interchangeable, and people who enjoy one often dislike the other.

Assets that produce nothing

Gold and cryptocurrency, including Bitcoin and the spot Bitcoin exchange-traded products that now hold it, sit in a separate category for a structural reason rather than a moral one: they generate no earnings, interest, or rent, so the entire return depends on someone later paying more than you did. That does not make them irrational to own, and people hold them for reasons ranging from inflation hedging to conviction about the technology. It does mean the usual tools for estimating what something is worth do not apply, and there is no underlying cash flow to cushion a fall.

Two practical differences are worth knowing before buying either. Physical gold and funds that hold bullion are treated as collectibles for federal tax purposes, so long-term gains face a maximum rate of 28% rather than the lower long-term rates that apply to stocks and funds. Cryptocurrency held directly or on an exchange is neither FDIC-insured, which covers bank deposits, nor protected by SIPC in the way securities held at a broker are; the protections people assume are present frequently are not.

Private and alternative investments

Private equity, hedge funds, private credit, and similar offerings are mostly gated behind the SEC's accredited investor rules. Most people who qualify do so on income or net worth rather than on any demonstrated investing skill, though certain professional securities licenses also qualify a person regardless of wealth. Either way, qualifying is permission to take the risk, not a judgment that any particular investment is sound. Where these offerings are available, treat illiquidity as a cost rather than a feature. Being unable to sell does not make an investment safer; it makes the reported value smoother, which is a different thing, and it removes an option you might want.

How much of each should you own?

Your asset allocation , meaning the split between stocks, bonds, and cash, is the single decision that most determines both how much the portfolio grows and how violently it moves along the way. It deserves more of your attention than fund selection, and it usually gets less, because picking funds feels like doing something and setting an allocation feels like doing nothing.

Three inputs decide it, and people routinely collapse them into one.

• Time horizon. When the money gets spent. This is the input with the most authority, because it determines whether a decline has time to recover before you need to sell.
• Risk capacity. Risk capacity is what your finances can absorb without a goal being derailed. It is a fact about your situation, not your feelings: stable income, other assets, guaranteed income in retirement, and a flexible target date all raise it.
• Risk tolerance. Risk tolerance is what you can hold through without selling. It is a fact about you rather than your balance sheet, and most people learn theirs only in a genuine downturn.

Capacity and tolerance genuinely differ, and the binding constraint is whichever is lower. Someone decades from retirement has enormous capacity even if turbulence keeps them up at night; someone about to pay tuition has almost none however calm they feel. The reason to honor the stricter of the two is practical rather than philosophical: a portfolio you abandon at the bottom performs far worse than a slightly conservative one you keep, so an allocation that fails the tolerance test is not actually the aggressive allocation it appears to be on paper.

Diversification does a specific job inside the mix and not a broader one. Spreading money across many companies, industries, and countries removes the risk that any single failure sinks you, and that risk is worth removing because the market does not pay you for carrying it. What diversification cannot remove is market risk. When everything falls together, a diversified stock portfolio falls too, and that is precisely the risk you are being compensated for. Cushioning it is the job of the stock-versus-bond split, not of owning more stock funds. This distinction explains a common disappointment: a portfolio of eight funds that all hold large U.S. companies is one bet in eight costumes, and it behaves like one when tested.

Allocation is also expected to change as the horizon shortens, and the schedule for that change is called a glide path . The logic is the same one running through this whole page: money you will spend soon has no time to recover, so it should not be exposed to assets that can halve. The sharpest version of that problem appears once you are withdrawing rather than contributing, when a poor run of returns early on forces you to sell more shares to fund the same spending. That is sequence of returns risk , and it is the main reason retirement portfolios get more conservative as the date approaches rather than staying aggressive to the end.

Finally, the mix needs maintenance, because markets drift it toward whatever recently did well. After a strong run in stocks, a portfolio set at 70% stocks might be 80% stocks, carrying risk its owner never chose. Rebalancing restores the targets by trimming what grew and adding to what lagged. Two things make it worth doing on a rule rather than a hunch: it keeps the risk you hold equal to the risk you chose, and it mechanically enforces selling high and buying low at moments when instinct argues for the opposite.

What does investing cost, and why do small percentages matter so much?

Costs matter more than their size suggests because of what they do to compounding. A fee is not a one-time charge against this year's gain. It is a permanent reduction in the rate at which everything compounds, and every dollar taken in fees also forfeits all the growth that dollar would have produced in every later year. The size of that effect surprises most people: paying one percentage point a year more, on an otherwise identical portfolio, costs roughly a sixth of the final balance over twenty years, about a quarter over thirty, and close to a third over forty. Those proportions barely move whatever return you assume, because they are a property of compounding rather than of markets. It is also the reason costs deserve attention out of proportion to how boring they are: they are the one input you can control with certainty, while returns are the one you cannot control at all.

Money leaks in four places, and only one of them arrives as a bill.

• The fund's expense ratio. Every fund charges an annual percentage of assets to cover running itself. The expense ratio is deducted continuously from the fund's value rather than invoiced, so a fund earning 8% and charging 0.5% simply reports 7.5%. You will never see it leave.
• Advisory fees. If someone manages the portfolio, they charge for it. The industry standard is a percentage of the assets under management, which means the dollar cost rises as the portfolio grows whether or not the work does. Flat-fee, hourly, and subscription arrangements price the same service differently. The full case for and against each pricing model is set out on assets under management and in Advice-Only vs. Fee-Only rather than repeated here.
• Trading costs. Explicit commissions on stock and ETF trades have largely disappeared at major brokers. What remains is the spread, the small gap between the buying and selling price, which is negligible for someone buying broad funds occasionally and meaningful for someone trading frequently.
• Taxes. The largest recurring cost for many investors, and the subject of two sections below.

The practical lesson is to compare the all-in annual cost, because the layers add. A portfolio held in funds charging 0.05% but managed for a 1.00% advisory fee costs 1.05% a year all in, twenty-one times the 0.05% the funds themselves charge, and someone comparing only expense ratios would never see the larger number. Some arrangements bundle advice, trading, and custody into one charge, which is what a wrap fee program does; bundling is not automatically worse, but it does make the components harder to compare. Watch the wording too: "no commission" and "no fee" are different claims, and neither means free. If it helps to see the compounding effect in dollars, our fee comparison calculator runs the arithmetic over whatever time horizon you give it.

Which account should you invest in?

The account is a tax wrapper around the investments, not an investment itself. The same index fund produces a different after-tax result depending on where it sits, which is why choosing the wrapper is a separate decision from choosing what to own, and why "should I buy an IRA or an index fund" is another question that does not parse. You buy the fund inside the IRA.

There are three wrappers, and each makes a different trade with the tax code. A tax-deferred account such as a traditional 401(k) or a deductible individual retirement arrangement gives you a deduction now and taxes the withdrawals later; the value of that tax deferral is that the money you would have paid in tax stays invested and compounds in the meantime. A Roth account such as a Roth IRA reverses the timing: you pay tax on the way in, and qualified withdrawals come out untaxed. A taxable brokerage account gets no special treatment at all, taxing dividends and realized gains as they happen. There are also purpose-built wrappers for specific goals, notably the 529 plan for education and the health savings account for medical costs, which is the rare account that can be untaxed at all three stages. Collectively these shelters are known as tax-advantaged accounts .

What the sheltered accounts ask for in return is access. Each has an annual contribution limit, published by the IRS and adjusted most years, and retirement accounts generally gate withdrawals until age 59½ with penalties for jumping the fence. That is the reason a taxable account is not a failure state or a consolation prize. It is where money belongs when you may need it before the gate opens, and its flexibility is worth something real. Many households end up using both deliberately: the shelters for money with a distant date, the taxable account for everything with an uncertain one. The retirement planning guide walks through the account sequence in more depth.

A word on where accounts physically live. A brokerage account is the container, held at a custodian, which is the firm that actually holds your securities. SIPC protection covers the custody function: if the broker fails, it works to restore the securities and cash in your account, within limits. It does not protect you against investments losing value, and that distinction gets misread often enough to be worth stating plainly. A market decline is not an event any insurance covers.

Once several account types exist, a further question appears: which account should hold which investment. Asset location is the practice of putting the most heavily taxed holdings inside the shelters and leaving the lightly taxed ones outside, so the shelter is not wasted. It takes your overall mix as given and changes only the tax bill, which makes it a refinement rather than a substitute for getting the allocation right.

How are investments taxed?

Inside a tax-advantaged account, generally not at all while the money stays there. Inside a taxable account, tax arrives from two directions: from income the investment throws off while you hold it, and from gains when you sell.

On the holding side, interest from bonds and cash is taxed at your ordinary rates, the same schedule as your wages. Dividends split into two categories, with qualified dividends taxed under the gentler long-term schedule and non-qualified dividends taxed as ordinary income. Mutual funds add a wrinkle: when the fund sells holdings during the year, it passes the resulting gains through to whoever still owns it, usually in December, so you can owe tax on a fund you never sold and that may itself be down for the year. ETFs largely avoid this because of how their shares are created and redeemed. It is a structural difference between the two containers, and it only matters in a taxable account.

On the selling side, the decisive variable is how long you held it. Sell after holding for one year or less and the gain is short-term, taxed as ordinary income at your marginal tax rate , the rate that applies to your next dollar of income rather than an average across all of it. Hold longer than a year and it becomes a long-term gain, taxed under a separate, preferential schedule. Nothing about the investment changes at the one-year mark; only the tax treatment does, and the gap is wide enough that "how long have I owned this" belongs before "should I sell this" in the order of questions. Higher earners also face an additional tax on investment income above certain statutory thresholds. The current rates, breakpoints, and thresholds live on capital gains tax , where they are kept up to date.

The gain itself is measured against your cost basis, broadly what you paid including reinvested dividends. Basis is unglamorous and matters enormously, because a record that is wrong or missing can turn a modest gain into an overstated one at exactly the moment you cannot reconstruct it. Brokers track basis for most purchases now, but transfers between firms, inherited holdings, and older positions are where it goes missing.

Losses are usable, which is the part most people underuse. Selling a holding worth less than you paid realizes a loss that offsets realized gains and, beyond that, a limited amount of ordinary income each year, with the remainder carrying forward. Tax-loss harvesting is doing this deliberately while immediately buying something similar, so the portfolio keeps its market exposure and only the tax position changes. The guardrail is the wash sale rule, which disallows the loss if you buy back the same or a substantially identical security within a window around the sale, and it reaches across your other accounts, including a spouse's. Automatic dividend reinvestment trips it accidentally more often than deliberate repurchase does.

Cryptocurrency has its own treatment worth flagging, because the assumptions people carry over from stocks do not hold. The IRS treats crypto as property rather than a security, which has meant the wash sale rule does not apply to it, and proposals to change that have appeared repeatedly without being enacted; it is an area to re-check rather than assume. The more common practical problem is that every disposal, including swapping one coin for another or spending it, is a taxable event, and the record-keeping burden falls on the holder.

Investment tax is one corner of a larger system, and the decisions above interact with the rest of it. Our guide to taxes covers how brackets, deductions, credits, and the pay-as-you-go rules fit together.

Why is investing mostly a behavior problem?

Because the gap between what investments return and what investors actually earn is created by decisions, not by markets. The fund does not know who owns it. Buying after a rise and selling after a fall converts ordinary volatility, which costs nothing if you wait, into realized loss, which is permanent. Almost everything else on this page is technical and learnable in an afternoon. This part is not, and it is where the money is won or lost.

The pull toward selling at the bottom is not stupidity, which is why willpower is a weak defense against it. A loss registers harder than an equivalent gain, a pattern known as loss aversion, so a 20% decline feels more urgent than a 20% rise feels pleasant. The recent past feels like a forecast, so a long calm stretch makes risk seem theoretical and a crash makes further losses seem inevitable. And the crowd is loudest at the extremes: when everyone is selling, selling feels like the prudent thing rather than the panicked thing.

It also helps to know that declines are a feature of the assets that produce long-term returns, not a malfunction in them. Markets fall regularly and sometimes sharply, and economic contractions are part of the ordinary cycle rather than a failure of the system. A recession, incidentally, is not the two-negative-quarters shorthand people quote; in the United States it is dated retrospectively by the National Bureau of Economic Research's business cycle dating committee, which weighs the depth, breadth, and duration of a downturn and often announces it many months after it began. Which is the practical point: you will not get a reliable signal in time to act on it, so a plan that only survives good years is not a plan.

The defenses that work are structural rather than emotional, because they remove the decision instead of asking you to win it.

• Automate the contributions. Money that invests itself on a schedule never has to survive a monthly debate. For income arriving over time, this is simply how sensible investing works, and it is what dollar-cost averaging describes. For a lump sum already in hand, whether to invest it all at once or spread it out is a genuine question with a defensible answer either way: investing immediately wins more often, because markets rise more often than they fall, while spreading it out reduces the regret if the timing turns out badly.
• Write the plan down while markets are calm. An investment policy statement records the target mix and the conditions under which anything changes. Its value is entirely in the timing: the rule for a falling market has to exist before the market falls, because that is the one moment you cannot write it clearly.
• Rebalance on a schedule. Beyond keeping the risk level honest, a rebalancing rule forces buying whatever just fell, which is the action instinct resists most and the one the plan needs.

One honest caveat, because "just hold on" is much easier to write than to do. If you suspect you would sell in a serious decline, the useful response is to set a stock allocation you could actually live with rather than to promise yourself you will be braver next time. A somewhat conservative portfolio held through a crash beats an aggressive one abandoned in the middle of it, and that is a statement about arithmetic rather than temperament.

How do you actually start?

With a short and unglamorous sequence, which most guides describe the theory of and then stop just before. In practice it runs: contribute enough to the workplace plan to capture any match; open an IRA or a taxable brokerage account for anything beyond that; fund it; choose the investments; automate the contribution; then leave it alone apart from scheduled rebalancing and an annual look.

For the "choose the investments" step, the simplest workable answer is one fund. A target-date fund holds a diversified mix of stocks and bonds and shifts it conservative on a schedule as its named year approaches, which means it is doing the allocation, the diversification, the glide path, and the rebalancing on your behalf. It is designed to be someone's entire long-term portfolio rather than a starter product, and holding it alongside other funds generally defeats its design. Two honest caveats: funds sharing the same year can hold meaningfully different amounts of stock depending on the provider, so the year alone does not tell you the risk, and nothing matures or is guaranteed when that year arrives.

The common alternatives are a small number of broad index funds held in chosen proportions, which trades a little more maintenance for more control over the mix and often a slightly lower cost, or a robo-advisor , which builds and maintains a portfolio automatically for a fee that sits between doing it yourself and hiring a person. Any of the three is a reasonable place to begin, and the differences between them are much smaller than the difference between starting and waiting.

Two things worth saying to anyone stuck at the starting line. The amount needed to begin is now genuinely small, because fractional shares and no-minimum funds removed the old barrier; the binding constraint is the emergency fund and the debt question from earlier in this guide, not an account minimum. And starting imperfectly and adjusting beats waiting until you are certain, because the cost of a few months out of the market is usually larger than the cost of picking a slightly suboptimal fund, which is a mistake that takes about ten minutes to fix later.

What are the most common investing mistakes?

Most of them come from missing how a rule works rather than from failing to predict markets. Each below is worth a sentence of prevention.

• Sitting in cash waiting for a better entry point. Waiting for the right moment is a market-timing bet, and it is one you have made by default rather than on purpose. It also has to be right twice, once getting out and once getting back in.
• Buying whatever just went up. Recent performance is the least useful information on a fund page and the most prominently displayed. Chasing it systematically buys high.
• Holding a large position in your employer's stock. Your paycheck and your portfolio then depend on the same company, so a bad year for the employer arrives as a layoff and a portfolio loss at once. Equity compensation makes this accumulate quietly, without anyone deciding to concentrate.
• Chasing yield without asking what pays for it. A materially higher yield is compensation for a materially higher risk: weaker credit, longer maturity, leverage, or illiquidity. Finding the reason before buying is the whole exercise.
• Confusing low cost with low risk. A broad index fund is cheap and diversified. It is still a stock fund, and it falls when the market falls.
• Ignoring fees because they never appear on a statement. The expense ratio is deducted from returns rather than billed, so nothing ever prompts you to notice it. Looking it up takes seconds and is one of the highest-value seconds available.
• Selling a winner without checking the holding period. Selling just short of a year turns a preferentially taxed long-term gain into an ordinary-income one. Checking the purchase date costs nothing.
• Harvesting a loss and buying back too soon. The wash sale rule disallows the deduction, and an automatic dividend reinvestment you forgot about is enough to trigger it.
• Treating "guaranteed high return" as a product category. It is not one; it is the defining signature of investment fraud. A Ponzi scheme pays early investors with later investors' money and can look flawless until it stops, and these offers characteristically arrive through someone you already trust, from a shared church, employer, or community. Verifying the firm and the person through official registration records is the cheap defense, and our guide to finding a financial advisor covers how.

When should you get professional help?

Less often than the industry implies, and more often than the internet implies. It is worth saying directly that someone contributing steadily to a diversified low-cost fund inside a workplace plan is already doing the thing most advice would tell them to do. Paying for help to be told that is not a good trade.

Advice reliably earns its cost when the situation has more moving parts than a single account: a portfolio assembled piecemeal over fifteen years that nobody has ever looked at as a whole; concentrated stock or equity compensation, where the tax treatment and the concentration risk interact; a sudden large sum from an inheritance, a business sale, or a settlement, where one irreversible decision dominates everything else; and the retirement transition, where withdrawal order, tax brackets, and benefit timing stop being separate questions. There is also the case people underrate, which is wanting a competent second opinion on a plan you fully intend to keep running yourself.

Whatever you decide, understand how the person is paid before taking their advice on investments specifically, because this is the area where the recommendation and the payment are most likely to be the same event. Someone earning a commission on a product, or a percentage of the assets you move under their management, faces a structural conflict of interest on the exact question you are asking. That is not an accusation about any individual; it is a fact about the arrangement, and good people work inside conflicted structures every day. Two things to check: whether the person is acting as a fiduciary when they advise you, meaning legally required to put your interests ahead of their own rather than merely to recommend something suitable, and how they are compensated. The first question matters less than it sounds if you skip the second, because the standard applies to the advice and not to the incentives behind it. A fee-only advisor takes no product commissions; advice-only planning narrows it further to advice paid for directly, with no assets to gather. Our guide to finding a financial advisor covers how to verify any of it. If investing is the question on your desk, you can browse advice-only advisors who specialize in investment planning.

Key terms in investing

The vocabulary you'll meet on fund pages, brokerage statements, and every article on this topic, each defined in plain English in our glossary.

• Asset Allocation

  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.

• Diversification

  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.

• Index Fund

  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.

• Exchange-Traded Fund (ETF)

  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.

• Expense Ratio

  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.

• Risk Tolerance

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

• Risk Capacity

  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.

• Rebalancing

  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.

• Dollar-Cost Averaging (DCA)

  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.

• Target-Date Fund (TDF)

  A target-date fund is a single diversified fund named for a year (2045, 2060) that automatically becomes more conservative as that year approaches. It is designed to be an investor's entire portfolio, and it is the default investment in most workplace retirement plans.

• Capital Gains Tax

  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.

• Tax-Loss Harvesting (TLH)

  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.

• Asset Location

  Asset location is the decision about which account holds which investment (taxable brokerage, tax-deferred, or Roth) in order to reduce the tax your portfolio generates. It is not the same as asset allocation, which decides what you own in the first place.

• Inflation

  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.

• Real Rate of Return

  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.

Browse all 45 investing terms in the glossary, or start from the Guide to Personal Finance.

Frequently asked questions