Active Management: The use of a human element, such as a single manager, co-managers or a team of managers, to actively manage a fund's portfolio. Active managers rely on analytical research, forecasts, and their own judgment and experience in making investment decisions about which securities to buy, hold and sell.
Asset Allocation: The division of one's investment portfolio between different types of assets, such as stocks, bonds, and cash.
Behavioral Finance: A field of finance that proposes psychology-based theories to explain stock market anomalies.
Benchmark: A standard against which the performance of a security, or investment manager can be measured. Generally, broad market and market-segment stock and bond indexes are used for this purpose.
Bond: A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate.
Commodity: A basic good used in commerce that is interchangeable with other materials (grains, metals, oil, etc.) of the same type. Commodities are most often used as inputs in the production of other goods or services.
Correlation: A statistical measure of how two securities move in relation to each other.
Diversification: A portfolio strategy designed to reduce exposure to risk by combining a variety of investments, such as stocks, bonds, and real estate, which are unlikely to all move in the same direction.
Dollar-cost Averaging (DCA): The technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high.
Efficient Market Hypothesis: The theory that security prices take into account all relevant information, thereby reflecting true value.
Efficient Frontier: The set of optimal portfolios that maximizes expected return for the given amount of risk. The efficient frontier is most commonly displayed graphically on a risk-return plot.
Emerging Markets Fund: A mutual fund or exchange-traded fund that invests the majority of its assets in the financial markets of a developing country or a group of developing countries. For the most part, these countries are in Eastern Europe, Africa, the Middle East, Latin America, the Far East and Asia. A developing country is characterized as being vulnerable to political and economic instability, having low average per-capita incomes, and being in the process of building its industrial and commercial base.
Exchange-Traded Fund (ETF): A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.
Expense Ratio: A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual calculation, where a fund's operating expenses are divided by the average dollar value of its assets under management. Operating expenses are taken out of a fund's assets and lower the return to a fund's investors.
Growth Stock: Shares in a company whose earnings are expected to grow at an above-average rate relative to the market.
Index Fund: A passively managed mutual fund that tries to mirror the performance of a specific index, such as the S&P 500. The primary advantage of investing in index funds is the generally lower expense ratio.
Individual Retirement Account (IRA): An investing tool used by individuals to earn and earmark funds for retirement savings. Traditional and Roth IRAs are established by individual taxpayers, who are allowed to contribute 100% of compensation up to a set maximum dollar amount. Contributions to a Traditional IRA may be tax deductible depending on the taxpayer's income, tax filing status and coverage by an employer-sponsored retirement plan. Roth IRA contributions are not tax-deductible, but distributions are tax-free.
Inflation: The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. As inflation rises, every dollar will buy a smaller percentage of a good.
Investment Policy Statement (IPS): A document that formally outlines the investment objectives, philosophy, boundaries and procedures for managing a portfolio. It is commonly used in client/advisor relationships, but it can also be employed by individual investors who wish to maintain investing discipline.
International Fund: A mutual fund that invests in non-U.S. securities.
Large Cap Stock: Shares in a company whose market capitalization is at least $10 Billion.
Market Timing: Investing based on a forecast of market direction.
Modern Portfolio Theory: A theory of portfolio construction that aims to optimize or maximize an investor’s expected return based on a given level of market risk. The theory asserts that the risk of a particular security should not be looked at on a standalone basis, but rather with respect to how that security's price varies in relation to other assets in the portfolio.
Municipal Bond Fund: A mutual fund that invests in municipal bonds, or "munis." Municipal bonds are debt securities issued by a state, municipality, county, or special purpose district (public schools, airports, etc.) to finance capital expenditures. They are exempt from federal tax, and are generally exempt from state taxes for residents of the state in which they are issued. They are attractive investments for individuals in a high income tax bracket with taxable investment accounts.
Mutual Fund: An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, or money market instruments. Mutual funds give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not impossible) to create with a small amount of capital.
Passive Management: A style of management associated with mutual and exchange-traded funds (ETFs) where a fund's portfolio mirrors a market index. Passive management is the opposite of active management, in which a fund's manager(s) attempt to use their own judgment and experience in making investment decisions on which securities to buy, hold and sell.
Real Estate Investment Trust (REIT): A security that can either sell like a stock on the major exchanges or be part of a mutual fund of similar securities. A REIT invests in real estate directly, either through properties or mortgages.
Rebalancing: Making the trades necessary to bring a portfolio back in line with its target asset allocation. For more information, click on philosophy in the top menu and see the Rebalancing tab.
Risk Premium: The reward for holding a non-risk-free investment.
Risk Capacity/Risk Tolerance: The degree of downside financial uncertainty that an investor can endure. An investor’s risk capacity is defined by objective factors like investment time horizon, income needs and financial assets, while risk tolerance often describes the degree of volatility that can be endured on an emotional level. The term "Risk Profile" can be used to encompass both risk capacity and risk tolerance.
Small Cap Stock: Shares in a company whose market capitalization is between $300 Million and $2 Billion.
Standard Deviation: A measure of the dispersion of a set of data from its mean. The more dispersed the data, the higher the deviation. Standard deviation is calculated as the square root of the variance. Standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility.
Stock: A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.
Stock Picker: Another term for a financial professional who researches and makes buy/sell decisions for an actively-managed mutual fund. See active management.
Taxable Account: An investment account that does not provide any special tax advantages.
Tax-Sheltered Account: An investment account that can be used to reduce an investor’s tax liability. The most common examples of tax-sheltered accounts are Individual Retirement Accounts (IRA’s) and employer-sponsored 401(k) plans. Typically, investment earnings such as interest, dividends or capital gains are free from taxation until the investor withdraws and takes possession of them.
Treasury Inflation Protected Securities (TIPS): A special type of Treasury note or bond that offers protection from unexpected changes in inflation.
Turnover Rate: A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by taking either the total amount of new securities purchased or the amount of securities sold - whichever is less - over a particular period, divided by the total net asset value (NAV) of the fund. The measurement is usually reported for a 12-month time period.
Value Stock: A stock that tends to trade at a low price relative to fundamental metrics such as dividends, earnings and sales. Common characteristics of such stocks include a high dividend yield, low price-to-book ratio and/or low price-to-earnings ratio.
Volatility: A statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.