Our list of glossary terms will only include what we feel are the most important set of definitions to understand long termed investing and retirement planning.
Asset Class - is a group of securities with similar traits that perform in similar ways. The three main asset classes are 1. stocks, 2. bonds, and 3. cash. Other asset classes can include real estate, precious metals, emerging markets, etc.
Asset Allocation - is the mixing of different asset classes (along with their respective risk and reward profiles) to develop the best portfolio of investments for you and your investment plan.
Diversification - is the result of your portfolio after you have performed asset allocation on your investments. It means having a different mix of stocks, bonds and cash all working in harmony so that you can shoot increasing your portfolio without having too much risk of exposure in any one asset class.
Stocks - also known as equities, is one of the main asset classes. Has high return potential, as well as high risk potential. A stock is a piece of ownership in a company like Starbux or Kellogs
Bonds - also known as fixed income, is another main asset class. Scores higher on the safety scale, but you give up some reward potential as well.
Index - is a collection of securities representing a particular slice of the overall market.
Mutual Funds - Is a vehicle for investing in stocks and bonds, rather than buying them directly yourself. Many mutual funds use an Index to measure their performance. They usually claim to be able to do better than an index.
Index Funds - is a mutual fund that seeks ONLY to mimic a certain index. Index funds do not have a human in charge, like a mutual fund.
Dollar Cost Averaging - is an investing concept where you invest a set amount of money each month no matter what the stock market is doing.
Style Drift - occurs when a portfolio's asset class composition changes over time from its original asset mix. One reason for this is when one asset class rises or falls drastically in relation to the other asset classes.