Glossary of Investment Terms
Active Management
The research and trading of individual stocks and bonds within a portfolio of securities (i.e. mutual funds or separately managed accounts). Investment managers of actively managed funds follow defined strategies to seek a better investment return than those of target market benchmarks (e.g., the Russell 1000 Growth Index).
Asset Allocation
The act of spreading investment dollars across different asset classes, such as stocks, bonds and cash. An investor’s asset allocation is usually based on his/her investment goals and personal comfort with different types of investment risk.
Asset Classes
The broad categories of assets that you can use to build an investment portfolio. They include stocks or equities, bonds or fixed income, and money market or cash. Each asset class offers varying degrees of potential investment reward and investment risk.
Compounding
Interest that is paid on interest, resulting in a geometric rate of increase on the initial principal. For mutual funds, reinvesting dividends and capital gains takes advantage of the power of compounding.
Correlation
A statistical measure of how two securities move in relation to each other.
Diversification
The act of spreading investment dollars across a wide variety of investments to help reduce the impact of any one investment in a portfolio.
Dollar-Cost Averaging (see Systematic Investing)
A method of investing that calls for the investment of a set dollar amount at regular intervals, regardless of the fund's share price. Since the set dollar amount will buy more fund shares when prices are low than at high prices, dollar-cost averaging usually brings down an investor's average cost per share over time.
Mutual Fund
A pooled fund of assets from many different investors that invests in individual securities, such as stocks and bonds.
Rebalancing
The process of returning the weighting of a portfolio’s assets to the desired mix of investment types. When certain asset classes increase in value, the proportion of investments in that class may grow to more than desired. By rebalancing a portfolio, you can ensure that the proportion of investments in the portfolio remain aligned with the investor’s goals.
Systematic Investing
The ability to purchase investments over regular intervals for a set period of time. A major benefit of owning mutual funds is the ability to contribute on a regular basis. Whether you are an aggressive or a more conservative investor, making systematic investments into your funds and overall portfolio provides you the opportunity to build portfolio value and take advantage of market changes. If you are enrolled in a company sponsored 401(k) plan, you are already taking advantage of systematic investing.
