Investment Vocabulary: A Crash Course

Submitted by Lara Coviello, Auctus Wealth Management

Does your mind wander when people start talking about investment accounts, mutual funds and ETFs? You are not alone. Many of us start to drift when the talk turns to financial matters but here’s the thing; if you want to be able to take that amazing vacation, buy a house or retire and maintain a certain lifestyle, you have to start thinking about your finances and saving for your goals.

So before your eyes glaze over, ask yourself if you know what’s happening with your portfolio? If you do, great! You are three steps ahead of the game. But if you do not, it is time you paid attention to it.

When it comes to financial and investment terminology, there is a whole world of words out there. For now, let’s focus on three important terms: asset allocation, target allocation and rebalancing.

  • Asset Allocation

In your portfolio or your 401k, it is key to balance risk and return between the main asset classes – stocks (equities), bonds (fixed-income) and cash or the equivalent (something like certificates of deposit.)

Each asset type reacts differently to the vagaries of stock markets, world events and economic conditions, so it is important to periodically meet with your financial adviser to review what percentage of your portfolio is in equities, fixed-income and cash.

Depending on your tolerance for risk and your timeline, you may decide you would rather invest more in bonds than stocks. Bonds are slow growth but less risky, whereas stocks can, over time, offer more financial fireworks but with a larger measure of uncertainty.

A smart asset allocation strategy typically involves a well-balanced portfolio, in which your wealth is spread across different asset classes to balance the risk.

  • Target Asset Allocation

You have goals, like buying a house or retiring with enough money in the bank for exotic vacations. Target asset allocation takes into account your timeline for those goals – whether they are short term, mid-term or long term– by looking at the returns and risks in each asset class and investing according to your needs.

Even within goals – like retirement, for example – there are different time horizons.

One thing to remember: your golden years of retirement account for about one-third of your life, so plan accordingly. The sooner your start saving and allocating, the more money you’ll have to enjoy later on.

  • Rebalancing

Basically, rebalancing is the act of you – or your investment adviser – buying and selling equities, bonds and other investments to restore your asset allocation back to where you want it. Think of it as resetting your watch to the correct time. Not too early, not too late – you want it at just the right time.

Assets produce different returns over time, which is why it is key to your portfolio’s health to check in periodically and ensure it is on the track you want it to be.

You may have started with a mix of 20 percent cash, 50 percent stocks and 30 percent bonds, but that asset allocation may have changed over time. Rebalancing it – buying and selling to bring it back to the original balance – may be exactly what it needs.

Allocating and readjusting are important aspects of the investment process. Allocations need to be rebalanced, and rebalancing helps keep your portfolio on track to meet your goals.

One thing: Make sure that you and your financial advisor are on the same page when it comes to your financial goals. That will make it easier to target assets and allocate them appropriately.

About the Author:

Lara Coviello, MA CFA is a managing partner with Auctus Wealth Management.

She began her career as a research and statistical analyst in 2004. She started in the financial services industry doing risk assessment and market analysis, and researching public and privately held companies, and soon expanded her role to include portfolio management.

For more information on Lara visit Auctus Wealth Management HERE.

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