Glossary of Financial Planning and Investment Terms

Active management

Active management is an investment strategy that seeks to achieve returns in excess of a specified benchmark (often a broad market measure such as an index) by recognizing and exploiting short term opportunities.

Advisory fee

The fee you pay your advisor to manage your portfolio. This advisor must fully disclose this fee to you. This term can also refer to the fee paid to a mutual fund manager. In this latter case, this fee is included in the fund’s expense ratio.

Asset

Anything of commercial value.

Asset allocation

The process of allocating investments across investment classes in order to achieve desired risk-adjusted returns. Proper asset allocation is fundamental to sound investment management.

Asset Class

A group of securities that exhibit similar characteristics. The most basic asset classes are cash, stocks and bonds. The investment community has identified many other asset classes including real estate, commodities, and private equity.

Basis

The amount of money invested in an asset.

Bear market

A period during which stock market prices fall at least 20%.

Benchmark

As standard against which the performance of a security, mutual fund or portfolio can be measured. CWM builds portfolios that seek to achieve the performance of a benchmark. Active managers attempt to achieve performance that exceeds a benchmark. Unfortunately, few active managers are successful.

Bid and ask

Bid is the highest price offered for a security. Ask is the lowest price a seller is willing to pay for a security. The spread between these two prices, the “bid-ask spread,” is indication of the liquidity of a market for a given security.

Bond

A debt instrument between an investor who loans fund to a borrower. Bonds are characterized by a specific period of time and a fixed interest rate. The borrower pays interest in the form of coupon payments to the holder of the bond. Bonds are issued by corporations, governments and agencies to finance projects.

Broker/dealer

A firm that buys and sells securities for investors.

Bull market

A market in which prices are rising.

Buy and hold investing

The investment strategy in which a portfolio is developed, maintained and rebalanced periodically.

Capital gain/loss

The increase/decrease in the value of assets. These gains/losses can short term (less than one year) or long term (more than one year).

CERTIFIED FINANCIAL PLANNER™ (CFP®)

A financial planner who has completed the certificate requirements of the CERTIFIED FINANCIAL PLANNER BOARD OF STANDARD. Terry Donahe is a CFP®.

Commercial paper

An unsecured, short term debt instrument issued by a corporation typically for financing short term operations. Commercial paper is issued on a discount basis. The maturity on commercial paper is seldom longer than 270 days.

Commission

The compensation paid by an investor to a broker for selling or buying a security.

Commodity

A basic good used in commerce. Commodities are often used as inputs in the production of goods. Examples of commodities include agricultural products (wheat, corn, soy), precious metals (gold, silver, platinum), industrial metals (iron, copper, aluminum) and energy (crude oil, natural gas, coal).

Correlation

The statistical measure of the relationship between to securities. Portfolio managers are interested in securities or asset classes that have weak or low correlation with each other. This results in the reduction of risk in the portfolio.