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Glossary of Financial Terms
Lost in the language of investing? Here are some important investing terms you’ll probably want to know:
Asset allocation—The process of distributing your investments—in varying percentages and among different asset classes—to yield the greatest possible return consistent with your risk tolerance.
Asset class—A grouping of similar investments, such as stocks, bonds, or stable values (cash equivalents).
Bond—A loan you can make to the government or a corporation, in exchange for repayment plus interest. Even though the rate of interest is set, the value of the bond may go up or down.
Capital appreciation—An increase in the value of an asset such as a stock or bond.
Core Funds—The 10 investment funds available to you through the Thrift and Savings Plans.
Diversification—One way to minimize risk by spreading your investments among various types of funds, instead of investing in only one type of investment or fund.
Fund—This is a collection of stocks, bonds, or other securities purchased by a professional investment manager with the pooled money of thousands of individual investors. (In the case of a company stock fund, the fund invests solely in that company’s stock).
Inflation risk—The risk that you aren’t going to make money above and beyond the inflation rate.
IRA—Individual Retirement Account. With an IRA you can defer paying taxes until you withdraw funds. That means the money that would have been going to paying taxes remains part of your account—building your retirement nest egg faster. Over time, with compounding and regular contributions, tax-deferred investing can help you save significantly more than after-tax investing. There are three types of IRAs: Traditional, Roth, and Education.
Market risk—Day-to-day ups and downs of the stock and bond markets.
PCRA—The Schwab Personal Choice Retirement Account™, a self-directed brokerage account offered through the Thrift and Savings Plans.
Portfolio—The mix of investments you hold, for example, stocks, bonds, or cash equivalents.
Pre-mix portfolio—A pre-determined mix of investment funds that spans different asset classes and targets a certain level of risk and return.
Risk tolerance—How comfortable you are with the possibility of losing value in your investments as a result of something like a market downturn.
Stock—A type of investment representing an ownership share in a company.
Roth 401(k)—Contributions to a Roth 401(k) are made on an after-tax basis, which means they are deducted from your paycheck after federal, state, and local income taxes have been withheld. You can make Roth contributions to the Thrift or Savings Plan. Roth contributions do not reduce your current taxes the way before-tax contributions do. However, if you are at least age 59½ when you withdraw your savings, and you’ve been making Roth contributions for at least five years, your Roth contributions and the earnings on those contributions are tax free. Roth contributions offer you a tax advantage: The earnings you accumulate by making Roth contributions can provide you with tax-free income in retirement.
529 College Savings Plan—A tax-advantaged plan administered by a state that is designed to help people save for the expenses of a college education. The state usually contracts an investment management firm as program manager who provides a variety of investment choices. You invest in the portfolio(s) of your choice that may be appropriate for your risk tolerance and investing time horizon.