Financial Systems Glossary

Interest calculated on both the initial principal and the accumulated interest from previous periods. Creates an exponential rather than linear growth curve.

The process in which an asset’s earnings are reinvested to generate additional earnings over time, resulting in geometric expansion of capital.

The mean annual growth rate of an investment over a specified time period longer than one year, smoothing out intermittent volatility.

The practice of investing a fixed dollar amount into a specified security at regular intervals, regardless of the share price.

A risk management strategy that mixes a wide variety of investments within a portfolio to limit exposure to any single asset or risk factor. Correlated assets can still fall together in a crisis.

A liquid reserve of cash or cash equivalents set aside to cover unexpected life expenses or income disruption, preventing the forced liquidation of long-term compounding investments during market downturns.

The annual percentage fee charged by an investment fund to cover management, administrative, and operational costs.

The rate at which the general level of prices for goods and services rises [verify: long-term US inflation rate benchmark], eroding the purchasing power of uninvested currency.

An investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets across equities, fixed income, cash, and alternatives.

The process of realigning the weightings of a portfolio of assets by systematically selling over-performing assets and buying under-performing assets. In taxable accounts, selling can trigger taxes; new contributions can also be used to rebalance.

The degree of variability in investment returns that an individual is willing and psychologically able to withstand without panic-selling.

A pooled investment fund that holds a collection of stocks, bonds, or commodities and trades on public stock exchanges like an individual stock.

An investment vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, and short-term debt, priced once daily after market close.

A mutual fund or ETF designed to track the performance of a specific financial market benchmark (e.g., S&P 500, Total World Stock Index) with low expense ratios; reduces company-specific risk by tracking a broad index; market risk remains.

An employer-sponsored, defined-contribution retirement account in the United States that allows employees to contribute pre-tax or post-tax (Roth) dollars directly from payroll.

A US account type: a tax-advantaged investing account opened independently of an employer, allowing individuals to save for retirement with tax-deferred growth.

A US account type: an individual retirement account funded with post-tax contributions, offering tax-free growth and tax-free qualified withdrawals in retirement. [verify: qualified withdrawal conditions and income limits, source IRS.gov]

A US account type: a tax-advantaged medical savings account available to taxpayers enrolled in high-deductible health plans (HDHP), featuring triple tax advantages: tax-deductible contributions, tax-free growth, and tax-free qualified withdrawals.

A statistical measure of the dispersion of returns for a given security or market index, typically measured using standard deviation or variance. Higher volatility induces volatility drag and asymmetric drawdowns, where recovering from losses requires non-linear percentage gains. Higher volatility reduces compound (geometric) return even when the average return is unchanged.

The collective collection of financial assets—including stocks, bonds, cash equivalents, and property—held by an institution or individual.

The earnings generated and realized on an investment over a particular period of time, expressed as a percentage of the investment’s cost or current market value.

A simplified mental mathematical shortcut used to estimate the number of years required to double invested capital at a fixed annual rate of return.

The annual percentage return on an investment adjusted for the erosive effects of inflation, reflecting true growth in purchasing power.

The maximum percentage of an investment portfolio that can be withdrawn in the first year of retirement, and adjusted for inflation annually thereafter, without depleting the portfolio before the end of the planned retirement period.