A short glossary
Twenty-odd terms you will hit in your first month, defined in one line each.
6 minute read
One line each, in the sense the word is normally used. Where a term has its own page on this site, it is linked.
- Asset allocation
- How your money is split between types of investment — shares, bonds, cash, property. Usually has more effect on your outcome than which particular fund you pick within each type.
- Bond
- A loan to a government or company that pays interest and returns the principal at a set date. Generally steadier than shares and generally returns less over long periods.
- Compounding
- Growth earning its own growth. Explained properly here.
- Diversification
- Holding many different things so that no single failure matters much. Reduces the risk of any one holding collapsing; does not reduce the risk of the whole market falling.
- Dividend
- A share of profits paid out to shareholders. Reinvesting dividends is what turns a price chart into a total-return chart, and the difference over decades is large.
- Drawdown
- Two meanings, unhelpfully. (1) Taking income from a pot in retirement. (2) A fall from a peak, as in "a 30% drawdown". Context disambiguates.
- ETF
- Exchange-traded fund. A fund that trades on an exchange like a share, priced continuously through the day. Most track an index.
- Expense ratio / OCF
- The annual charge deducted inside a fund, before the price you see. Why it matters more than it looks.
- Index
- A published list of holdings and their weights, used to measure how a slice of the market performed. Not a product in itself.
- Index fund
- A fund that buys an index's constituents rather than selecting holdings. Longer description.
- Inflation
- The rate at which prices rise, which is the rate at which cash loses purchasing power. Calculator.
- Liquidity
- How quickly something can be turned into cash at a fair price. Listed shares are liquid; property is not.
- Nominal vs real
- Nominal is the headline number. Real is after subtracting inflation — what it actually buys. A 5% nominal return with 3% inflation is roughly a 2% real return.
- Pound-cost / dollar-cost averaging
- Investing a fixed amount at regular intervals, which mechanically buys more units when prices are low. A description of what a standing order does, rather than a strategy in itself.
- Rebalancing
- Periodically selling what has grown and buying what has not, to return your allocation to its target. Requires selling winners, which is why few people do it.
- Sequence risk
- The risk that the order of returns ruins you even when the average was fine. Barely matters while contributing; matters enormously while withdrawing. Explained here.
- Share / stock / equity
- Three words for part-ownership of a company. Its value follows the company’s fortunes and the market’s mood about them.
- Total return
- Price change plus dividends, which is the number that actually matters. A price-only chart understates long-run returns considerably.
- Tracking error
- How far a fund drifts from the index it follows. Usually small for large mainstream funds.
- Volatility
- How much a value swings around. Often used as shorthand for risk, though the two are not the same thing — a volatile holding you never need to sell is a different problem from a stable one that quietly loses to inflation.
- Withdrawal rate
- The share of a pot taken as income each year. The 4% figure is a rule of thumb from studies of thirty-year retirements, not a law. Calculator.
- Yield
- Income as a percentage of price. A 3% dividend yield means the annual payout is 3% of what you paid. Not the same as total return.
Missing something? The list covers what comes up in the first month. It is deliberately short — a glossary long enough to be complete is one nobody reads.