Asset Allocation – the process which divides investments among different asset classes, such as stocks, bonds, real estate, commodities and cash.
Exchange-Traded Fund (ETF) – an investment security that tracks an index, a commodity or a basket of assets. Two examples are index funds on S&P 500 or FTSE. The ETF is traded on stock exchanges much like stocks. ETFs are attractive as investments because of their low costs, tax efficiency and performance characteristics.
Fund of Funds – a Fund of Funds allows investors to achieve broad diversification through investing in a number of underlying funds with different managers. The Fund of Funds investor can get access to a number of asset classes and management styles in one entry point.
Equities – refers to stock market investments in listed companies. Buying a company’s stock gives the investor ownership of part of the respective company’s profits. The stock price will go up and down in value depending upon the expected future revenue streams of the particular company. In general, investors buy stocks with the expectation of higher returns than other safer investments like bonds. Most stocks pay out a yearly dividend to the shareholder which represents a part of the yearly profit.
Hedge Funds – refer broadly to funds investing in many financial categories beyond traditional stocks and bond funds. Many hedge funds are known for being able to profit from both rising stock markets and falling ones and are able to trade many more stock markets around the world. The average individual investor normally is not able to access a wide range of hedge funds due to high initial investment requirements.
Managed Futures – is a subgroup of hedge funds and are also commonly known as trend followers or Commodity Trading Advisories (CTA’s). Managed Futures managers are trying to benefit from trending markets and are trading everything from stocks to bonds, commodities and currencies globally. In general, managed futures investments are not correlated to the stock market and could (Delete therefore) function as a very efficient addition when building a portfolio of assets.
60/40 Portfolio – is a portfolio mix of assets with 60% in stocks and 40% in bonds which is rebalanced regularly. This type of portfolio mix is commonly used by advisors and their clients as a way to diversify and to reduce the risk of a portfolio compared to only investing in stocks. This way of investing is similarly used by institutions like pension funds.
Diversification – Blending together a wide range of different assets that will counter each other in times of turbulent markets. Diversification is famously known as the only way to decrease risk while maintaining returns in an investment portfolio; therefore, being an essential aspect to bear in mind when building a portfolio.
Active Management – is performed by fund managers who will actively buy and sell different assets to diversify also rebalance the portfolio regularly to try to outperform a set benchmark; consequently adding value to their clients.
Bonds – are an investment in a government’s or corporation’s debt. The investor lends money to the government (government bonds) or to a corporation (corporate bonds) and will in exchange receive an interest on the debt. Government bonds are considered a safer investment compared to stocks due to being less volatile and paying a regular yield.
Independent Financial Advisors – are trained as professional financial planners to assist clients in matters such as advice on insurance, investments, pensions and taxes. The advisor works without ties to a particular financial institution; therefore, can help his clients to choose the best suitable product from the whole marketplace.
Standard Deviation – is the expected variation in a fund or an asset. The annual standard deviation for a stock should be seen as the possible expected negative or positive variation in the price over the coming 12 months.
Alpha – is used to describe the outperformance of an active manager compared to his benchmark.