If you’re new to investing, or just trying to educate yourself so that you can play a more active role in managing your money, wading through all the financial terms and acronyms used in our industry might make you feel like you’re drowning in alphabet soup.
On today’s show, we try to demystify some of these financial terms and acronyms for our listeners. Because we adhere to the fiduciary standard at Keen Wealth, we always put the best interest of our clients first. We want to be as transparent as possible when it comes to your retirement planning, and sorting through this word jumble of financial terms and acronyms might be a big help.
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Insights from Today’s Podcast on Financial Terms
Here are important financial terms that you should know by heart:
1. CFP® (Certified Financial Planner™)
CFP® certification is a rigorous study and exam process that’s only open to financial advisors who have at least three years of experience in financial services. In the words of the CFP® Board, “By passing this exam, you demonstrate to the public you have attained a competency level necessary to practice independently as a financial planner.” To maintain the certification, you also have to complete ongoing continuing education.
At Keen Wealth, we always say there are two pieces to successful financial planning: 1) having an up-to-date and quality financial plan in place, and 2) the investments that serve as the engine, driving that plan. Having Certified Financial PlannersÔ on staff, like Matt Wilson, Joel Hamilton, and Rey Arellano here at Keen Wealth, can help clients with understanding the details within these dynamics.
2. Monte Carlo Simulation
Monte Carlo simulations are used in many statistical and scientific fields -- including the creation of the atomic bomb to predict fallout scenarios. But as a financial term, we use these simulations to predict what will happen in the markets with reasonable probabilities of success. Based on those predictions, we can make educated decisions about what we're going to do on the ground, in the trenches, in each of our client's financial plans.
The way that an experienced fiduciary advisor can apply this advanced analysis to your specific financial situation is one area in which working with an advisor adds real value to your portfolio. You wouldn’t believe how many prospective clients come into my office with spreadsheets showing exactly how much they plan on saving and spending for the next twenty or thirty years, based on a fixed rate of return on their investments. But returns don’t come in a straight line. A fiduciary advisor can look at multiple simulations, analyze a range of possibilities, and help you make educated financial plans.
3. DCA – Dollar-Cost Averaging
This financial term is a strategy that invests a fixed dollar amount or percentage over any time period. When prices are higher, this fixed amount will buy less shares, and when prices are lower, you will buy more shares. If you’re contributing to a 401(k) on a pay-period basis, then you’re already practicing dollar-cost averaging automatically, which can help take some of the emotion out of investing, and ensure that you’re saving for the future every month, no matter what. It’s also one way to help you buy more shares when prices are lower—which is often a good strategy.
Volatility scares some folks away from investing in the market, but, as we’ve discussed before, the market tends to trend up in the long run. Strategic rebalancing is one of the best ways to deal with the inherent peaks and valleys of the market. When we talk about this financial term, we’re setting established risk parameters within your portfolio so that if some of your assets appreciate, we move a pre-determined amount of your money into another asset that might be down, thus rebalancing your overall investment picture. It might seem counterintuitive to “sell some of your winners” but this helps ensure that one asset class does not become too large of a portion of your portfolio and expose you to risks you hadn’t expected. Time and time again, this strategy proves more trustworthy than trying to “time the market” based on current events, or just running away from the market altogether during a downturn.
5. RMD – Required Minimum Distributions
The IRS (you probably know that one!) bases this financial term on a table it publishes that determines how much retirees have to withdraw from their retirement plans or Individual Retirement Accounts (IRAs) every calendar year. Generally speaking, it comes in to play once you hit age 70½. At Keen Wealth, we make sure our retired clients keep a close eye on this number, because if you don’t withdraw your RMD, you can get hit with a penalty amounting to 50% of what you were supposed to take out. And that’s on top of the tax you already owe! Ouch!
6. ARM (Adjustable-Rate Mortgage)
If you have an ARM, it means the interest rate on your mortgage might adjust, up or down, each year. If you budgeted your retirement spending, you might end up paying more each year on your mortgage payment if you have an ARM and interest rates go up.
One of our mantras at Keen Wealth is, “Try to limit surprises in retirement.” That’s why we recommend that our clients try to steer clear of ARM mortgages, especially as you’re nearing retirement. Paying a fixed-rate mortgage that’s already factored into your monthly budget will put you in a better position to adjust when the unexpected does happen.
7. EPS (Earnings Per Share) and PE (Price to Earnings Ratio)
When deciding if we think a company is a good investment candidate for our clients, the amount the company earns on every share is one indicator of how a company is doing. For a big-picture take, we divide the current cost of a share by the EPS and look at the ratio between the two. Typically, the lower the PE ratio, the more reasonably-valued the company might be. If the PE ratio is high, it might reduce the “margin of safety” we like to see when making an investment.
8. BS (Belief System)
OK, so this isn’t strictly a financial term, but one of the things we're most interested in when we sit down with clients is their Belief Systems. We ask about family history. What was it like growing up for you? Did you have any good or bad experiences with financial people? Did you have anything happen in your life that was a turning point in how you handled your financial affairs? Our clients at Keen Wealth are much more than just a jumble of numbers, acronyms, and financial terms on a page. We want to understand how you got to where you are, so that we can help make a plan that will get you where you want to go.
Bill Keen on Financial Terms ...
“If you aren't familiar with these key financial terms, ask your fiduciary advisor to help you sort out the jumble."
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Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
KWMG, LLC’s dba Keen Wealth Advisors (“company”) is an SEC Registered Investment Advisor located in Overland Park, KS. The company and its representatives may only conduct business in those states where registered or where excluded/exempt or from licensure. For registration information please contact the SEC or the state securities regulators for the states where the company is notice filed. A copy of the company ADV is available upon request. Advisory services are only offered to clients or prospective clients where the company and its representatives are properly licensed or exempt from licensure. No advice may be rendered by the company unless a client service agreement is in place. This information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy and is for illustrative purposes only. Clients and prospective clients must consider all relevant risk factors involved with each strategy, including costs or fees, and their own personal financial situations before trading.
The views outlined in the book, Keen on Retirement Engineering the Second Half of Your Life, are those of the author and should not be construed as individualized or personalized investment advice. Any economic and/or performance information cited is historical and not indicative of future results. Economic forecasts set forth may not develop as predicted.
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