Reference
Index Investing Glossary
Short, plain-English definitions of the terms used throughout WealthGuides. Each term links back to the articles that explain it in more depth.
401(k)
An employer-sponsored retirement account that lets employees contribute pre-tax (traditional) or after-tax (Roth) income, often with an employer match, subject to annual IRS contribution limits.
Asset allocation
How a portfolio is divided among asset classes — typically stocks, bonds, and cash — based on goals, time horizon, and risk tolerance.
Asset class
A broad category of investments (e.g., stocks, bonds, real estate) that share similar characteristics and behave similarly in the market.
AUM (Assets Under Management)
The total market value of investments a fund or firm manages on behalf of clients.
Basis point
One-hundredth of one percent (0.01%). Fund fees are often quoted in basis points — 20 basis points equals a 0.20% expense ratio.
Benchmark
An index or standard (e.g., the S&P 500) used to measure a fund's or portfolio's performance.
Bond
A debt security where an investor loans money to an issuer (government or corporation) in exchange for periodic interest payments and return of principal at maturity.
Bond fund
A mutual fund or ETF that holds a portfolio of bonds rather than a single bond.
Bull market / Bear market
A bull market is a sustained period of rising prices; a bear market is a sustained period of falling prices, typically defined as a 20%+ decline from a recent high.
Capital gain
The profit realized when an investment is sold for more than its purchase price.
Capital gains tax
Tax owed on a realized capital gain. Long-term rates (assets held over one year) are typically lower than short-term rates.
Compound interest
Interest calculated on both the original principal and previously accumulated interest, causing growth to accelerate over time.
Diversification
Spreading investments across different assets to reduce the impact of any single investment's poor performance.
Dividend
A portion of a company's or fund's earnings distributed to shareholders, typically on a quarterly basis.
Dividend yield
Annual dividend payments expressed as a percentage of the current share price.
Dollar-cost averaging (DCA)
Investing a fixed dollar amount at regular intervals regardless of price, which averages the purchase price over time.
DRIP (Dividend Reinvestment Plan)
An arrangement that automatically uses dividend payments to purchase additional shares rather than paying them out as cash.
Expense ratio
The annual fee a fund charges, expressed as a percentage of assets invested, covering management and operating costs.
ETF (Exchange-Traded Fund)
A fund that holds a basket of securities and trades on an exchange throughout the day like an individual stock.
Fiduciary
A person or entity legally obligated to act in a client's best financial interest.
Index
A hypothetical basket of securities representing a segment of the market (e.g., the S&P 500 represents large U.S. companies), used to measure market performance.
Index fund
A fund designed to track the performance of a specific market index by holding the same, or a representative sample of, the index's securities.
IRA (Individual Retirement Account)
A tax-advantaged retirement account individuals can open independently of an employer, available in Traditional and Roth versions.
Large-cap / Mid-cap / Small-cap
Classifications of companies by market capitalization (total share value) — roughly, large-cap exceeds $10 billion, small-cap is under $2 billion.
Market capitalization
The total market value of a company's outstanding shares (share price × number of shares).
Mutual fund
A pooled investment fund priced once per day after market close, purchased directly from the fund company rather than traded on an exchange.
Rebalancing
Adjusting a portfolio back to its target asset allocation after market movements have caused it to drift.
Required Minimum Distribution (RMD)
The minimum amount that must be withdrawn annually from certain retirement accounts starting at a specified age, per IRS rules.
Risk tolerance
An investor's capacity and willingness to endure declines in portfolio value in pursuit of higher long-term returns.
Roth IRA
An IRA funded with after-tax dollars, where qualified withdrawals in retirement are tax-free.
S&P 500
An index of approximately 500 large publicly traded U.S. companies, widely used as a benchmark for the U.S. stock market.
Sector
A group of companies operating in the same segment of the economy (e.g., technology, healthcare, energy).
Tax-loss harvesting
Selling an investment at a loss to offset capital gains tax owed elsewhere in a portfolio.
Total return
An investment's gain or loss including both price appreciation and income (such as dividends), typically expressed as a percentage.
Traditional IRA
An IRA funded with pre-tax (or tax-deductible) dollars, where withdrawals in retirement are taxed as ordinary income.
Tracking error
The difference between a fund's performance and the performance of the index it's designed to track.
Volatility
The degree of variation in an investment's price over time; higher volatility means larger, more frequent price swings.
Yield
Income generated by an investment (interest or dividends), expressed as a percentage of its price or value.