Investment jargon busting: what you really need to know

The investment industry is fond of jargon. Deciphering this alphabet soup of acronyms can give the impression that investing is complex and impenetrable. It may even deter charities from making the best long-term decisions for their reserves. Much like flatpack furniture, the clearer the instructions, the better the outcome.

While it is our job to understand and interpret the detail, it is worth getting to grips with some key concepts. This can help unlock some of the complexities of investment markets. With this in mind, we look at five pieces of jargon which are worth understanding.

Five to understand

1. Volatility

Volatility is the extent to which the price of an asset moves around. It is used as a proxy for risk – so higher volatility would be higher risk. However, this isn’t exactly true because a stock that moves up very rapidly has the same volatility as a stock that moves down very rapidly, but they may not mean the same thing to an investor.

2. Diversification/asset allocation

This is how different assets – bonds, shares, property, cash – are blended in a portfolio. The ideal is to build a portfolio that suits the investor’s overall goals and is robust in different market conditions. A more risk-averse investor, for example, would have more in bonds and less in stock market investments. Asset allocation may also change over time and with income needs. A diversified portfolio will hold a range of different assets, including cash, bonds and shares. This means it remains resilient at each point in the business cycle. If stock markets are performing poorly, high quality government bonds should do well. As well as ensuring that their overall portfolio is diversified, it is worth investors ensuring that the sources of income are diversified, generated by bond, equity and/or property holdings. 

3. Total return approach versus income only

Under a total return approach, a charity might spend all of the income it receives from its investment portfolio and an element of the capital gains it generates. With an income only approach the charity would only spend the income generated by the portfolio.

4. Target return and time horizon

It is important to know what you want your investment to achieve (target return), and how long you have to achieve those goals (time horizon). This influences the amount of investment risk you can take and how much you can allocate to higher growth but more volatile areas such as emerging market equities.

5. Benchmarks

The idea of a benchmark is to provide a comparative measure against which someone can judge the portfolio’s positioning and performance. The benchmark should match the investor’s long-term goals – be that long-term capital growth or income.

It is important not to be distracted by jargon or let it turn you off investment altogether. The alternative is to have a high weighting in cash, which may feel like the straightforward option, but will not protect against inflation and may see your portfolio lose money in real terms over time.

Please get in touch if we can help: Keith Burdon, Head of Charities, Scotland & NI

Evelyn Partners Investment Management Services Ltd keith.burdon@evelyn.com

RISK WARNING

Investment does involve risk. The value of investments and the income from them can fall as well as rise and investors may not receive back the original amount invested. Past performance is not a guide to future performance. 

DISCLAIMER

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.