Some common Investment Terms simplified

Asset allocation refers to the method of deciding how much money to invest
And in which investment vehicle (i.e. stocks, bonds, mutual funds etc.)

Diversification Based on the wisdom of “not putting all your eggs in 1 basket” it is a strategy where an investor puts money in several kinds of businesses or tools to protect his investments in case the market suffers a downturn. This could be a mix of shares in the stock market, mutual fund, or government securities like bonds and treasury bills. To illustrate a point, going back to basics (of investment) If your risk profile is conservative, supposedly so should your investments be, but because the lesser the risk-the lesser returns, you could also be losing out on potential income offered by higher instruments. The solution: Diversify-use 2 or more tools to achieve a common goal, say child’s future education, you start out with safer (but lower income) savings like a typical educational plan, then as your income increases, you compliment it with a higher return (but riskier) type of instrument, like Mutual Funds, to compliment the (the low income)educational plan, or if you’re the aggressive type, you start with the Mutual Funds, then back it up with an educational plan, as a back up support. (this is just an example to illustrate a point)

Portfolio A person’s investment in several instruments like stocks, equities, mutual funds, bonds, treasury notes, etc. consists of his portfolio – a term which refers to the investment collectively.
Fund manager A person who advises or helps manage an investor’s portfolio. Some financial institutions provide professional fund managers to clients as part of their investment package.

Liquidity refers to how fast investments or other assets can be converted to cash. Investments in the stock market and mutual funds are normally considered liquid because they can be easily sold to the stockbroker or issuer, while real state investments and jewelries take a while to dispose of .

Principal is the amount an investor originally uses invest, the premium he paid, or to buy securities or stock shares. It can also mean the amount a borrower applies for a loan, It also refers to the value where simple interest rates are computed, and so is the amount paid for the issuer of treasury notes and bills (usually the government) upon maturity.

Return on Investment refers to how long it takes to recover the amount of money an investor has put into a business or other money-making vehicles – higher returns at lesser time is ideal.

Term refers to the length of time your money has to be tied up to a deposit account or investment vehicle, which could either be for short, medium or long term. Terms could indicate the investment’s yield(interest or earnings – e.g., for bonds longer terms may offer higher interest rates) while pre termination (the withdrawal ,closing, and redemption of the investment before the agreed specified term, time deposits, and mutual funds for example ) may require you to pay a certain amount as fee or penalty.

Inflation refers to the increase in the prices of commodities in relation to the capacity of people to purchase such goods, to illustrate, say, if we had a 10% annual inflation, that means, that the same basket of assorted groceries that you bought for P100 last year will now cost you P110 – it is said that money may no longer be able to buy in the future what it can afford today. A Higher inflation rate diminishes the ability of the investment to yield higher returns. if the inflation rate is at 6-7% and your investment is earning you less than that, you’re basically losing money.

The Power of Compounding
One of the things you need to know about building wealth is the power of making regular periodic investments and reinvesting rather than spending the profits.

The results you will with this discipline are surprising. Let’s say you start with nothing, and decide putting P5000 of your income into an investment account every month, and you commit not to touch your money in investment. That means you can’t take withdraw any funds until you’ve reached your long-term goal. Based on an 11.8%, interest on average, annually over the past 10 years. If you achieve that same return, you’d have P1,140,000 after 10 years. But it gets better. You’ll have P4,860,000 if you stick with the plan for 20 years and a cool P17 million in 30 years.

The process described here is a combination of two powerful investing strategies: compounding and peso-cost averaging.

Compounding is simply reinvesting rather than spending your profits. By doing that; you capture the future returns on your reinvested profits as well as on your original investments.

Cost averaging was actually adopted from gambling, (in Las Vegas) it goes like this-If you had a $1000 to gamble in a casino, you should only bet $1 dollar per deal, that way you increase your odds a thousand times, but you should never gamble more than a dollar even if you keep winning, and stop when you’ve already bet a thousand times, (the original capital you brought in-it also involves self discipline) that way, if you win, you’ll end up with more than $1000 but if you loose, you won’t loose more than a thousand. Taken in the financial context of investing it means that you buy stocks at the same amount at regular intervals, fixed monthly investment buys more shares of a mutual fund or stock when prices are low, and fewer shares when prices are high. For instance, if you were investing P5000, you’d get 500 shares if a stock were trading at P10, but roughly 555 shares if it dropped to P9. Done regularly on the long run, it drives the average cost down, so you make more money.


Discipline Required. The hardest part of implementing these strategies is making the regular monthly investments. It’s easy to procrastinate adding to your account if the market is down or if you could use the cash for something else.

The best way to make sure that the regular investments happen is to automatically deduct a fixed amount from your monthly salary and directly invest it in a mutual fund account every month.

SOURCE:Inquirer.net, "Take Charge of your Money".