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Definitions

Active Investing: an investment strategy involving frequent buying and selling of assets in the portfolio in response to or anticipation of changes in the market.

Asset Allocation: the proportion of assets in a portfolio in each asset class (equities, fixed-income, and cash & equivalents).  Determining the right allocation for you involves taking into account your goals, risk tolerance, and investment horizon.

Diversification: Lowering the overall risk in an investment portfolio by owning a wide variety of assets.  Here’s the rationale for this: significantly different assets will likely respond differently to the same event (i.e., they aren’t highly correlated). This means that some assets will change in value differently compared to others (or even change in the opposite direction) in response to a market event.  Owning some assets of each kind dampens the volatility in the value of your portfolio.

Index: a group of stocks or other investment vehicles that are grouped together and their value is tracked over time.  The index is meant to represent a particular sector of the entire stock market so changes in the index reflect changes in that sector.

Index Fund: a type of mutual fund with a portfolio that matches or tracks the components of a market index.

Nominal Return: the percentage growth you get on an investment before factoring in inflation.  Contrast with Real Return.

Passive Investing: an investment strategy designed to maximize long-term growth by reducing turnover (i.e., the buying and selling of assets in that portfolio), thus avoiding many of the trading fees associated with more active strategies.

Portfolio: the sum total of investments that you have in all asset classes (i.e., equities, fixed-income, and cash & equivalents).

Real Return: the percentage growth you get on an investment after you factor in the effects of inflation.  In recent years, inflation in Canada has been pretty steady around 2% but, historically, it has been about 3%.  Contrast with Nominal Return.

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