Investment Must-Knows

5 Financial Terms Investors Are Sure to Encounter

Investors have to understand the language of the financial industry in order to competently and actively grow their money and savings. Many of these financial terms contribute to the contradictory, and ultimately confusing industry clutter.

“Buy and hold”

Among the most common, most accepted investment strategies, "buy and hold" advises investors to find a good company, invest in it, and hold it for the long term without much regard to the stock's performance or the performance of the larger market. The theory is that even if the price drops, a good company will eventually recover. By trying to time the market, or selling out of fear when the price drops, investors will miss out on the recovery and potentially stunt their growth.

The idea should be to capture the best part of a company’s stock price growth — whether it's two years or 20 — no matter the company. Investors should buy and hold, but only until it no longer makes sense to keep the stock. In some cases, the growth S-curve — and therefore stock market opportunity — is shortened.

“Buy Low, Sell High”

The ultimate goal of investing, "buy low, sell high" is as common a phrase as "buy and hold" — the problem is, the two philosophies directly contradict each other. It is, of course, good policy to buy something when it is inexpensive and then sell it for a profit when the price rises. But how is that possible for investors who are told to buy a stock and hold it forever no matter what happens?

Hopefully, investors will work with financial advisors who buy low and sell high on their behalf. A critical ingredient is cash. Investors must have enough cash on hand — at least 20 to 40 percent or more of their portfolios — to buy when stocks are low. When stocks reach or flirt with all-time highs, investors can generate that cash by selling between 20 and 40 percent of their stocks when prices are high or more when markets are on the verge of crashing.

“We Don’t Time the Market”

When an investor chooses a new advisor, that investor is buying into the advisor's philosophy. "We don't time the market" is a phrase that describes a common investment firm philosophy and statement made to the prospective investor. It means the firm might put a new investor's money into their philosophy starting on day one, whether or not the time is right for entering their positions. It might also mean they aren’t going to try to time the purchase of new investments on of the four to six annual dips available or avoid investing at an all-time high and wait for a lower price.

Recent stock market crashes have triggered the emergence of professionals touting their crash-management expertise. The “we don’t time the market” crowd does not believe crash management is possible, and instead choose to buy, hold and ride out crashes. With that there is asset devastation and hopefully recovery. While that has worked pretty well for 55 years-1945-2000, debatably not so well the last 16. From 1896 to 1945 buy and hold did not work well at all.

“Death Cross”

The "death cross" sometimes occurs when markets are in a correction. This phenomenon takes place when the price of a company or market (white line), a commodity or the stock market in general falls below the 50-day (green) and 200-day (blue) moving averages.

Chart

A moving average is a trend line based on average prices from the last 50 or 200 days as examples. Rallies generally take place when the market is above the trend line. When the market is below the trend line, it signals a correction or a crash. The transition is critical. Even more so is understanding the magnitude of the transition. In other words, the difference between a correction and a crash. Investors who understand it may be able to avoid excess loss.

The problem is that the market falling below a trend line doesn't necessarily indicate a pending crash, and could instead just signal a correction. The market has fallen below those two trend lines 70 times, in 120 years, and while many were severe, only 13 are what we would consider deadly crashes, meaning retirement lifestyle altering, if mismanaged.

"Managing Volatility"

Volatility is when a market or stock price experiences quick, wild up-and-down percentage swings. If a market goes down 10 percent and up 10 percent in the same month or quarter, that market is experiencing volatility.

Investors and financial professionals are naturally spooked by large, fast swings. This is because they’ve recently experienced two large, destructive crashes in just 16 years. The first crash lasted from 2000, ended in 2003 and didn't recover until 2006. The second started in 2007, lasted until 2009 and didn't recover until 2013.

12 of the first 17 years of the 21st century have been unproductive.

People naturally want to protect their investments during market volatility, losing less on the down swings and gaining more on the upswings. In response, investors have been bombarded with articles and emails about “managing volatility” as the buzzword. This buzzword is unfortunately many times followed up with the same investment strategies that didn’t work the last time but wrapped inside a word we all have come to care about now.

Conclusion

Investors must understand what is being said by the most commonly used language of the financial industry. Much of this language contributes to industry clutter, which can mislead investors. When investors know the language and the concepts these phrases are designed to convey, investors are better positioned to make more informed and hopefully better decisions.

Article tracking number 1-512023

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