Today’s Prep:
Do you know the difference between large cap and small cap funds? What are basis points? This episode will discuss various financial jargon to help translate what these really mean.
Equipping Points:
What did they just say? Some of these financial terms can get thrown around but not everyone knows what they mean. On today’s podcast we’ll try to break it down so you can feel at ease and informed the next time you’re in a financial conversation.
People sometimes get confused by asset allocation. It’s about allocating your assets into different types of stocks, not just all-in-one. For instance, you’ll want exposure to large cap stocks, mid cap stocks, small cap stocks, and within those, international stocks as well, not just one of them. The best performer last year is not always the best performer next year. What do those different terms mean? Which one carries more risk?
When accounts go down, you might notice your risk tolerance isn’t as high as it seemed when things were up. What’s your risk tolerance? Remember that your definition of aggressive or moderate might be different than Wall Street’s definition of risk. Understanding your risk tolerance is critical to building you plan to see how much you can really tolerate.
If you say something costs 100 basis points, what does that really mean? When would you hear the term basis points and why does it matter when making your decisions?
Finally, what are qualified accounts? This means it is qualified from a tax code. If you have a qualified plan, those are things like an IRA, 401(k), TSP, 403(b). All of these are qualified or protected from taxation until you take it out.
Listen to the entire episode or click on the timestamps below to skip ahead to a particular term.
0:47 – Sometimes financial jargon comes up.
1:30 – What is asset allocation?
2:55 – What is your risk tolerance?
5:47 – What are basis points?
6:26 – What’s small cap, mid cap, and large cap?
7:22 – What are qualified accounts?
Today’s Takeaway:
“Diversification and asset allocation go hand-in-hand, they’re not the same thing but one is trying to fulfill the other.“
-Eric Peterson
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