Are you confused when your broker says your stock is headed for "bagel land?"
Not sure whether to worry that your bank loaded up on "CDOs-Squared?"
Do you fall into a trance after reading the first paragraph of a mutual fund prospectus?
It's not just you. The financial world is filled with jargon that even some financial professionals admit they don't always understand. Some sales people use complex terms as a way to impress customers.
The consequences of this are serious. We carry more of the burden today of managing our own money so it lasts our lifetime, and jargon intimidates or keeps some of us from investing while causing others to jump into the wrong investments.
Every industry has its own jargon, of course. (Just try talking to the IT guy at work.) Jargon is shorthand that makes it quicker and easier for those in the same field to talk to one another. Some of it can't be avoided. But there is no need for financial language used with consumers to be as murky as it often is. Why do mutual funds, say, continue to use the term "load" when it would be much clearer to say "sales charge?"
In a recent AARP Financial survey, most of 1,200 adults polled were far more confident about finding the right surgeon for a major operation than choosing the right investment. Overwhelmingly they said it was easier to understand computer instructions, IRS tax forms and car insurance policies than a mutual fund prospectus.
The most troubling findings: At least half of the adults said they didn't read financial literature because it was too difficult.
Many admitted to making wrong investment decisions because of the jargon barrier. Nearly a third, for instance, regretted investing in something they didn't understand. Another third failed to invest or waited too long because the information was confusing. And nearly one out of five paid a penalty because they didn't comprehend the rules of pulling out of the investment.
These consumers say confusing lingo is used on purpose. The vast majority believed financial professionals and investment companies spout jargon to make a product seem more impressive or to distract from the fees that will be charged. And they suspected investment pros used high-falutin' language to make small investors feel less confident about managing finances on their own.
"I would agree," says Cory Janssen, co-president of Investopedia, an online dictionary with 8,000 words and counting.
Companies' annual reports, he says, often use language to steer shareholders away from the bad news. If you were in investor relations, Janssen says, which would you rather tell shareholders: "We lost a boatload of money" or "Pro-forma adjusted earnings are up?"
Even professionals get tripped up by terminology.
How else can you explain how the so-called smart money on Wall Street got so badly burned in the subprime mortgage mess? They didn't understand what they were investing in and lost billions.
"It's amazing how fast Wall Street can churn out these terms, never mind the products behind them," Janssen says.
As the mortgage crisis unfolded last year, Investopedia added terms like collateralized debt obligation squared, or CDO-Squared. A CDO is a security backed by bonds, loans or other assets. A CDO that's backed by a pool of CDOs is a CDO-Squared.
Some terms are clever and reflect our changing finances.
Chances are you know a "stripper," or might be one yourself. That's someone who stripped all the equity out of a home and spent the cash on, say, flat-screen TVs or other goods.
How many of you have KIPPERS at home? That stands for Kids In Parents' Pockets Eroding Retirement Savings, typically adult children who have finished school, found a job, but still live with mom and dad.
And if your broker says your stock is headed toward "bagel land," that's a warning that the price is headed toward the shape of a bagel - zero. This might push you to the "puke" point, where you sell a falling stock no matter how big the loss.
The AARP survey found that investors often were confused by some of the basics, such as basis point, index fund and diversification.
A basis point is 0.01 percent or one one-hundreth of a percent. It's often used to describe interest rate changes. If your interest rate goes from 4 percent to 4.25 percent, it went up 25 basis points.
An index fund is a mutual fund that buys shares in companies that make up an index, like the Standard & Poor's 500 index. The goal is to get similar returns as the index.
And diversification is putting your money in a variety of unrelated investments so that if one tanks, your entire portfolio doesn't go down. ("Diworsification" is buying a lot of investments that have the same strategy or similar holdings so that you make things worse.)
Mac Hisey, AARP Financial chief investment officer, says the survey is "a wake-up call to the entire industry." Investment companies need to see that jargon is a barrier and find ways to better communicate with investors, he says.
But don't count on the industry becoming fluent in plain English.
"Everybody has an obligation to educate themselves," says James Angel, an associate finance professor at Georgetown University. "Some people spend more time analyzing washing machines than they do picking their retirement fund, even though retirement funds have much more of an impact on their quality of life."
There are plenty of beginner personal finance books and online educational tools.
And if a financial adviser is talking circles around you, speak up.
"If you don't understand, keep asking your adviser," Hisey says. "That's what your adviser is paid to do."
Note: Last week's column mentioned that dividends from real estate investment trusts are taxed as ordinary income. The majority are, but many are taxed at the long-term capital gains tax rate of 15 percent.
USEFUL FINANCIAL TERMS
There's a lot of jargon out there that you don't need to know. Here are terms that are actually useful:
* Dividend yield: A measure of how much income a stock produces. Yield is calculated by dividing the annual dividend by the stock price. A $20 stock with a $1 dividend means a 5 percent yield.
* Total return: Your rate of return that includes any gains or losses in the stock price plus dividends received.
* Price-earnings ratio: P/E, for short. A common measure of how much investors are paying for a company's earnings. It's calculated by dividing a stock's price by the earnings per share. A P/E of 20 means investors are paying $20 for every dollar of earnings.
* Coupon: The interest rate on a bond when issued.
* Yield to maturity: The total return you will receive from the bond if you hold it until the date your principal is repaid.
* Bond rating: A letter grade indicating the likelihood that the company or government issuing the bond will return your principal. "AAA" is the highest quality bond and safest. "C" bonds are risky and called "junk" bonds.
* Load: A sales charge you pay when buying or selling a fund. No-load funds don't charge these fees.
* Expense ratio: The percentage of the fund's assets used to pay its expenses each year. A high expense ratio reduces your return.
* Style: The fund's investment approach to selecting stocks. A fund might invest only in big or small companies. Or it might focus on companies with fast-rising earnings - growth stocks; or undervalued companies that often pay high dividends - value stocks.
* Asset allocation: The percentage breakdown of stocks, bonds and cash in a portfolio. An asset allocation should reflect your tolerance for risk and years to invest.
* Rebalancing: Returning a portfolio to its original asset allocation. A rising stock market can turn a half-stock, half-bond asset allocation into 70-30 stock-bond split. By rebalancing, you move money out of stocks and into bonds to return to the 50-50 allocation.
* Dollar cost averaging: Investing the same amount on a regular basis. You end up buying fewer shares when prices are high and more shares when prices fall.
* Deductible: The amount you must pay out-of-pocket before insurance kicks in.
* Co-payment: A flat fee you must pay at the time of service, say, $20 for a doctor's visit or $10 for a prescription.
* Network: A group of medical professionals and hospitals under contract to provide services at a discount for an insurance company's customers. Go out of network, and you'll pay more for service.
Credit cards :
* Annual percentage rate: The interest rate you would pay on a credit card balance. It's stated as a yearly rate. The better your credit history, the lower your APR.
* Default APR: The rate a card issuer can charge if you miss a payment or go over your credit limit.
* Grace period: The number of days you have to pay off your card balance before finance charges kick in. Usually it's 20 to 25 days.