Less Financial Jargon, More Clarity for Investors

4 years ago

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By Mariam Bartlettt

The amount of financial jargon used by financial advisors, especially in the retirement plan space, can become overwhelming and intimidating very quickly. If you can relate to this, you are not alone. The general public, according to a recent Empower Retirement survey, often misunderstands words that are commonly used by financial providers, employers and others in the retirement planning industry. Below are a few examples defined in plain English.  

Traditional: A traditional tax-advantaged account is a way to save for retirement that gives you tax advantages. Contributions you make to a traditional tax-advantaged accounts may be fully or partially deductible, depending on your circumstances. Generally, amounts in these accounts (including earnings and gains) are not taxed until distributed. Therefore, the taxes are deferred. Examples of Traditional tax-advantaged accounts include but are not limited to Traditional IRA’s, SEP IRAs, Traditional 401ks.

ROTH: A ROTH account holds your retirement investments and encourages you to save by offering you a tax benefit. Although these contributions are not tax deductible, the investment earnings grow tax free, which allows for tax-free distributions in retirement. Examples of ROTH accounts include ROTH IRAs and ROTH 401ks.

IRA: An Individual Retirement Account (IRA) is a tax-advantaged account that is designed to help you save for retirement. There are two different types of IRAs: Traditional and Roth IRAs.

Deferral: This is simply the percentage of your paycheck that you contribute into a 401(k) plan or the amount of funds contributed to a Traditional tax-advantaged account on which taxes will be deferred.

Defined Contribution: This term sounds a bit odd, but easy to understand when broken down. When an individual decides to contribute a percentage of their paycheck into their 401(k), you may hear the plan called a ‘defined contribution’ plan, which simply means a workplace savings plan.

Basis Points: This one takes a while to understand, especially if you don’t hear it all the time. In finance, individuals use this term to avoid ambiguity in discussions about rates. Basis points are used to understand percentages under 1%. One basis point is equal to one one-hundredth of one percentage point (.01%). Therefore, 100 basis points = 1%.  You may see the expenses you pay for your workplace plan referred to as a certain basis point (or percent) of assets.

Asset Classes: Asset Class refers to a type of asset an investment (fund) may invest in. For example, five friends walk into a bakery and buy a treat. There are 5 total asset classes and each of them represent a dessert. So, let’s say stocks are donuts, bonds are muffins, real estate is cookies, commodities are cupcakes and cash is pie. Now because each friend buys a different dessert, which has a different taste and satisfies each person differently, we cannot truly compare them without taking the differences into account. Same is true about comparing how a fund performs. If I am comparing my fund to another fund, it is important that the comparisons are equal. Participants often compare how a fund performs without regard to the asset class the fund is intended to invest in or the objectives of the fund. So, it is important to understand the asset class the fund invests in in order to understand how well that fund is doing versus other funds in the same asset class.

Dollar-cost averaging: When you invest in your 401k plan, you have the option to invest a fixed amount of money at regular intervals over a long period. So, when you receive a paycheck, a fixed amount will be invested on a weekly or monthly basis in your 401(k) This investing technique means you invest when the market is up and when the market is down allowing you to take advantage of different prices over time and hopefully avoid “chasing” returns or trying to time when to invest.  Over a period of time, studies have shown that dollar-cost averaging can have a positive impact in the overall return of a portfolio.  

Risk: This is a term that some are comfortable with, while others maybe not so much. Risk is often expressed as “volatility.” Volatility is the movement of an asset moving quickly down or up in price in a short period of time. At its core, risk measures the probability of loss or exposure to loss of investment. Risk will vary based on a multitude of factors.   

Glide Path: You may hear this term when someone speaks about a certain investment option available in your retirement plan called a Target Date Fund, or TDF.  The “Glide Path” refers to how the TDF reduces risk over a period of time, moving the fund from high risk (stocks) to lower risk (bonds) assets.  The “target” for the fund is typically age 65, which will correlate to the date in the fund –e.g. Target Date 2050 (a participant is expected to turn 65 in, or around the year 2050).  The younger, or further away, the participant is from the year 2050 the more risk (conceptually) the participant can take on.  As the participant nears age 65 (the year 2050) the fund reduces the risk.  Kind-of like gliding down a slide, the higher the slide, the more perceived risk, as you slide toward the bottom of the slide, there is less perceived risk.

Vesting: You may hear this term when you learn about the money your employer is putting into your retirement account to help you save for your future. Vesting just refers to an employees’ entitlement (or ownership) to the money their employer has deposited into their retirement account.  When an employer’s match contribution becomes “fully vested” it means an employee will receive 100% of the employer money after a stated period of time. A match contribution refers to a matching dollar amount contributed by an employer to the retirement savings account of an employee who makes a similar contribution, usually to a 401k plan.

Portfolio: Think of a portfolio like an account that holds the various investments in your retirement plan.


Cabana LLC (dba “Cabana Asset Management” and “Cabana Retirement Solutions”), is an SEC registered investment adviser with offices in Fayetteville, AR and Plano, TX The firm only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV, Part 2. A copy of which is available upon request or online at https://www.adviserinfo.sec.gov/.

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June 22, 2022

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This material may only be distributed in its original format and may not be altered or reproduced without the prior written consent of CabanaThe opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.  

This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal.  

Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser with offices in Fayetteville, AR and Plano, TX. The firm only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV Part 2A or Form CRS. A copy of which is available upon request or online at www.adviserinfo.sec.gov/. 

Past performance is no guarantee of future results. All investment strategies have different degrees of risk and the corresponding potential for profit or loss. Asset allocation and diversification will not necessarily improve returns and cannot eliminate the risk of investment losses. “Target Drawdown” is merely a descriptive term used to describe the general strategy and objective of the portfolio, it is not a guarantee, nor should it be construed to suggest safety or protection from loss. There is no guarantee that portfolio performance will remain consistent with the targeted drawdown parameter. While risk tolerance and targeted “drawdown” are identified on the front end for each portfolio, Cabana’s algorithm does not take any one client’s situation into account and there is no guarantee that Cabana’s strategies will be suitable for any investor. Investors and advisors should not simply rely on the name of any portfolio to determine what is suitable. It is the responsibility of investment advisors to determine what is suitable for their clients. Cabana manages assets on multiple custodial platforms. Performance results for specific investors will vary based upon differences in associated costs and asset availability.  

Cabana claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a trademark of the CFA Institute. The CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To receive a GIPS Report and/or a firm’s list of composite/pooled fund descriptions please email your request to info@thecabanagroup.com.

All recommendations made in the prior 12 months are available upon request. Cabana’s allocation history is available here. For additional information regarding our services, including performance disclosures and award methodology, please visit https://thecabanagroup.com/disclaimers/. 

Commonly used index/benchmark definitions:  

All indices and categories are unmanaged and an individual cannot invest directly in an index or category. Index returns do not include fees or expenses. Benchmark indices will likely materially differ from Cabana’s portfolio strategies. Detailed information as to how the returns are calculated can be obtained online from the following link: https://thecabanagroup.com/disclaimers/performance-reporting-methodology/. 

Morningstar’s Moderate Target Risk index  follows a moderate equity risk preference and is based on well-established asset allocation methodology from Ibbotson Associates, a Morningstar company.  

Morningstar’s Tactical Allocation category includes portfolios that seek to provide capital appreciation and income by actively shifting allocations across investments. These portfolios have material shifts across equity regions, and bond sectors on a frequent basis. 

The S&P 500 Index is a market-capitalization weighted stock market index of 500 widely held large-cap stocks often used as a proxy for the U.S. stock market.  

The Russell 2000 and 3000 indices are market-capitalization weighted stock market indices that include, respectively, 2000 and 3000 of the most widely-held stocks and are often used as proxies for the U.S. stock market. 

The Nasdaq Composite Index is a market-weight capitalization index that covers more than 3,000 stocks listed on the Nasdaq Stock Market. What is the Nasdaq Composite, and What Companies are in It? | Nasdaq