The Questions That My Spouse Usually Asks

What does that mean?

As an investment advisor with well over 25+ years in the financial services industry, I am often asked “…what does that mean” when communicating with people outside and sometime within our industry. I must therefore be very mindful in my day-to-day communications to not use financial terms / jargons.

The purpose of this article is to try to simplify some of the many terms that we use daily so that they become more common place. What is a bull or bear market? Do I have a healthy net worth? When do I start the decumulation phase of my life? Can I earn a rate of return that is higher that inflation? What is this asset allocation thing that I keep hearing about? What is a 60/40portfolio?

Here are some simple definitions of regularly used terms.

Bear Market
A bear market is the opposite of a bull market and describes pessimistic market conditions. During a bear market, people are more reluctant to invest, and the value of the stock market drops. A bear market can indicate the start of an economic recession.

Bull Market
Bull market is a term that describes optimistic market conditions, where prices are either rising already or are expected to rise. In a bull market, more companies are entering the stock market and people are investing more, so it usually marks the beginning of an economic boom.

Net Worth
Your net worth is an expression of how wealthy you really are. It’s your assets, in other words anything you own that has financial value – such as the money in your bank account, your home and car, and your investments – minus your liabilities, which are what you owe – such as your mortgage, line of credit, loans.

Accumulation Phase
The Accumulation phase refers to a period one’s life in which they are saving for retirement. The accumulation happens ahead of the decumulation phase when they are retired and spending the money that they have saved.

Decumulation Phase
Decumulation is the drawdown of savings to provide an income stream in retirement. Since retirees no longer earn a regular income, they instead rely on accumulated savings to finance their retirement lifestyle.

Inflation
What is the purchasing power of my dollar today in 5 years? Inflation refers to how prices rise over time. A high inflation rate means that things become more expensive more quickly, so that your dollar won’t be buying you as much in the future as it does today. You need to take inflation rates into account when you budget for the long term.

Inflation rate was at 5.7% in February 2022. [source: Stats Canada March 17^th, 2022]

Asset allocation
Asset allocation is a form of diversification, which in turn means that you’re putting your financial eggs in various baskets. With asset allocation, you spread your money across different forms of investment, for example a savings account, a mutual funds, ETF, stocks, and possible alternatives.

What is a 60/40 portfolio?
60/40 portfolio is an investment strategy where 60% of your portfolio is allocated to equities [stocks, ETFs…]  and 40% to fixed income [bonds]. This traditional portfolio strategy was meant to solve the twin objectives of long-term capital appreciation and capital preservation. The merits of this strategy have come into question of lateas some analysts believe that it can no longer achieve it desired objective… this strategy should be discussed with your investment advisor for more clarity.

Capital gain
A capital gain is basically making a profit. If you sell something [say your stock for more than you paid for it], it’s a capital gain. Capital gains are taxable in Canada, so you need to list them on your tax return the details of which you can be obtained from your investment advisor and or accountant.

Capital loss
A capital loss is just what it says: you’ve lost money on your investment. In other words, you’ve sold something for less than you had initially paid for it. Capital losses affect how much income tax you will pay.

Prime rate
The prime rate is the basic interest rate that banks and other lending institutions use for setting their variable interest rates. If you take out a loan with a variable interest rate, the amount of interest you pay will go up and down along with the prime rate.

Credit report
Your credit report is a report of how much debt you have and whether you’ve been repaying what you owe in a timely manner. You can get a credit report for free. Two common reporting agencies in Canada are TransUnion an Equifax. This report will include your credit score. If you have a good credit score, financial institutions will be more willing to lend you money.

Mutual fund
A mutual fund is a collection of investments managed for you by an investment company. The company will buy and sell stocks, bonds and other assets on your behalf and you don’t have to keep track of each investment, making it a good choice if you’re just starting out as an investor.

TFSA
A tax-free savings account is an account that can be held in both Canadian and or US dollars in which contributions, interest earned, dividends, and capital gains are not taxed when withdrawn.

I have chosen to call this account a tax-free investment account as the name “savings account” has mislead many people in believing that you can only use this account for savings, not realizing that you can invest in mutual funds, ETFs, securities (stocks), bonds etc. This account is available to individuals ages 18 and older in Canada and can be used for any purpose. The cumulative TFSA limit as of January 1^st, 2022, is $81,500.

My hope is that the above definitions will make it a little easier for you to understand some of the terms that we as   financial / investment advisors use on a regular basis which sometimes can slip into our daily communications with you.

Written By: Leric Bishop