Welcome to the first of a series of articles by registered teacher Clara Kim, JUNO’s educator. Clara’s passionate about financial education and is on a mission to help Kiwis get better with money. Join her as she helps you learn about a new topic every month. This month, we’re learning about important investment words.Benchmark. Capital gains. Diversification. What do these terms mean? And why should I learn them?
Articulacy (using words well) is the currency of communication. The better we express what we know, the easier it is to communicate our thoughts, feelings and actions to others. It also helps us understand what others are trying to communicate to us.
How does this relate to financial education? If we don’t know what financial terms mean, it’s difficult to make informed decisions about money.
Imagine you’re baking a cake and need to borrow sugar from your neighbour, but don’t know the word ‘sugar’. Instead, you show them a picture. Your cake may end up being delicious and sweet, or a salty mess. Your neighbour thought they knew what you wanted. But more knowledge, and articulacy, would have removed all doubt.
This is why we at JUNO use plain English, so our information is clear, concise and easy to understand. We even won a Plain English award for our JUNO KiwiSaver Guide.
The finance industry, however, like most industries, has and uses a specific list of words called ‘jargon’. All of them have meaning within the industry, but little or no meaning outside it. We don’t want you to assume or guess what the terms mean, and risk getting salt when you need sugar. Or, worse, give up and not make a financial decision at all. So we’ve set out some of the key jargon terms below so you can develop your financial capability and articulate, and get, what you need.
Active management: Investment strategy where managers or a management team actively buy and sell investments to try to out-perform the investment benchmark. In times of volatility, active managers can take steps to help protect your investment, like holding more cash.
Benchmark: A reference point to which managed fund performance can be compared. A benchmark usually reflects the types of assets, and risk, of the fund it is being compared to. For example, if you hold only Australian shares, you might use the performance of the ASX200 (the top 200 companies on the Australian stock exchange) as your benchmark.
Capital gains: The increase in value of an asset, like a house, over time. This is usually measured by the difference between the current market value and what you paid for it. This is common with property if you paid $500,000 for a property and then sold it for $600,000 a few years later, the capital gain is $100,000.
Compounding interest: Compounding interest helps supercharge your savings. You earn interest on your balance which makes your balance bigger. When you get interest on a bigger balance the dollar value of the interest is also bigger. Which makes your balance even bigger, and so on. This positive cycle is the compounding effect. Note there is no guarantee your balance grows every year. But the longer you are invested, the more likely you will experience compounding.
Diversification: Having a mix of investments, which helps reduce your risk. It’s not having all your eggs in one basket.
Dividend: A dividend is where a company will pay out some of its profit to its shareholders. If you held 100 shares in a company, and the dividend was $0.50 per share, you would receive $50 back.
Interest: What lenders are paid by borrowers, for using the lender’s money. For example, if you borrow money from the bank, like a loan, you pay them interest. If the bank borrows your money, like from a term deposit, they give you interest.
Managed Fund: Where money is pooled with other investors’ money, and invested by a fund manager in different types of investments. Rather than holding the shares directly, you own a portion of the pool. As the value of the underlying assets increases or decreases, so too does the value of your share.
Passive management: Passive management is where a manager is trying to match the return on a market index, not outperform it. Passive managers should track up and down with the market. They should also have lower fees than active managers.
Return: What an investor earns on an investment during a certain time period. Your return will be driven by capital gain as well as any cash returns like interest or dividends.
Risk: Risk means uncertainty you will achieve your investment goal, typically because the value of your investment moves up and down; or sometimes because you lose some, most or even all of it.All investments, including KiwiSaver, come with risk. Taking on more risk should mean the potential for higher returns over time, but also potentially larger losses if the market suddenly changes.
Published 19 September 2019
By Clara Kim, registered teacher and JUNO's educator
Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read our Product Disclosure Statement here. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. We recommend you speak with a financial adviser before relying on the content. All content is correct at time of publication date.