In every industry there are words or “lingo” specific to that industry. The investment community is no different. In fact, it can be very confusing deciphering what means what.

There’s many websites that offer definitions of investing lingo, but you can subscribe to one that will send you a new definition every day which is an automatic reminder that there are new investing words to learn all the time. Even if you already know some of the words in the investment industry, it acts as a great reminder or refresher.

Investing Lingo

Here’s a link that you can subscribe to and get new financial and investment words delivered to you by email.  Browse to InvesterWords.com and subscribe to their daily email.  You’ll receive one word a day to your inbox and you’ll start learning the lingo slowly over the long haul.

Here 7 investing words that will help you at Smart Saving and Investing:

1. Mutual Fund – A mutual fund is basket of investments.  That basket of investments could hold stocks, bonds, gold, etc.

2. Roth IRA – A Roth IRA is an Individual Retirement Account where you can invest and your withdrawals during retirement are tax free.

3. Annuities – An annuity is a contract between you and an insurance company, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.

4. Bonds – An investor loans money to an entity (corporate or governmental) that borrows money for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities.

5. Retirement Plan – the setting aside of money or other assets to obtain a steady income at retirement. The goal of retirement planning is to achieve financial independence.

6. 401K – A 401K is typically a retirement plan offered by your employer.

7. 403b – A 403b is a retirement plan offered by universities, civil government, and not-for-profit employees.

Another great investment lingo resource is the U.S. Securities and Exchange Commission.

When you invest, you are taking some risk.

So if you think you don’t like risk or you think you don’t have any risky investments, then look again. You are taking some risk when you invest.

Below are 10 attributes of Investment Risk:

1. Market Risk

This is the ups and downs of the market. When the market experiences big swings up and down, especially down, this can make a lot of folks sick. The sicker it makes you feel the more you should look at your portfolio and adjust it so you can handle the wild swings of the market. This could mean that you invest a higher percentage of your portfolio in bonds, which are a less risky type of investment.

2. Inflation Risk

The cost of living goes up. If you invest in something that returns 2% and inflation goes up 4% then you’ve lost 2% of the value in your investment. My parents and parents-in-law thought they would be able to live their retirement years with $100,000.00. Back then, 1930s thru 1940s, $100,000.00 made people feel they were rich forever.

3. Opportunity Risk

Opportunity Risk is when you decide to invest in one type of investment, you’re also deciding not to invest in others. So if you commit money to a certain investment and it goes down in value, you’re stuck in that investment and are not able to participate in another investment that might be more attractive.

This is especially apparent when you purchase your own bonds for instance. You could be stuck in a 10-year bond and you want to get out because of high interest rates. You would then be forced to sell for a loss. It’s much better to invest in bond funds because the fund manager has the ability to invest in many different types of bonds.

4. Reinvestment Risk

Reinvestment Risk has to do with timed investments like CDs and bonds that you purchase yourself. A mutual fund manager has the ability to diversify a portfolio of these types of investments by selecting from a larger basket of different types of CDs and bonds to reduce the risk.

5. Concentration Risk

Diversification, Diversification, Diversification. Don’t concentrate your investment dollars in one type of investment. Read my article here on Diversification.

6. Interest Rate Risk

When the Fed messes around with the interest rates moving them up and down, the markets react. The value of bonds go up when interest rates go down. The value of bonds go down when interest rates go up. Keeping a well diversified portfolio will reduce the affects the Fed’s have on your portfolio.

7. Credit Risk

“The Credit Crunch” is what we’ve been in lately. The financial sector has taken a hit. The financial sector includes lenders like Countrywide Bank. On another note, I’m watching that sector with everyone else because it just might be getting ripe to pick. Since I write about options at this site that’s how I’d play it if something comes up that looks interesting.

8. Marketability Risk

Having the ability to sell you investment(s). This pertains to a low interest in stocks, bonds or CDs that you may personally own. By “low interest” I mean not enough buyers. This is reduced immensely if you invest in a mutual fund.

9. Currency Translation Risk

The value of the dollar goes up and down in the international market depending on what country. This is one reason why it’s good to just have 10% of your portfolio in the international market.

10. Timing Risk

The market goes down and you feel uncomfortable about it so you sell one of your investments that you shouldn’t sell – bad timing.

What to do

Invest in mutual funds and you’ll reduce a lot of this risk. Not completely, but enough to make you sleep at night while your money is working hard for you.

When purchasing mutual funds don’t let the covers direct you.

Scenario: You’re standing in line at the grocery store or you’re at the bookstore and there it is in big bold letters – “THE BEST FUNDS TO INVEST IN NOW!!“. You buy the magazine and read a bit about the top performing funds and then you go buy them or sell what mutual funds you have and buy the ones recommended in the magazine. Hey, why not, if this popular magazine is recommending it, it’s good enough for me. You’re “Chasing the Covers”.

While that move might be best for you, it probably isn’t. You might have the personality that drives you to be in “THE BEST FUNDS NOW!!” all the time. So you end up chasing the so called “BEST FUNDS“. You could do this over and over as you see the different money magazines recommending the best funds to buy right now.

Besides driving yourself crazy, you end up driving up fees, trading in and out of the “best funds”. A good rule of thumb to use is, if you’re in funds that are in the top 25% of the “best funds”, then that’s okay. What you’re going for with mutual funds is consistent, long-term returns. What you don’t want to be doing is trying to be in the top 3, 5, 10 or 15 funds all the time.

This is like day/week/month trading your mutual funds. I watched someone do this years ago and it’s just not right. This person thought they were getting the best returns of the day and beating everyone else based on the news of the day.  Not true.

Use the financial magazines to learn more about saving money, investing money, best places to retire, opinions on stocks, bond, ETFs and more.  Financial magazines are great to keep up on the latest financial new but not good to use as investment advice on what you should and shouldn’t be investing in right now.

Here are some of the latest financial news magazines to help you keep up on the latest saving and investing news.

Risk Tolerance is what allows you to sleep at night.

Imagine how you would feel if your Roth IRA had $500,000.00 and you lost 10% in one day. So let’s say on Monday you check your Roth IRA value and you see a big fat $500,000.00 in your account, then on Tuesday you see $450,000.00. You just lost $50,000.00 in one day. Ouch!!

Well, you have to remember that’s the way of the markets. If you can stomach those type of losses and realize that the markets do what they do overtime, go up and down and recognize that they really do go up historically, you’ll be fine. But, that’s a big emotional step for some folks and it takes some getting used to.

It’s also a reason why we have to spread our risk over different asset classes and styles. With mutual funds we want to spread our investments over different asset styles – large growth, large value, small growth, small value, some international, and some…the list goes on and on for the types of investments we can hold.

Asset classes include equities (stocks), bonds, fixed income and cash. Stocks can be held inside mutual funds as well as bonds and fixed income investments. Mutual funds are the way to go for most folks as they work their way through life. Mutual funds allow you to spread your risk over many types, styles or classes of investments to lower your risk while investing your hard-earned money.

Your risk tolerance at age 70 is going to be different than at age 30. A 70 year-old person who’s retired or getting close to retiring will want extremely low risk investments or no risk at all to protect what they do have. A 30 year-old investor might be able to tolerate a lot of risk because there’s plenty of time to recover from any losses they experience in their retirement portfolio.

Take this Risk Tolerance Quiz to get you thinking.

Compounding or Compounding Interest is a process where your money earns money on its own over time. This is compounding and it’s a powerful process for investors.

Over time, small amounts of money can grow into a substantial amount of money through the process of compounding. Compounding includes the reinvestment of what your money has earned. So as your money “makes” money, that earned money is reinvested and continues to grow. When the process repeats for a long period time, your money grows automatically.

Let’s take an example. For this example we’ll say we have $10,000.00 invested in something. That something earns 10% in one year so your $10,000.00 after one year is worth $11,000.00. Our money, $10,000.00 made $1,000.00 over the course of one year all by itself. You can calculate this by taking 10,000 times .10 which equals 1,000. You add the 1,000 to 10,000 and you’ll come up with 11,000.

$10,000.00 x 0.10 = $1,000.00.

0.10 is ten percent and is also notated as 10%.

Now let’s look at those two parts of our investment as Principal and Interest. Our principal was $10,000.00 when we first started and our interest is $1,000.00. That is, the interest earned. But guess what? After one year of earning 10% interest, our interest is now added to our principal. So in the second year our $10,000.00 is $11,000.00. In the second year our $11,000.00 is the principal that will make money. That’s called compounding or compounding interest.

Like I mentioned earlier, the money that was made is reinvested to make more money. So the money we made, $1,000.00 is added or reinvested to make more money, in this case, $11,000.00.

Are you with me? Good. Read through it again if you don’t understand this concept of compounding.

Let’s keep going. Let’s say our new amount of money to invest is $11,000.00 for the second year and as luck would have it our money earns another 10% in the second year. So does that mean we make another $1,000.00 the second year? No. Because of compounding (also known as compounding interest) we make the 10% on our $11,000.00 which is $1,100.00.

So now we add the newly earned $1,100.00 (interest earned) to our $11,000.00 (also know has our principal) and we have a grand total of $12,100.00 after the second year of earning interest on our initial investment of $10,000.00.

To drive the concept of compounding home, play with some numbers using this Financial Calculator.