I am as guilty of it as anyone. When one has been in any industry for a long time, they speak the lingo. Problems arise when one continues to speak it to people who aren’t in the industry. The results can be confusing.
Example: our previous receptionist who, overhearing us asking the head trader for quotes using security symbols PEP for Pepsico, or AMZN for Amazon, thought we were speaking in code to keep things confidential from her.
The same thing happens with clients. We work every day with a jargon of abbreviations, acronyms, symbols and securities, and we get way too comfortable and forget that others do not.
I’d like to clear up some of the confusion.
I recently had a client that confused ‘yield’ with ‘return.’ This is important because yield isn’t the only way to get returns or income. In finance, yield is synonymous with interest or dividends on a security. Dividends are paid on stocks and usually utility stocks have good yields. For example, at current market levels AT&T (T) has a $2 dividend on each share and that equates to a 6.215 percent annual yield. Bonds, CDs, and bond funds pay interest. Your savings account also pays interest. On average, dividends are better tax-wise than interest, because qualified dividends are taxed at the 15 percent rate while interest is typically taxed at a person’s income level. While you can pull strictly the yield (dividends and interest) from an account to provide income in retirement, you can also set a fixed percentage, regardless of the yield. Studies have found doing a growth and income portfolio and pulling a fixed percentage regardless of yield is the most successful for retirement. This is partially due to the fact that concentrating on securities with yields leads to less diversification in a portfolio.
Yield is only part of a security’s return. Return also includes the gains and losses on a security. The yield on AT&T sounds great but the loss so far this year is -17.30 percent. Gain on a security comes from an increase in the selling price. You can have unrealized or realized gains (or losses). Unrealized gain (or loss) is how much the stock is up or down from your purchase price (cost basis) but you still own it. A realized gain or loss is whether the security is more or less than the cost basis when you sell it. A realized gain or loss outside of a retirement account leads to tax consequences. Long-term gains (assets held more than a year before selling) are taxed at the lower 15 percent tax rate.
Returns are a combination of yield and gains/losses. When comparing returns, always be sure you are getting ‘returns net of fees.’ This means whatever expenses were involved (advisory fees, commissions, mutual fund fees, etc.) are taken out of the return so you know what you really made.
Many investors have mutual funds, typically in their retirement accounts (401k, IRA etc.). However, many people don’t know what they are. Mutual funds pool investors’ money and invest it into securities. They are advantageous because you can put a small amount in and get lots of diversification. Mutual funds are also called open-end investment companies because there are not a finite amount of shares. Mutual fund shares are issued and purchased by the mutual fund company that created and manages the fund. Thus, you will get the Net Asset Value (NAV) when you sell your mutual fund shares. NAV is the value of the assets minus liabilities of the fund. Therefore, each day the fund values their underlying securities as of the close of the market (4 p.m. Eastern for stocks) and will pay NAV per share for any investor wishing to redeem shares of their fund holdings.
This is just some of the jargon found in my industry. There is much more, but if you ever have a question when one of us ‘speaks the lingo’ I encourage you to ask for clarity. A clear line of communication is beneficial for all parties.
*Nothing contained in this article should be interpreted as a promise or guarantee of earnings or investment results nor a recommendation for the purchase or sale of any security or sector. Past performance is no guarantee of future results.
