Part of developing a savings ethic is also learning the fundamentals of investing. Many already have the knowledge basics to begin investing and saving but do not put it to practical use in their daily life. Also, there are some words, vocabulary, and phrases that those associated with this industry use that is not part of the vocabulary people outside of the Financial and investing world use in their daily life. I am going to address some of those to assist in the goal of comprehension and understanding. The definitions will be coming from the "Investopedia" database. If there are any specific questions on words or phrases that any of you would like clarification on please email those to me.
Words for this week:
Absolute Return Vs. Relative Return Vs. Annual Return
Absolute return is the return that an asset achieves over a specified period. This measure looks at the appreciation or depreciation, expressed as a percentage, that an asset, such as a stock or a mutual fund, achieves over a given period.
Absolute return differs from relative return because it is concerned with the return of a particular asset and does not compare it to any other measure or benchmark.
In general, a mutual fund seeks to produce returns that are better than its peers, its fund category, and the market as a whole. This type of fund management is referred to as a relative return approach to fund investing. The success of the asset is often based on a comparison to a chosen benchmark, industry standard, or overall market performance.
Relative return is the return an asset achieves over a period of time compared to a benchmark. The relative return is the difference between the asset’s return and the return of the benchmark. Relative return can also be known as alpha in the context of active portfolio management.
This can be contrasted with an absolute return, which is a standalone figure that is not compared to anything else.
An annual or annualized return is a measure of how much an investment has increased on average each year, during a specific time period. Annual-return statistics are commonly quoted in promotional materials for mutual funds, ETFs, and other individual securities.
The annualized return varies from the typical average and shows the real gain or loss on an investment, as well as the difficulty in recouping losses. For instance, losing 50% on an initial investment requires a 100% gain in order to make up the difference. Because of the sizable difference in gains and losses that can occur, annualized returns help even out investment results for better comparison.
Please email us for any definitions, and explanations of words or phrases that you would like to have. You will be assisting us in providing clarity to the language that we use daily. I find myself looking up words from Doctors, Lawyers, Politicians, and Teenagers. Trying to put in context some of the things that I hear them say.
Words for Next Week........ Annuity / Annuitization / Annuitant