Customer Service
We'd like to hear your comments and answer your questions about this site or your subscription to Jim Lowell's Fidelity Investor. Please contact us by filling out the form below. Please note that fields marked with an asterisk* are required.
Correlation Tool
401(k)
Updates | Correlation Tool
401(k) Updates
Specific Models For 401(k) Plans, January 2013 Quarterly Updates
Are you covered? Jim covers 401(k) plans in his monthly newsletter and now updates each covered plan's models quarterly. Here are the links to the plans covered so far in your monthly issues of Fidelity Investor and links to the quarterly updates.
If your plan is covered here AND you know that fund choices have changed since the original publication date, please send us the fund list update by sending an UPDATE email.
Fidelity Investor News
Subscribe
How it Works
Welcome to Fidelity Sector Investor...
It's great to have you with us!
This note includes some important material that will help you get started quickly in the Fidelity Sector Investor plan. And a special report about Sector investing follows the Getting Started information. Again, thanks for joining us in this pursuit of greater returns on our money by investing in Fidelity Select sector funds.
FSI Plan Details
Getting Started
To follow the Fidelity Sector Investor portfolio plan, you allocate assets in one fund in each of seven categories (six Select categories and one International category).
Trades are made every 31 days. On the Thursday before the 31-day period comes to a close, trades will be announced along with a recommended trade date. Trades are made when our proprietary FSI Rating is higher for the newly purchased fund than for the fund we are selling, counting Hold Handicaps favoring existing positions. Note: when making a trade, be sure to "exchange" one fund for another.
Here's an example (these are NOT the actual funds to choose right now):
The week that you start, the plan holds:
24.8% in the Consumer category: Food & Agriculture
11.1% in the Cyclical category: Paper & Forest
11.2% in the Financial category: Insurance
13.1% in the Health Care category: Biotech
14.7% in the Technology category: Electronics
13.6% in the Utilities category: Natural Gas
11.5% in the International category: Japan Small Companies
NOTE: If you are starting this plan with close to the minimums for each fund, this could affect the total dollars that you will have to commit to the plan. In the example above, if you were using your retirement account dollars to follow the allocation (minimums for each fund of $2,500), the 11.1% smallest allocation to Paper & Forest would have to be the minimum $2,500. Percentages allocated for each the other funds would follow in the same fashion with your investment totaling $22,523 in all seven funds (well above the $17,500 for equal portions of each of seven funds).
Not a Math Whiz?
This is how you figure out percentage and dollar amounts. If you have $25,000 to invest, using the example above, you'd use this formula to calculate the dollar amount for the Food & Agriculture fund: $25,000 x 24.8% = the amount to invest (or 25,000 x 0.248 = 6200). So you'd invest $6,200 of the $25,000 in the Food & Agriculture fund. Use the same formula for each different percentage amount to determine the dollars to invest in each fund. For the smallest percentage: 25000 x 0.111 = 2775 so you'd invest $2,775 in Paper & Forest fund.
This is a trading plan. You will be moving dollars from fund to fund. Because of this, it is best to follow this plan in a tax-deferred account to defray the possible additional taxable trading costs.
This plan is designed to augment a diversified investment portfolio. It is not recommended for the majority of your investment portfolio, but only for a portion of your overall investable assets. With the minimums required for most Fidelity funds at $2500 and with the requirement of holding seven funds in the plan, you should be able to commit at minimum $17,500. See NOTE above for explanation of why we recommend to start for having $25,000 to accommodate most fluctuations in holding percentages.
Over the backtested past history of this plan, the average holding period is four (4) months for Select funds, 10 months for international funds. The portfolio averages 19 trades per year (an average of 2.9 per Select sector, and 1.2 for the internationals). About 1 in 6 trades results in an early redemption fee (0.75% for Selects sold in the first 30 days, and 1.5% on Internationals sold in the first 90 days). All our return calculations take these fees into account.
When You Will Receive Your Fax or Email
You will receive your fax or email weekly, Thursday by 8 p.m. Eastern Time. It will contain any changes to my recommendations, and a complete list of fund returns.
Trades are made every 31 days. On the Thursday before the 31-day period comes to a close, trades will be announced along with a recommended trade date. Trades are made when our proprietary FSI Rating is higher for the newly purchased fund than for the fund we are selling, counting Hold Handicaps favoring existing positions. Note: when making a trade, be sure to "exchange" one fund for another.
Customer Service
If you do not receive your fax or email, or if you have another question regarding this service, please contact 1-800-290-6577 or send an email message to members@fidelityinvestor.com.
FSI Plan Details
(I do this for you but if you want to understand what I'm doing, read this part)
To follow the Fidelity Sector Investor plan, you allocate assets in one each of seven categories (six Select categories and one International category). The plan remains fully invested.
Fund holdings are only Sold when another fund within their category becomes a more attractive Buy.
The plan is rebalanced into equal portions in each of the categories on our first trading day of the calendar year.
The Fidelity Sector Investor system divides the funds into seven categories, as follows: Consumer, Cyclical, Financial Services, Health Care, Technology, Utilities and International. (I exclude the Natural Resources category because it is volatile, poor-performing and not amenable to trend analysis.)
The FSI portfolio holds one fund from each category. This ensures sufficient diversification. Within categories, the system ranks the funds based on short- and long-term momentum. This system holds on to an existing position over trading into a sister fund (based on a marginal momentum advantage), reducing needless and performance-punishing short-term trading fees.
My system scores each Select fund's potential based on 7-day (7 trading days, not one business week) and 50-day returns, and places a positive "handicap" for the fund already being held. Specifically, each fund's score is equal to 2 times its 7-day return, in percent, plus its 50-day return, in percent, plus the "handicap" for existing positions. (Although the 7-day return is weighted twice as heavily as the 50-day return, the 50-day returns still tend to have more effect on fund choice because 50-day returns are generally much greater moves up or down.)
If the "handicap" for existing fund positions is equal to 10 percentage points, it has as much effect as a 10% move on the 50-day momentum number. This 10-point handicap applies to Consumer, Health and Technology stocks funds. A handicap of 15 points applies to the more-interest-rate-sensitive groups: Finance and Utilities, as well as the Cyclical group, since with 11 Cyclical funds to choose from we would otherwise constantly be generating trades based on incremental momentum differences. (History confirms theory here, as Cyclical models have performed much better with this higher handicap.) The handicap is also 15 points for International stocks; this reduces fund trades and provides better returns.
The entire portfolio holds these seven sectors in approximately equal portions. While portion size fluctuates with market performance, sectors are re-balanced annually (at the end of the calendar year). The results, after all trading fees are accounted for, are solidly market-beating (see graph) over time.
Track Record (backtested results prior to year 2000)
|
FSI Portfolio |
S&P 500 |
FSI $100,000 |
S&P $100,000 |
|
| '92Q4 | 9.8% | 5.1% | 109,753 | 105,050 |
| 1993 | 26.7% | 10.1% | 139,075 | 115,639 |
| 1994 | 7.4% | 1.3% | 149,330 | 117,165 |
| 1995 | 36.5% | 37.6% | 203,773 | 161,196 |
| 1996 | 21.4% | 23.0% | 247,399 | 198,207 |
| 1997 | 22.9% | 33.4% | 304,051 | 264,329 |
| 1998 | 30.4% | 28.6% | 396,415 | 339,874 |
| 1999 | 75.2% | 21.1% | 694,519 | 411,587 |
| 2000 | 22.0% | -9.1% | 1,176,713 | 374,133 |
| 2001 | -19.6% | -11.9% | 946,077 | 329,611 |
| 2002 | -18.8% | -22.1% | 768,215 | 256,767 |
Profiting With Fidelity Sector Funds
Bonus Special Report:
Active traders will feel at home using Fidelity Sector Investor's model portfolio, but so too will investors who have a long time horizon, a tolerance for volatility and more frequent trading who could consider this model as a complement to a more diversified growth portfolio.
Fidelity's Select funds are an often overlooked and under-appreciated but nevertheless core strength for Fidelity investors. Likewise, my use of Fidelity's regionally focused foreign funds will fulfill the international weighting of the portfolio.
The Fidelity Sector Investor system divides the funds into seven categories, as follows: Consumer, Cyclical, Financial Services, Health Care, Technology, Utilities and International. (Again, the Natural Resources category is excluded as volatile, poor-performing and not amenable to trend analysis.)
We will always be invested in each of these categories, but don't think that this fact guarantees that we'll hold some "losers." It's amazing that within each category, the return swings can be great. Let's look at some examples. For 2000, here are the differences in returns for the top and bottom funds in each category:
Consumer: Food & Agriculture, +29.8%;
Leisure, -24.4%
Cyclicals: Air Transport, +39.7%;
Automotive, -7.2%
Financial Svcs: Insurance, +53.3%;
Banking, +18.3%
Health Care: Medical Delivery, +67.8%;
Biotech, +32.8%
Technology: Business Services, -1.6%;
Technology, -32.3%
Utilities: Natural Gas, +71.3%;
Telecommunications, +37.4%
International: Europe Cap App, -5.8%;
Japan Smaller Companies, -50.2%
Concerns and Answers
As you can gather from this service, I'm an advocate of investing in Fidelity Select funds. But I also know that many of you have concerns. First many investors think Select funds are too risky to consider. Second, many investors are baffled by the mechanics of investing in them. Let me put those concerns to rest.
Fidelity Select Fund Strengths: When it comes to profiting from sector investments, there's no place like Fidelity. To say that no other fund family comes close to providing the broad menu of sector investment options is true, but it's insufficient to describe the Fidelity advantage that you and I can enjoy. For example, Vanguard has three sector funds. Fidelity provides more than 40 actively managed Select funds, of which we invest in 37.
What about the fund managers whom I've always said were an important part of choosing funds? How does this square with my mathematical method here? Well, among Fidelity's diversified domestic and international funds, fund management is the most important determinant of fund performance. But with the narrowly drawn Select funds, the managers' performance record is relatively less important than the funds' investment objective. I don't invest in or avoid a Select fund based on its fund manager alone when management factors are swamped by other issues.
For example, Automotive may be down this year not because of any flaw in its manager, Robert Bao, but because this sector is suffering declines. The same logic is applicable to the international regional funds where we invest.
Select Fund Risks: Many Fidelity investors-and not just the conservative ones-find sector funds a bit intimidating. After all, taken individually, most of Fidelity's Select funds are among the riskiest funds you can buy. That's because each Select fund invests in a single industry, or related industries, and companies within the same industry tend to move up and down together. Most Selects have more than 50% of their assets in just their top-10 stock positions, so even a single stock's decline can have a big effect. But that doesn't mean that all Select positions add a significant amount of risk to a portfolio.
The Fidelity Sector Investor portfolio has a lower volatility relative to its component holdings, as well as the broader market. That's because the various sector funds do not all closely track each other; often, when one is going down, others are going up. Moreover, some Select funds (e.g., Food & Agriculture and Utilities Growth) can make sense even for the most conservative stock-invested portfolios, as their defensive sectors are considerably less volatile than the market.
As with any fund, you should get the new account kit from Fidelity (call 1-800-FIDELITY or click into www.fidelity.com), which includes the fund prospectus. (All the Fidelity Select funds are on the same prospectus and all the International "targeted" funds have the same prospectus.) Read it before you make a purchase. While you can always just tell a Fidelity rep you've read the prospectus, there's a reason they must ask before letting you buy the fund. If you've read the prospectus, you know exactly what the fund can invest in, and the rules for buying, holding and selling the fund.
Like many Fidelity stock funds, Selects have a short-term trading fee. The Selects' fee is actually among the least onerous: it is only levied on positions held for less than 30 days since their purchase. On these short-term trades the charge is $7.50 plus 0.75% of the amount traded. On positions held for 30 days or more, the exchange fee is a flat $15. And in either case, $7.50 of the fee is waived on exchanges made via automated systems (on the web or by touch-tone phone).
Trading Fidelity Selects and International regional funds or the International funds used, the short term trading fee is as follows. For Europe Capital Appreciation and Europe funds, Fidelity assesses a 1.00% fee for shares held less than 30 days; for Japan, Japan Smaller Companies, and Pacific Basin funds, Fidelity assesses a 1.50% fee for shares held less than 90 days.
Again, all fees are calculated into our returns. I hope that you'll enjoy investing in this exciting world of sector funds. Thank you for joining me on this wealth-building journey.
Remember, if your email address changes, please contact us right away to avoid any interruption in your service. If you have any questions about your service, please call our Fidelity Sector Investor Customer Service team at 1-800-290-6577, or send an email message via the customer service page. Again, thank you for joining me! You'll hear from me again soon with your first Fidelity Sector Investor, so watch your inbox.
— Jim Lowell
Now the legal stuff
IMPORTANT NOTE: To contact you, we rely on the email address you provide us. Please understand that we cannot be held responsible for our inability to contact you (due to changed or incorrect email address information), for your failure to receive or take note of our contact, for the order in which you may be contacted (which is intended to be random), or for any other matter arising out of or relating to the Fidelity Sector Investor service. We reserve the right to modify, supplement or terminate the Fidelity Sector Investor service at any time.
CONFIDENTIALITY WARNING: All Fidelity Sector Investor messages are intended only for the subscriber they are addressed to and may contain information that is privileged and exempt from disclosure under applicable law. Dissemination, distribution or copying of Fidelity Sector Investor messages is prohibited. This includes the use of electronic forwarding of these messages.
Fidelity Investor Model Portfolios
Most Recent Trade Date: April 1, 2013
Reflecting most recent trades in the Aggressive Growth, Growth, Growth & Income, and Income portfolios (effective April 1, 2013).
Fidelity Sector Investor
Attention: The issue downloads are in the Adobe Acrobat PDF format. The Adobe Acrobat Reader software is required to read this download file. You can get the FREE Acrobat software by clicking on the Get Acrobat link.
If you have the Acrobat Plug-in installed into your browser, the report will be shown within this browser window. If you would like to download the report for later viewing just RIGHT-CLICK on the link and select Save Link (Windows) or CLICK and HOLD on the link and select Save Link (Macintosh).
Fidelity Investor Issues
Hotline
Glossary
The following Fidelity Investor Glossary is designed to help those who are relatively new to investing come to terms with Wall Street. At times, it may sound like a foreign language. But it's easy to learn, and it's an essential part of FI's mission to make sure all our members are among the best-informed investors on the Street — both Wall and Main.
Ask Jim
Have a question for Jim? Email him below.
Unfortunately he is unable to respond to every email personally, but he does read them and take them into account as he writes the weekly update.
Help
Thank You
Thank you for your form submission. A member of our team will be following up with you shortly.
FAQ
Got a question about our services? Check out the questions and answers listed below and chances are you'll be able to find what you're looking for right here. And, of course, if you have a question that you still can't find a response for, please e-mail or telephone us. Our address is at the bottom of this page, so please let us know what your questions and comments are.
Contact
We would love to hear your feedback and your questions. Please send us an email below and we will get back to you as soon as we can.
Mailing Address
About
Jim Lowell is the President of FundWorks, Inc., a leading independent research firm covering mutual funds, exchange traded funds, sector, currency, leveraged product and income investing strategies for individual investors and investment professionals.
He is also the Chief Investment Officer for Adviser Investments (www.adviserinvestments.com), a fee-only advisory firm with over 2500 clients nationwide and $2.4 billion in assets under management.
He is Editor-in-Chief of the multiple award-winning independent newsletters, Fidelity Investor and Fidelity Sector Investor, the Editor of The ETF Trader on Marketwatch (www.marketwatch.com), and Editor-in-Chief of The Forbes ETF Advisor by Jim Lowell (www.forbes.com). Lowell has also written several books on investing: Investing from Scratch (revised edition, Penguin, 2006) and What Every Fidelity Investor Needs to Know (Wiley, 2007) among them. Lowell is also a guest investment columnist for Forbes Magazine.
Lowell has been a regular participant and guest host on Fox Business News, and has a nightly appearance on the largest regional news network in the U.S., New England Cable News. He has written and lectured extensively on investing and personal finance for national audiences, magazines, TV, radio, and on-line media including Bloomberg (radio and TV), CNN, CNBC, and PBS’ Nightly Business Report. His market views and opinions appear frequently in such publications as Barrons, Business Week, The New York Times, The Wall Street Journal, Fortune, Investment News, Money and Smart Money to name but a few.
Lowell has passed both his Series 7 and 65 securities licenses. He was educated at Vassar College (B.A.), and holds Master's degrees from both Harvard University, and Trinity College (Dublin, Ireland). In addition to the above, Lowell is involved in charitable works, is a published poet, a former teaching fellow at Harvard University, and former lecturer in the Philosophy/Religion Department at Northeastern University College in Boston. He is an accomplished catch and release sport fisherman.
Home
|
|
Fidelity Investor
|
Fidelity Sector Investor
|
401(k) Focus Model Portfolios for your company's 401(k) plan. (Free with registration.) |
|
What Every Fidelity Investor Needs to Know
|
12b-1 Fee
The part of a fund's Expense Ratio that pays for marketing and/or distribution expenses. Unlike a Sales Load, a 12b-1 fee is ongoing and recurrent. While Fidelity funds do not charge 12b-1 fees, some of their expenses could, under different legal interpretations, fall into this category. At any rate, a fund's total Expense Ratio is more relevant than its breakdown into 12b-1, management, and administrative and other expenses.
401(k) Plan
A retirement plan offered to employees of many for-profit companies. A 401(k) works a lot like a deductible IRA, but with higher contribution limits: $11,000 in 2002 (50 or older can contribute more). One downside: the employing company chooses what investment options to offer, sometimes only a half-dozen funds or so.
403(b) Plan
A retirement plan offered to employees of many government and nonprofit organizations. A 403(b) works a lot like a deductible IRA, but with higher contribution limits: $11,000 in 2002 (50 or older can contribute more). Most of these plans offer many investment options.
Active Management
Trying to surpass the return of the financial market. An active manager would utilize their own knowledge and experience in making investment decisions while looking at market trends and company research.
Adjusted Gross Income (AGI)
Utilized in making the decision on whether an IRA holder qualifies for an IRA deduction. This is shown on a 1040 or 1040a tax form.
ADR or American Depositary Receipt
Securities representing a fixed number of shares of stock in foreign companies. ADRs trade like regular common stocks and are much easier to buy and sell than overseas shares. Many fund managers prefer ADRs to foreign stocks for this reason alone. There are several hundred ADRs available in the U.S.
Advance/Decline Ratio
The number of stocks whose prices have advanced relative to those that have declined over a given day. Typically calculated at the close of the market, this ratio is used to represent the general direction of the market. Since, unlike most market indexes, it weighs all stocks evenly, it is heavily influenced by the performance of small-cap stocks.
After-Tax Contributions
Part of an employee's salary put into a retirement plan that is still subject to Federal income tax.
Aggressive
Investing exclusively for growth and ignoring income from dividends or interest. Also used as a synonym for "risk-taking." While definitely risky, aggressive investing also has the most potential for profits. An aggressive strategy would include investing in small, fast-growing companies. Investing exclusively in long-term zero-coupon bonds is also considered aggressive, at least among bond investors.
American Stock Exchange (AMEX)
The other stock exchange domiciled in downtown Manhattan. The companies that trade on the AMEX are generally smaller than those on the New York Stock Exchange (NYSE).
Annual Report
Yearly report of the overall financial condition (from operations to balance sheet) of a company or mutual fund, which is sent to all shareholders.
Annuity
A form of life insurance policy which can provide tax-deferral to underlying investments (however, usually at the cost of substantial fees). For retirees, annuities can usefully be structured to make payments for the life of the annuity holder making them in a way the exact opposite of life insurance. The advantage of such an arrangement is that the holder of such an annuity won't outlive his savings.
Asked Price
A security's (or commodity's) price as offered for sale on an exchange or the OTC (over-the-counter) market. (See Bid Price.)
Asset
Value attributed to stocks, bonds, real estate, mutual funds, or, in terms of a company, the value of owned equipment or plants. A mutual fund's Net Asset Value (NAV) is its assets minus its liabilities, usually expressed in dollars per share.
Asset Allocation
A strategy for diversifying money in major investment categories (stocks, bonds, cash, and % foreign) as well as particular types of investments within each category.
Asset Allocation Fund
A mutual fund that invests in a wide variety of assets, such as stocks, bonds, money market securities, and sometimes, gold bullion.
Asset Class
Different kinds of investments. Stocks, bonds, and cash reserves are the three main asset categories.
Automatic Investment
A method for investing in mutual funds which enables you to select a specific amount to be withdrawn from your bank savings or checking account on a regular, scheduled basis and invested in a mutual fund. It's a great low-cost way to start investing in mutual funds, since many funds are willing to waive their minimum in order to get your long-term participation in their fund.
Automatic Reinvestment
Typically, the automatic reinvestment of dividends in new shares of a company's stock or a mutual fund. Some companies and almost all mutual funds allow automatic reinvestment. You still have to pay taxes on distributed dividends and capital gains even if they are reinvested.
Average Annual Return
A measure of historical return. The amount per year you would have had to earn to achieve the same total return over the time period in question. If you were up 21% over the last 2 years, your average annual return was 10%, even if your returns were very different in each of the two years. (Confused by 10% + 10% = 21%? See Compound Interest.)
Average Maturity
The maturity of a bond is the date the debt is due and payable. The average maturity of a bond fund is the average of the maturities of the fund's holdings (weighted by size of holding). Typically, the longer a fund's average maturity, the greater its interest-rate risk. Not quite as meaningful a term as a bond fund's Duration.
Back-end load
Also known as a "redemption fee," this is a fee charged when you sell your shares. Either your profit is cut or your loss increased. No matter how you look at it, this load is just as bad as any other.
Balance Sheet
A company's accounting of its current assets, liabilities, and owner's equity at a specified point in time. Found in the company's annual report.
Balanced Fund
A fund that invests substantial portions in both stocks and bonds. A conservative type of Growth and Income fund.
Basis Point
One one-hundredth of a percentage point of yield or return. For example, a bond yielding 6.32% is said to yield 32 basis points more than a bond yielding 6.00%. Sometimes referred to as "beeps".
Bear
An investor who expects a market decline.
Bear Market
A sustained period of falling stock or bond prices with a decline greater than or equal to 20% of value. (A "correction" is generally defined as a decline over 10%.) (see also Bull Market)
Before-Tax Contributions
The allotted part of an employee's salary put into a retirement plan that is not taxed because it is not included in gross income. The before-tax contributions may be rolled over.
Beneficiary
The person to whom death benefits are paid when the owner of an annuity dies.
Bequest
Under the terms of a will, property given to an inheritor.
Beta
The extent to which a fund or stock's value tends to go up or down as the market goes up or down. A growth fund with a beta of 1.5 would most likely go up 15% when the market as a whole is up 10%. (Or down 15% when the market is down 10%.)
Bid Price
The highest price a prospective investor (or market maker) is prepared to pay for a security, usually just under the asked price, the lowest price a seller is willing to accept.
Big Board
The New York Stock Exchange.
Blue Chip
A large, well known, established company whose stock is considered to be a solid investment and safer than other companies' stocks, since a blue chip is unlikely to go bankrupt.
Bond
An IOU issued by a corporate, municipal, or government entity in return for a pledge of repayment of the original face value invested, plus interest payments to be paid on specified dates.
Bond Fund
A mutual fund that invests primarily in bonds.
Bull
An investor who expects a market rise.
Bull Market
A sustained period of rising stock or bond prices. While the market is trending upward, there will be volatility and shorter-term down days (but no declines of 20% or more from the market's peak) (see also Bear Market)
Buy-and-Hold
A long-term strategy that, like its name implies, emphasizes ignoring short-term market moves, and instead holding on for the long term.
Call
When a bond is repaid or "called" by its issuer prior to its maturity date. This usually happens just when the bondholder doesn't want it to (when rates are low).
Capital Appreciation
Profit made by selling a security for an amount of principal greater than when purchased. Contrast with Income.
Capital Gain
Profit made on the sale of securities or property. Federal capital gains taxes are currently capped at 20% for investments held over 12 months, even for investors whose income is taxed at a higher rate.
Capital Gains Distribution
A mutual fund's distribution to shareholders of gains realized on the sale of securities within the fund's portfolio. Typically, the distributions are made once per year, and can affect the optimal timing of your own purchase or sale of the fund.
Capital Loss
When the amount realized on the sale of an asset is less than the amount originally paid for it, the investor has suffered a capital loss.
Capital Preservation
Investors who have already grown their seed money into a harvestable crop want to protect what they've got. Capital preservation refers to the objective of ensuring that the amount of capital doesn't become reduced over time, which in turn means that risks are avoided in favor of a defensive portfolio. Nevertheless, some growth of capital must ensue, if only to be able to safeguard the capital from inflation's toll. Income is also usually sought, to allow periodic withdrawals without depleting principal.
Capitalization
The total market value of all shares of a company's stock.
Cash
The most liquid asset typically thought of in the form of negotiable currency, but including stable interest-bearing short-term money market instruments like Commercial Paper or Treasury Bills.
Cash Account
A brokerage account that has transactions recognized on a cash basis.
Cash Dividend
Taxable cash payments made to shareholders from a corporation's earnings. Some companies issue a stock dividend in lieu of a cash payout.
Cash Flow
A company's net income after expenses, but before accounting for abstract costs such as depreciation. Cash flow is one indicator used by stock analysts to evaluate a company's ability to pay off debt and keep paying dividends or finance expansion.
Certificate of Deposit
Better known as a CD, it is a specified-term, fixed-interest earning debt instrument issued by a bank or savings & loan. A good temporary parking place for cash you will need at a specified date in the near future. (CD maturities range from 3 months to 5 years.) Penalties apply for early withdrawal. Most are insured by the Federal Deposit Insurance Corporation (FDIC).
Certified Financial Planner (CFP)
This certificate, issued by the Institute of Certified Financial Planners, signifies that the holder has passed a series of tests showing the ability to advise clients on a host of financial concerns including banking, estate planning, insurance, investing, and taxes. Be advised that tests are no substitute for experience, intelligence, and integrity.
Certified Public Accountant (CPA)
A person who has passed a rigorous examination process, coupled with relevant experience and state licensing, combine in this certification process to yield one of the more meaningful professional designations for those whose career is focused on accounting, auditing, and tax preparation. This designation is an excellent indicator of a level of proficiency in the aforementioned fields, but is less indicative of the person's ability to advise you on non-tax related investment matters.
Chartered Financial Analyst (CFA)
A person who has passed a rigorous (three-year) examination process, coupled with relevant experience in the fields of economics, ethics, financial accounting, portfolio management, and hard-core security analysis. CFAs stand out among those who would proclaim themselves qualified to analyze an investment's fundamental worth and appropriateness to particular portfolios.
Chartered Mutual Fund Counselor
A new designation offered by the National Endowment for Financial Education, showing a financial advisor's enhanced ability to advise clients on their mutual fund questions and concerns.
Closed-End Fund / Closed-End Investment Company
Contrasted with an open-end mutual fund, which issues new shares per new purchase, a closed-end fund sells a fixed number of shares in its portfolio of securities. Closed-end fund shares trade on the major US exchanges and over-the-counter market. Their market value is determined by supply and demand, which leads to shares being sold at either a premium or a discount to the actual Net Asset Value of the fund's portfolio.
Commercial Paper
Short-term loans to corporations, usually of very high credit quality. Held by taxable money markets, except for those that stick to government securities.
Commission
A fee (usually expressed as a percentage of assets sold or amount managed) charged by a brokerage firm — be it real estate or investment.
Commodities
Generic goods, ranging from grains and other foods to metals, which are traded on several exchanges by traders speculating on supply and demand's effect on the goods' prices.
Common Stock
A share of ownership in a company. Stock prices can rise or fall with the company's fortunes, or even with stock market supply and demand fluctuations (which may or may not be entirely rational).
Compound Interest
Interest earned on previously paid interest as well as on original principal amount. Example: $500 principal at 10% annual interest would become $550 in one year, but going forward, that $550 at 10% compound interest would become $605, after realizing $55 in interest during the second year. ($50 on the original principal, plus $5 on the first year's interest.)
Consumer Price Index (CPI)
A monthly measure of the cost of a fixed bundle of goods that are considered typical consumer purchases.
Contrarian
An investor who examines the investments and trends consensus wisdom is buying into, and invests in their opposite. To a contrarian, the crowd is always wrong. But, you might ask, what happens if there's a crowd of contrarians?
Convertible Security
Convertibles are bonds or preferred stock that can be exchanged for a set number of common stock, at a pre-stated price.
Corporate Bond
Debt instrument (IOU) issued by a private or public corporation, as opposed to a government entity. Corporate bonds typically share the following characteristics: their income is taxable; they have a par value of $1,000; they have a specified maturity; and they're traded (albeit thinly) on one of the major exchanges.
Correction
A modest but significant market decline, usually defined as one bringing the market down 10% to 20% lower than its high.
Correlation
The extent to which a fund and the stock market (usually as measured by the S&P 500 index) tend to move together. An S&P 500 index fund would have a correlation of 99% or 100%. A fund invested in smaller stocks not found in the S&P 500, or which makes big bets on narrow sectors, or which invests heavily overseas, would tend to have a much lower correlation (most likely less than 50%). See also R-square.
Cost Basis
An investment's original cost which is subtracted from the sale price to see if there were capital gains or losses from the sale of the security. It is used for tax purposes.
Coupon
The original interest rate paid on a bond's face (or par) value. A $1,000 par bond paying $50 per year has a 5% coupon.
Credit Rating (consumer)
A report of a consumer's history of timely (and untimely) bill paying, used to determine potential credit risk for mortgages, new credit cards and other loans.
Credit Rating / Quality (bond)
A letter grading of potential risk. Standard & Poor's (S&P) and Moody's are the top rating agencies, and both rate companies based on their ability to repay bondholders' interest and principle. Standard & Poor's ratings of AAA (Moody's Aaa) to BBB (Baa), signify a range of "investment grade" bonds, while ratings of BB (Ba) or lower denote "below investment grade" bonds, more commonly referred to as "junk bonds." The rating of D signifies a bond is in Default.
Currency Risk
The likelihood of an international stock's dollar value fluctuating in reaction to a change in currency exchange rates.
Current Yield
Current yield is determined by dividing a bond's annual interest by its current market price. It differs from the coupon rate in that it accounts for the price paid for the bond (as opposed to its par value). So, for example, while the coupon rate of a $1,000 par bond paying $50 per year is 5%, the current yield of that same bond, if it is bought at $950, would be 5.26%. CUSIP Committee on Uniform Securities Identification Procedures The committee supplies a numeral identification, called a "CUSIP number," for each mutual fund, stock or other security. These lengthy numeric codes are not as well known as the letter codes used by QUOTRON.
Custodian
An organization in charge of and protecting financial assets. For example, a bank is a custodian.
Cyclical Stock
Shares in a company whose main business regularly experiences ebbs and flows in activity, usually tied to economic activity. The auto, chemical, paper and steel industries, for example, are considered cyclical since their earnings tend to fall when the economy slows. Food and drug stocks are typically considered by most investors to be non-cyclical since people continue to eat and demand medical care even during the worst of times.
Cyclical Stock
A stock whose performance is closely tied to the health of the economy. In tough economic times, these stocks falter. In good times, they typically rise rapidly. Housing, cars, and "deep cyclicals" like steel manufacturers, are directly affected by the consumer's (and industry's) willingness and ability to purchase goods.
Debt-to-Equity
A ratio which is calculated by dividing a company's total liabilities by total shareholder's stock in the company, and which is used to help measure a company's ability to pay its creditors if the company's business falters.
Default
Failure of a company or other debtor to make principal and/or interest payments on schedule. A bad thing.
Defensive Stocks
These stocks are the antonym of cyclical stocks, since the company's products tend to be staples (like food) that consumers can't do without (unlike a new car). As a result, their performance is less affected by economic downturns.
Deferred loads (contingent deferred sales fees)
On the surface, a deferred load seems as lousy as a back-end load. But a deferred load is charged by some funds if and only if you redeem your shares before a specified time — typically a few years. While this may not be to your advantage if you're investing for the short-term, the principle of discouraging investors from jumping into and out the market in short shrift is a good one.
Defined Contribution Plan
A retirement plan that proposes a benefit that relies on the total contribution from an employer and his/her employee and the return of the contribution. The employees bare the risk of the investments. This contrasts with Defined Benefit Plans because DBPs offer a guaranteed return where the employer assumes the risk. DBP Benefits are guaranteed by a federal agency called the Pension Benefit Guaranty Corporation.
Deflation
Deflation (not to be confused with disinflation, which is the slowing down in the rate of price increases) is the opposite of inflation, namely, a decline in the general price level of goods and services.
Derivative
A bet on the direction of interest rates or the price of some other security or commodity. Some funds and investors use derivatives aggressively to enhance the yield or potential return of their portfolio, while others use them in an attempt to reduce the risk of their portfolio. Derivatives aren't all bad — but, like a dark freckle, the excessive proliferation of them is a potential warning sign.
Discount
Just like what you find at Wal-Mart, discounts reflect a price reduction in the product or security you're buying at market. For example, relating to bonds, a discount is the difference between the bond's par value and its current market price, where that price is lower than the par value. (In contrast, buying a bond at a premium would mean the current market price is higher than the par value.) For a closed-end fund, a discount is the amount by which the purchase price is less than Net Asset Value.
Discount Broker
A broker which typically charges less (in comparison to full-service brokers) for services rendered — from trades transacted to reports and recommendations issued. There's a wide variance in such costs and services among discounters and deep discounters.
Discount Rate
The interest rate the Federal Reserve Board charges member banks on loans. This rate in turn affects the interest rates on loans consumers will pay, since banks use the discount rate as the benchmark from which they mark up the rate on their loans. The discount rate gets a lot of press only when the Fed is tightening (i.e., increasing interest rates).
Distribution
A payment made to a shareholder. Except for income from municipal funds, distributions are taxable events. Distributions amount to a return of your capital because (except for monthly bond fund dividends) share prices are reduced by the same amount as the dividend. This share price reduction occurs on the ex-dividend date.
Diversification
A strategy for reducing investment risk by investing in different categories and types of investments as well as (within the stock market) different industries and company market capitalizations. Fund managers may buy several stocks or bonds issued by several companies in a wide range of industries to spread out their risk. The objective is to not let one investment have too much of an impact on the entire portfolio.
Dividend
Like automatic reinvestment, the reinvestment of dividends in new shares of the stock or fund. A smart move, even though you will have to pay taxes on the dividend amount (even if you don't receive it in cash).
Dividend Reinvestment Plan (DRIP)
A payment made to a shareholder. Except for income from municipal funds, distributions are taxable events. Distributions amount to a return of your capital because (except for monthly bond fund dividends) share prices are reduced by the same amount as the dividend. This share price reduction occurs on the ex-dividend date.
Dividend Yield
The current dividend paid on a single share of stock divided by the current share price of that share. In terms of portfolios, one would look at the weighted average dividend yield for the stocks held in them.
Dollar Cost Averaging
Investment method in which a specific, equal amount of money is invested on a regularly scheduled basis. This method can reward the investor who employs it, with more shares bought at lower prices than at higher prices, but it doesn't necessarily beat just putting your money to work as soon as possible.
Dow Jones Industrial Average (DJIA or “The Dow”)
A stock market index which is calculated by adding up the prices of 30 large-cap stocks, which results in a potential flaw (according to some critics), namely, its narrow definition and exclusion of newer industries and companies. Nevertheless, this index is the most widely used measure of the market — and it has certainly earned its place as a standard worth watching.
Duration
A measure of a bond fund's interest-rate sensitivity, based on the maturities of the bonds in the portfolio. A fund with an effective duration of 4 should lose 4% if interest rates rise 1%, or gain 4% if interest rates fall 1%. A zero-coupon bond with a maturity of 4 years would have such a duration. Duration estimates are rather amorphous for mortgage-backed securities, whose effective duration can get considerably longer when rates go up and refinancings slow — just when you don't want a longer duration.
Early Redemption Fees
These are only charged within a set period of purchase, usually 1 to 12 months. They differ from Deferred Loads in that they are paid to the fund (not Fidelity or another management company) to reimburse the fund and its shareholders for the expenses associated with heavy shareholder turnover. These are actually a good thing for most shareholders.
Earnings per Share (EPS)
Portion of a company's profit allocated to each outstanding share of common stock. (Total profits divided by number of shares of common stock.)
Economic Indicators
Statistics used to represent the current state of the economy and also to predict (with a meteorologist's accuracy) the direction of the economy.
Education IRA
Now called a Coverdell Education Savings Account, this account started with the goal of paying a child's education. Currently $2000 after-tax dollars can be contributed each year on the child's behalf.
Efficient Market Theory
A theory which suggests that market price reflects market value, meaning that dart throwers and analysts have an equal chance of selecting the best stocks. Contentious, but hardly groundless. See Index Fund and Inefficient Market Theory.
Emerging Markets Fund
Also referred to as developing economies, it is a mutual fund that mostly invests in countries that are in the process of being industrialized. Emerging Markets Funds tend to be very risky so fluctuations in values will, most likely, occur.
Employee Contribution
An employee's contribution to his/her retirement plan and are normally made on a pre-tax basis.
Employer Matching Contribution
Transfer of money between one fund and another within the same fund complex. Usually accomplished by a single phone call. Investors should be aware that the exchange out of one fund constitutes a sale of that fund's shares and is taxable.
Equity
A fancy name for common stock. If you're in the habit of saying "tres good," then by all means call stocks "equities."
Estate Planning
Formulation of a plan including a will, power of attorney, and trusts that execute a person's wishes concerning his/her property before or after death.
Estate Tax
Being taxed for the right to reassign property because of death. The tax is imposed on the deceased's property and not on the inheritor receiving the estate. IRA assets can be included as part of the estate and are able to be taxed.
Estimated Tax
A tax a person has to pay on income such as investment income, capital gains, alimony, and rent because it is not subject to withholding tax.
Ex-Dividend Date
The date on which stocks (or mutual funds) effectively pay out their dividends. Shareholders who own the fund on this date receive the dividend, the share price tends to fall by the amount of the dividend on this date, and automatic reinvestments are made on this date. (However, actual dividend checks may be delayed by several days.)
Exchange
Transfer of money between one fund and another within the same fund complex. Usually accomplished by a single phone call. Investors should be aware that the exchange out of one fund constitutes a sale of that fund's shares and is taxable.
Expense Ratio
The amount investors in a fund pay for expenses incurred in the operation and management of the fund during the year. This expense may be 1% or more. A higher expense ratio reduces the fund's total return; therefore, two funds of equal strength but with unequal expense ratios present a clear choice — opt for the one with the lower expense ratio. An expense ratio is even more important than load, since this figure is charged continually (it is expressed on an annual rate). Even if a fund has a decent past performance, if its expense ratio is high compared to funds with similar objectives, it's likely to be handicapped looking forward. However, fund performance figures already have these expenses subtracted, so don't double-count them by subtracting them from published returns. Note that the infamous 12b-1 fees (which are paid to brokers and other fund salesmen) are included in a fund's expense ratio; you should generally be more concerned with this total expense ratio than with its breakdown into 12b-1, management, administrative and other expenses.
Face Value
Nominal worth of a bond or other security, as printed on its "face." Also known as Par. The security may actually sell for considerably more or less than this figure, especially if it is a long way from maturity. See Average Maturity.
Family of Funds
Group of funds "owned" (that is, managed and operated) by the same investment management company. (Technically, each fund is owned by its shareholders, who could vote to move the fund to another fund family.)
FAST Number
The 1 to 3 digit number used within Fidelity to identify its funds, especially on the Fidelity Automated Service Telephone system.
Federal Funds Rate
The rate on short-term, overnight loans among commercial banks. The Federal Reserve influences the Fed Funds Rate by buying and selling Treasuries in the open market and by changing reserve requirements for banks.
Federal Reserve Board
Group of economists and bankers (led by Presidential appointee Alan Greenspan, who in England might have the title "Lord of the Purse"), which sets short-term interest rates and other factors affecting monetary supply.
Fee Table
A table showing the expenses and fees a shareholder will take on concerning a particular mutual fund. Usually located at the front of a fund's prospectus.
Fees
Fees come in many forms. Here are the most common ones: Load, No-load, Back-end load, Deferred loads, Reinvestment loads, 12b-1, Early Redemption.
Fidelity Performance Index
The Fidelity Performance Index™ is an asset-weighted index, much like the S&P 500 index. But unlike this "stocks only" index, the Fidelity Performance Index™ is the investor's best yardstick for measuring diversified, mutual fund portfolio performance as it incorporates the returns of stocks, bonds, REITs, cash and foreign investments. In addition, many investors own municipal bond funds, which pay a lower yield, but leave them with more money after taxes. The Fidelity Performance Index™ takes all these various financial assets into account.
Fixed-Income Fund
A mutual fund which invests in fixed-income securities such as corporate bonds, Commercial Paper, or GNMAs.
Fund of Funds
A mutual fund whose portfolio consists of other mutual funds. At Fidelity, the Freedom funds are the only such choices, although the fund industry offers many others.
Fundamental Analysis
Analysis of a company and its securities based on hard data from its balance sheet and income statements, sales, earnings, and management, as well as extrinsic economic factors which affect the company's ability to operate profitably. Such analysis can be used as a predictor of future potential. Contrast with technical analysis.Futures Contract
Written agreement to buy or sell a commodity or security for a specified price at a specified future date. May be used for speculation or, on the other hand, as a Hedge against risk.
Global Fund
A mutual fund that invests in U.S. and foreign securities.
GNMA (Ginnie Mae)
A security backed by a pool of residential mortgages. In case of default by a homeowner, credit is further guaranteed by the Government National Mortgage Association, which has the "implicit" backing of the federal government. However, while credit quality is very high, these securities still have significant interest-rate risk.
GOs (General Obligations)
Municipal securities which are backed by the full power and taxing ability of a municipality or state (in contrast with securities backed only by the revenues from a specific project, such as a toll bridge)
Gross Domestic Product (GDP)
The total value of all goods and services provided by U.S. companies within U.S. borders. Since December 1991, this has been the Commerce Department's primary measure of the U.S. economy's size and growth or contraction. An inflation-adjusted measure of GDP is called the "real GDP."
Growth and Income Fund (G&I Fund)
A mutual fund which typically combines the objective of capital appreciation with the generation of some income. Note: some G&I funds are very close to growth funds, offering virtually no income; others look almost like bond funds, with little room for capital appreciation. Match your objective with a G&I fund's actual portfolio.
Growth Fund
A mutual fund that invests in stocks, especially one investing in more growth-oriented stocks paying little or no income dividend. This type of fund seeks to deliver capital appreciation to its shareholders, rather than income.
Growth Stock
A stock in a company characterized by above-average growth in earnings or sales. Growth stocks tend to have a high price relative to earnings, and provide little if any dividend. Growth stocks also tend to have a high beta (or risk), but can offer long-term investors the potential for solid capital appreciation. Contrast with Cyclical Stock and Value Stock.Hedge
Not a rhododendron. A hedge, or hedging, is a strategy which is used to neutralize the risk inherent in an investment. The phrase "hedge one's bets," accurately reflects the objective: to break even whether the hedged assets move up or down. Hedging, which is often accomplished with the use of derivatives, sometimes fails to protect against risks as planned.High
The highest level at which the market or some investment has ever been, or, sometimes, the highest level it's been at in the past year (more exactly known as the 52-week high).
Income
The regular payment of fixed sums in return for the possession of a relatively larger principal investment. Income may be paid on a bond or other loan, or on a dividend-paying stock. Income investments tend to be more stable than investments seeking Capital Appreciation.
Income Fund
A mutual fund that strives for income rather than growth. Usually invest in high-yielding stocks and/or bonds.
Index
A standard or benchmark against which the performance of a market, industry, company, or security (stock, bond, real estate, mutual fund and more) is measured.
Index Fund
A fund whose objective is to match a specific market index (most commonly the S&P 500 stock index). Since most funds fail to beat their relevant index benchmark, an index fund is likely to perform slightly better than most funds in the long term.Individual Retirement Account (IRA)
A personal investment account into which individuals can invest up to $3,000 annually (50 or older can contribute more), and which grows sheltered from taxes. For some investors, deposits into IRAs qualify as deductions against income. Used primarily for retirement savings since you are heavily penalized for withdrawals made before the age of 59 and a half.
Inefficient Market Theory
This theory holds that a smart, informed investor stands a better-than-even chance of outperforming a chimp and a dart board or a stupid, ill-informed investor. Contrasted with the Efficient Market Theory, this one encourages research and analysis in the attempt to beat fellow investors to the punch.
Inflation
The rise in the general price level of goods and services. There are two common inflation measures: The Consumer Price Index (CPI) tracks consumer goods prices, and the Producer Price Index (PPI) focuses on industrial goods and materials. Inflation decreases the purchasing power of your dollar in the long run. The cause is usually attributed to an increase in the money supply.
Initial Public Offering (IPO)
The first offering of a company's stock to the public.
International Fund
A mutual fund that invests in securities that are traded in markets that are outside of the U.S. They offer long term growth and capital.
Investment Company
An arrangement whereby investors pool their assets into a corporation or trust which then employs professional management to invest the assets according to a stated objective. Mutual funds are one form of investment company. See Mutual Fund and Closed-End Investment Company
Investment Objective
A fund's aim, as stated in its prospectus. Investors should choose a fund whose objectives match their own — although they need to go beyond the stated objective and examine the fund's history of actually hitting what it's aiming at.
IRA
An Individual Retirement Account which can provide you with a tax deductible retirement investment plan — or, at least, a tax-deferred one. Penalties apply for early withdrawal.
Joint Account
Two or more adult shareholders that are registered to the same account. They need to have an equal interest in the account so in the event of one shareholder dying, the other shareholder(s) will inherit the property automatically.
Junk Bond Fund
A fund made up of higher yield and high-risk bonds. These are bonds that are either issued by solid companies that have fallen upon hard times and lost their investment quality ratings or have been issued originally with interest rates that are higher than the average by financially troubled companies. Junk bonds are rated BB or lower by Standard and Poor's or Ba or lower by Moody's.
Keogh Plan
A retirement plan similar to an IRA, but aimed at self-employed workers only. Investors having a Keogh Plan may contribute much more than the $3,000 per annum IRA limit.
Large Capitalization Stocks (large-caps)
Stock of a company that has more than a five billion-dollar market value. These companies are well-established corporations with a long-term record of stable earnings growth and dividend payments.
Liability
A debt or other position with negative value. Contrast with Asset.
Liquidity
A measure of how easily an investment can be converted into its present value for cash or cash equivalents. Mutual fund shares are very liquid because you can sell them and receive their net asset value in cash or cash equivalents on any day the stock market is open. On the other hand, real estate is not liquid.
Load
Also called Front-end Load. A load is an up-front sales commission charged and deducted from your initial investment amount. (Load charges range as high as 8.5% but are more commonly in the range of 3% to 4.5%.) There's little reason to purchase high-load funds when there are so many good no- and low-load funds to choose from. Most of Fidelity's 3% load funds are no‹loads when purchased in a retirement plan (exceptions: Magellan, New Millennium, Selects).
Load Fund
A mutual fund that charges both Front-end and Back-end loads.
Long-term Capital Gain
After holding a mutual fund or a security for one year, the profit you gain from selling it.
Low
This could mean the lowest level at which the market or some investment has ever been, but is more typically the lowest level it's been at in the past year (more exactly known as the 52-week low), since the all-time low for market indices and most stocks in long-extant companies approaches zero (especially after accounting for any stock splits.).
Management Fee
The fee which goes to pay for the analysis and selection of securities. See Expense Ratio.
Margin Account
A brokerage account where a customer borrows money from the broker to pay for a percentage of the cost of securities. The money borrowed is the margin. The amount borrowed is restricted by the Federal Reserve and there is a charge for borrowing this money.
Marginal Tax Rate
The highest percentage at which your income is taxed and is utilized to figure out taxes on your investment income.
Market Timing
An investment technique based on a forecast about the direction of the stock market or interest rates. Market timers will put all of their money into stocks if they think the market will rise or long term bonds if they think the market will fall. They will quickly turn their investment into cash if they think that that trend is changing direction. Market timing is very risky. It generates excessive taxes and trading costs and, more often than not, underperforms the simple buy-and-hold investment program.
Maturity
The date which a bond's, or other source of debt's, face value becomes due and payable.
Median Market Capitalization
In terms of market capitalization, the middle stock in a portfolio.
Minimum Investment
The minimum amount required to make additional investments in a portfolio or to open an account.
Money Market
A fund (or bank account) which invests in very high quality, short-term income securities. See Cash and Commercial Paper.
Mortgage-Backed Securities
Bond-like securities which are backed by mortgages, usually on single-family houses. Some are also backed by GNMA.
Municipal Bond Fund
A mutual fund that invests in tax-exempt bonds issued by states, cities, or local governments whose interest payments are free from Federal Taxes and are passed to shareholders. Often referred to as tax-free bonds.
Mutual Fund
A professionally managed portfolio of securities (stocks, bonds, cash, etc.) which enables investors to pool their money and reap the potential rewards (or suffer the possible consequences). An excellent investment vehicle for getting you to your investment destination — the problem is, there are so many cars on the lot, and only a few of them have a full tank of gas. Mutual fund companies buy and sell shares to the public for their underlying Net Asset Value (plus any Fees).
National Association of Securities Dealers (NASD)
An organization established to provide protection for investors against fraudulent acts by executing rules of fair practice. The NASD is usually made up of brokers and dealers.
National Association of Securities Dealers Automated Quotations (NASDAQ)
Provides price quotes for securities that are traded over the New York Stock Exchange and over the counter.
Net Asset Value (NAV)
The market price of a fund (its NAV per share) is derived at the close of market every day by determining the value of the fund's total Assets (the value of each security as well as cash and cash equivalents) less its Liabilities, divided by the total number of its outstanding shares.
New York Stock Exchange (NYSE)
The largest and oldest stock exchange in the United States. Located in New York City, it is has been around since 1792.
Nikkei Index
The most widely quoted Tokyo index of Japanese stocks.
No-load
No-load means no initial sales commission fee. No-load refers only to up-front sales commission charges. Many no-load funds have other fees (see 12b1 and Early Redemption). Nevertheless, no-load funds tend to be the best way to invest in mutual funds because more of your money is going to work for you.
Offering Price
The Net Asset Value per share, plus the Sales Charge. Also called the "asked price." For no-load funds, the NAV and offering price are the same.
Open-End Investment Company / Fund
See Mutual Fund.
Option
The right to buy or sell at a designated price at a certain point in time.
Over-The-Counter (OTC)
The NASDAQ is the leading over-the-counter market in the US. OTC stocks aren't listed on any exchange. Instead, they are bought and sold through a computerized network of traders.
Par
The face value of a bond, and the principle amount that should be paid when the bond matures.
Part B Prospectus
Another name for a fund's Statement of Additional Information.
Passive Management
A management approach that has the goal of matching risk and return characteristics of a single market segment by holding all of the securities that comprise the particular market segment you are looking at.
Portfolio
Term used to describe an investor's or fund manager's investment holdings.
Preferred Stock
Actually acts more like a bond. A preferred stock generally pays a fixed income like a bond. But unlike bondholders, preferred holders cannot force a company into bankruptcy for failure to make a dividend payment. (The leverage the preferred holders have is that the company cannot pay a dividend to its common stock holders until it's paid the preferred's dividends.).
Prepayment Risk
The possibility that if interest rates fall far enough, a bond issuer will pay off the bond's principal early, forcing the investor to re-invest in bonds with lower yields.
Price/Book Ratio
The price of a security per share divided by its book value per share. In terms of a portfolio, it is the weighted average Price/Book Ratio of the securities held in the portfolio.
Price/Earnings Ratio
The current price of a security divided by the per-share earnings over the past year. In terms of a portfolio, it is the weighted average Price/Earnings Ratio of the securities held in the portfolio. The higher Price/Earnings Ratio, the higher the prospect for earnings growth in years to come.
Prime Rate
This key interest rate is what banks charge on loans to their most creditworthy customers. Most large banks follow each other in setting the prime rate. Most other interest rates to consumers and businesses and then somehow tied to the prime. A rising or falling Prime Rate indicates rising or falling demand for loans and economic activity.
Principal
How much of your own money you contributed originally to an investment.
Proceeds
After sales commissions are subtracted, the amount that the seller actually acquires.
Profit-Sharing Plan
A defined contribution plan where contributions are based on the employee's earnings and can vary. It is possible for an employer to still contribute to the plan even if no profits are generated. Also, there is no minimum contribution necessary.
Prospectus
The Securities and Exchange Commission (SEC) requires every fund to provide each shareholder a prospectus wherein the fund describes its investment objectives, investments, past performance, fees, and services. Get it. Read it. Know it — before you invest in it.
Proxy
When someone gives the right to another person represent him or her. The two parties authorize this right in writing.
QUOTRON
A stock symbol consisting of 1 to 3 letters for NYSE stocks, 4 letters for NASDAQ stocks, or 5 letters for mutual funds. For example, IBM is IBM, Amazon is AMZN, and Fidelity Magellan is FMAGX.
R-square (R2)
Simply put, for any two funds, there is a number, called the "R2", which shows what percentage of one fund's performance can be explained by the other fund. (A fund's R2 when compared to itself is 100%.) I also use R2 to show each fund's correlation with the S&P 500 Index — the best overall benchmark for US stock investors (although it does have its limitations as a benchmark for small-cap funds). Spartan 500 Index, for example, has a 100% correlation with the S&P 500 Index. Why is understanding your funds' correlation important? It will help you ensure that your own portfolio is well diversified. How? If you hold only two growth funds like Blue Chip and Growth Company, your overall portfolio isn't as diversified as it should be. That's because these two funds have a high correlation, meaning they've performed similarly, and are likely to continue to do so. On the other hand, if you own two growth funds with a very low correlation, like Dividend Growth and Small Cap Independence, you've achieved added diversification (since their correlation is low) — not surprising, given each fund's different capitalization and industry emphasis.
Real Return
The return gained from an investment after inflation has been taken out. For example, if the return on a security was a positive 7% and the inflation rate was 4%, the real return would be 3%.
Reinvestment loads
Some fund companies (not Fidelity) dock your dividend, interest and capital gains should you decide to reinvest them. Any fund that does this is discouraging a very wise investment choice — reinvesting dividends. Drop any of these funds from your list of possible investments.
Relative Volatility
See Risk.
Required Minimum Distribution
Once an IRA holder reaches the age of 70 1/2 the Required Minimum Distribution is the minimum annual distribution amount that holder is required to take.
Risk
The best measure of risk is Relative Volatility. Volatility is the standard deviation, or uncertainty, of a fund's return. A fund which goes up about the same each month (i.e., a money market) has very low risk, while a fund whose performance is more erratic is said to be more "risky." To calculate a fund's volatility, I take its monthly performances (for the last 36 months) and calculate the standard deviation for this series of numbers. Relative Volatility is a fund's volatility divided by the volatility of the S&P 500 index for the same period. All funds riskier than the market have risk levels above 1.00, and all funds with less risk than the market have risk levels below 1.00.
Risk-Adjusted Return
RAR is a figure that permits comparisons between the total return of funds (and/or investment models or the S&P 500 index) of varying levels of risk, by factoring out differences in volatility. A fund's Risk-Adjusted Return is the return one would obtain with a portfolio holding the fund and enough Cash Reserves (or, for low-risk funds, enough margin) to maintain the risk level of the S&P 500. For a growth fund with a Relative Volatility of 1.25, a portfolio would be constructed of 80% of that growth fund, and 20% of Cash Reserves, giving the hypothetical portfolio a volatility of 1.00. The returns for this hypothetical portfolio are that growth fund's Risk-Adjusted Return. Algebraically, to calculate a fund's Risk-Adjusted Return: One subtracts the return of Cash Reserves from the return of the fund; divides this number by the fund's Relative Volatility; then adds back the return of Cash Reserves.
Rollover
Once an IRA holder reaches the age of 70 1/2 the Required Minimum Distribution is the minimum annual distribution amount that holder is required to take.
Rollover IRA
An individual retirement account that is set up for only for acquiring a distribution from a qualified plan so the assets can be thereafter rolled over into another qualified plan.
Roth IRA
An IRA that has withdrawals that are tax-free and is funded with contributions that are nondeductible. It was formulated for people who don't qualify for tax deductions for contributions to an IRA up-front. These individuals usually don't qualify for these deductions because of their income level or participation in a retirement plan that is sponsored by their employer.
Sales Charge
See Fees.
Sector
A fancy name for industry, especially a narrowly defined industry (e.g., biotech, pharmaceuticals and HMOs are sectors in the health care industry).
Sector Fund
A fund which invests in companies in one defined sector or related group of sectors. Fidelity's Select funds are the best-known and widest ranging of this speculative genre.
Securities
Stocks, bonds, and other investments.
Settlement Date
The date when a completed order must be settled. For Regular-Way Delivery of stocks and bonds, three days after the trade was completed is the settlement date.
Short-term Capital Gain
After holding a security or mutual fund for a year or less, the profit you make on the sale of the security or fund.
Signature Guarantee
Validating a signature by a stamp or seal performed by a member of a bank or stock exchange. In order to change the ownership of an account, a signature guarantee would have to be provided.
Simplified Employee Pension (SEP-IRA)
A retirement plan which assumes the likeness of an IRA and is available to all qualified employees.
Small-Cap Stock (small-caps)
When a company's market value is less than $500 million, they are considered a small-cap stock. Small-cap companies have the tendency to have faster growth and more risk than large-cap stocks. They use their profits to finance development rather than pay their shareholders dividends.
Spartan
Austere, basic, cheap. Fidelity's Spartan funds keep expenses low with high investment minimums, trading restrictions, and fees for various services. They all either seek Income or are Index Funds. (These are the areas where a low Expense Ratio is most important.)
Split/Stock Split
When the board of directors of a company decides to increase the number of shares that they have outstanding, pending shareholder approval. What happens is the number of shares increases and the price of an individual share decreases. For example, if a company announces a 4 for 1 stock split and you have 200 shares of stock at $100 a share, you end up with 800 shares of stock at $25 a share. The value stays the same for the shareholder.
Standard and Poor’s 500 (S&P 500)
The most common index used by money managers to assess the performance of the U.S. stock market. The S&P 500 measures the market capitalization of 500 stocks. The S&P 500 is price index and does not include the value of reinvested dividends.
Statement of Additional Information
A document prepared as an addendum to a mutual fund's prospectus that contains more information about policies, operations, and risks of the fund. Also, it is a record of all the fund's officers and directors' compensations.
Stock
See Common Stock.
Stock Fund
A mutual fund that is mostly made up of stocks.
Systematic Withdrawal Plan
A withdrawal plan where a specified amount is taken from another account either monthly, quarterly, semi-annually, or annually.
Tax-deferred Retirement Plan
When earnings in a retirement plan are not taxable.
Tax-Exempt Bond
When a bond's interest payments are not taxed. Some examples are state, county, and municipal governments and agencies.
Tax-Exempt Income Fund
Mutual funds that are looking to provide the highest amount of Federal tax-exempt income while being consistent with capital preservation and risk characteristics.
Technical Analysis
Using charts of a security's past price performance, technical analysts look for trends (and other, more abstract symbols) to tip them to an investment's future prospects.
TechnoQuant Growth
The only Fidelity fund admitting to significant use of technical analysis. (Most proponents of Fundamental Analysis see technicians as the alchemists or astrologers of the investment world.).
Tenure
This term refers to a fund manager's time at the helm. Since managers are responsible for the performance of the portfolios they run, tenure is an excellent way to determine the relevance of any performance history. Note that just because a manager may not have a lengthy tenure at the fund you're thinking of buying (the average tenure is under 4 years), doesn't mean he or she didn't have solid and relevant experience elsewhere.
Ticker Symbol
A group of letters that are used to represent a security.
Total Return
Total return is how much an investment has gone up (or down), taking into account all relevant factors: share price, income, and capital gains distributions.
Treasury
An income security backed by the full faith and credit of the United States Government. Treasury securities have essentially no credit risk, since the federal government has the power to print money. (Printing a lot of money to pay off Treasury bonds would of course be inflationary, bring on higher interest rates, and cut the value of all longer-term bonds, so let's hope it never comes to that.).
Trust
An arrangement made legally where a trustee holds a title to assets for the benefit of another person or group of people.
Turnover Rate
Calculated by taking the value of all the fund's trades (buys and sells) and dividing it by twice the net assets of the portfolio, this figure indicates how aggressive a manager has been in trading in and out of (or within) the market. A turnover rate in excess of 100% generally means a pretty aggressive manager. If the manager's good, that's not a problem, but excessive turnover can drive up fund expenses and hurt returns.
Uniform Gifts to Minors Act/Uniform Transfers to Minors Act (UGMA/UTMA)
An account registration where a custodian (i.e. parent or grandparent) acts on behalf of a minor who is the beneficial owner of the account. All income and capital gains or losses in the account are reported under the social security number of the minor. For children under 14, unearned investment income up to $1,000 is taxed at the child's tax rate. If that income is over $1,000, it is taxed at the parent's tax rate. For children over 14, the child's tax rate is the only one that applies.
Value Stock
A stock that is considered cheap relative to earnings or assets. Value stocks tend to be stodgier players in slower-growing, defensive, or cyclical areas. Contrast with Growth Stock. (Note that almost all fund managers at least pay lip service to the concept of value; even some aggressive growth players claim to be seeking "value-growth" issues!).
Vesting
A participant's interest in his/her account balance or his/her accumulated benefit.
Volatility
See Risk.Wall Street
Sometimes is another name for the investment community. Also, the name of the financial district in New York City where the NYSE and AMEX reside.
Wash Sale Rule
An investor cannot claim a loss on a sale of an investment if that investment, within 30 days before or after the sale, is bought. The Wash Sale Rule is an IRS regulation.
Yield
The level of interest payments on a bond or stock. The current yield on a bond is the amount of annual interest divided by the current value of the bond. A more complete measure, yield to maturity, takes into account the fact that bonds selling at a discount or premium to their Par value will get closer to par value as they near maturity. Funds report this yield to maturity.
Yield Curve
A graph displaying the relationship between bond maturity and yield. The longer-maturity bonds yield more than short-maturity bonds; therefore, the curve slopes up as maturity lengthens. The spread of long- and short-term rates is shown by the steepness of the yield curve.
Yield Spread
The difference between the yield on one kind of income investment and the yield on a standard investment, usually US Treasury Bonds. The yield spread between a bond and the benchmark US Treasury would tend to indicate the degree of credit risk expected for the bond. Not surprisingly, yield spreads are much higher for junk bonds than for high-quality corporate bonds.
Yield to Maturity
If a long-term, interest-baring investment is held until its maturity date, the yield to maturity is the estimated rate of return the investor will gain.
Zero Coupon Bond
A form of debt sold at a steep discount to its face value and which pays no annual interest. The discount from face value and the bond's maturity reflect an implied interest rate. The price of these bonds is extremely sensitive to changes in interest rates.
- What Every Fidelity Investor Needs to Know
- Profile of Jim Lowell and FI's Growth Portfolio in the Wall Street Journal: Picking a Skipper