Frankenberry Three Xbox Four Sixty
I am a fan of the comedic styling of Frank Caliendo. He is the master impressionist who rose to fame with his dead on imitations of George W. Bush, Robin Williams and of course, sportscaster John Madden. Over the last few years it seems he is specializing in sports figures.
Around the Super Bowl last year he did a skit where he interviewed ESPN football announcer Jon Gruden as Jon Gruden. They poke fun at many things, not least of all the overly complex lingo and terminology used in modern football. At one point, fake Jon Gruden asks real Jon Gruden to draw up a play called, Tarantula Two Beryllium Phosphate. As soon as he starts, fake Jon Gruden shouts, “No! No! That’s Frankenberry Three Xbox Four Sixty”
Ridiculous lingo… every industry has it, especially financial services. It is possible that in the last year I could have uttered the following, “The REIT ETF has outperformed its benchmark by 20 basis points and is currently above NAV. I recommend we sell it to satisfy this year’s RMD from your IRA.” It makes perfect sense to me. It might be Frankenberry Three Xbox Four Sixty to you.
I would like to take some time to define these and often thrown around terms and abbreviations.
REIT (Real Estate Investment Trust)- a security that invests in physical real estate, but that trades on an exchange like a stock. This is a more liquid way to invest in real estate. The REIT would typically have a specialty- office buildings, apartments, storage spaces, etc. They are required to pass along income to shareholders and are usually high dividend payers.
Security – an investment holding that trades, like a stock.
Liquidity – how quickly an asset can get sold and turned into cash.
ETF (Exchange Traded Fund) – a basket of securities like a mutual fund. It trades all day on an exchange (offering good liquidity) versus a mutual fund that only trade once a day, at the close of the market. The ETF tracks a certain index (or benchmark), holding the same securities as the index and only looks to perform the same as the index. It is considered a passive investment (passive vs active may be a topic for a future blog) and typical charges a lower expense ratio then a mutual fund.
Mutual Funds – a group of securities. Typically offers the benefit of diversification. Usually has a theme or specific style.
Benchmark – a standard that a mutual fund, ETF, or securities performance is compared too. You want like things compared to like things- large company compared to other large companies, not small companies.
Diversification – the act of spreading your dollars among several different investments or securities to help manage your risk.
NAV (Net Asset Value)- the total dollar value of all the positions held in a mutual fund or ETF.
RMD (Required Minimum Distribution) – Once a participant has reached age 70 ½ the IRS requires that they start to take money out of their IRA. Each year they must make a withdrawal based on the value of all IRAs at the end of the prior year and their age. The withdrawal will be taxed at the participant’s ordinary income tax rate.
IRA (Individual Retirement Account) – an account where individual save for retirement. Depending on income levels and availability of retirement plans through their employer contributions may be tax deductible. Investments grow tax deferred until withdrawals which are taxed at ordinary income.
ROTH IRA – a different flavor of IRA. There is no tax deductibility on contributions. Investments still grow tax deferred, but withdrawals come out tax free. There are income limits on who can invest in a ROTH.
Expense Ratio – the cost investment companies charge each year to manage a mutual fund or ETF.
AUM (Assets Under Management)- This can be the amount of money a mutual fund or investment advisor controls. It is often used in fee pricing. For example, the advisor could charge you a percentage of AUM, like 100 beepers (ugh). If you invest $100,000 with the advisor you would pay $1,000 in annual fees.
Class A fund, Class B fund, Class C fund – this could also likely be a topic for another blog, but mutual funds come in all different share classes with different pricing. There are a lot more classes then just A, B, and C but they are more common. Class A share charge investor a load when they are purchased. Reducing the amount of money that gets invested by that sales charge.( $10,000 with 5% charge, $9500 get invested). They do tend to have lower annual expense ratios. Class B shares charge investor when the sell shares and can have higher expense ratios then A Shares. Class B shares can convert to A share if they are held for a long enough time period. The industry seems to be doing away with B Shares. Class C shares charge an even higher expense ratio, but there can be no sales charge if they are held for at least a year. ($10,000 get invested).
This has the potential to be the longest blog in the history of the world. Each definition seems to the need for two more definitions. I could go on and on, but I won’t . Unfortunately, Lingo is here to stay. The point is that Frank Caliendo picking on NFL offensesd is funny. You investing in something you don't understand is not. Never be afraid to ask for something to be further explained.
For more information about managing your money, please visit www.frontporchfinancial.com or call (262) 236-9022.
* This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.