Traditional Retirement Investing Terms and Concepts

Last Updated on August 20, 2022

Exchange-traded funds (ETFs) can entail risks similar to direct stock ownership, including market, sector, and industry risks. Some ETFs may involve international risk, currency risk, commodity risk, leverage risk, credit risk, and interest rate risk. Trading prices may not reflect the net asset value of the underlying securities.

Mutual funds, closed-end funds, and ETFs are subject to market, exchange rate, political, credit, interest rate, and prepayment risks, which vary depending on the type of mutual fund. Mutual funds and ETFs are not FDIC-insured, may lose value, and are not guaranteed by a bank or other financial institution.

Asset allocation and diversification do not ensure a profit nor eliminate the risk of investment losses.

Mutual funds only trade at the end of the trading day. This is because at the end of the day, the value of the fund’s shares, called the NAV, or Net Asset Value, is calculated. After the NAV is calculated, your order will be filled.

ETFs are subject to risk similar to those of their underlying securities, including, but not limited to, market, investment, sector, or industry risks, and those regarding short-selling and margin account maintenance. Some ETFs may involve international risk, currency risk, commodity risk, leverage risk, credit risk, and interest rate risk. Performance may be affected by risks associated with nondiversification, including investments in specific countries or sectors.

Additional risks may also include, but are not limited to, investments in foreign securities, especially emerging markets, real estate investment trusts (REITs), fixed income, small-capitalization securities, and commodities. Each individual investor should consider these risks carefully before investing in a particular security or strategy. Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. Shares are bought and sold at market price, which may be higher or lower than the net asset value (NAV)

ETFs trade more like stocks, and their prices are constantly changing throughout the day. Using a market order allows you to buy or sell at the current trading price.

Types of Capital Markets

In the stock market, investors provide money to companies in exchange for a piece, or share, of ownership in that company. This fractional ownership in the company is called a stock.

In the bond market, investors lend their money to corporations, government agencies, or municipalities, but unlike the stock market, bonds don’t entitle investors to ownership. Bonds are a loan to a company or government for a certain time frame. Bonds earn interest, which are regular payments that the borrower has to pay to the investors. At the end of the bond’s time frame, investors are repaid the full amount they lent.

In addition to capital markets, there are money markets for cash investments. A typical rate of return for a cash investment might be between 1% and 2.5%—often, not enough to outpace inflation. People may participate in money markets to keep a portion of their money secure and accessible but aren’t expecting to see much growth.   


Dow Jones (est. 1896)
The Standard and Poor’s 500 (S&P 500) est. 1957)
Nasdaq (est. 1971)

Index Funds

To capitalize on the long-term performance of indices, many investors invest in index funds. An index fund is made up of a group of investments that are similar to the investments in a certain index.

Retirement Planning

The percentage of your working income that you’ll replace during your retirement is called your wage replacement ratio

Self-directed: You purchase your own investments for your portfolios.

Managed solutions: You choose your goal and risk tolerance, and professionals choose your investments and manage your portfolio for you. 

Financial Advisors: Like managed solutions, the expenses you have to pay a professional can often cut into your returns, and there’s no guarantee financial advisors will outperform the market.

Passive investors hope to achieve the same rate of return as the broader market. They take more of a hands-off approach to investing. They tend to choose investments and hold on to them.

Active investors, attempt to achieve returns better than the market average. This involves carefully analyzing the market to select investments and frequently buying and selling to get the best prices.

Core And Explore: The core of your portfolio might consist of low-cost, widely diversified index funds. Perhaps this is 80% – 95% of your portfolio. For the explore part of your portfolio, you might allocate 5% – 20% of your portfolio to certain types of assets in an attempt to outperform the market.

Dollar-Cost Averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset’s price and at regular intervals.

Capital Gains Tax: As an employee, when you receive a paycheck, taxes are typically taken out. So when you contribute money to n investment account, you are contributing money on which you’ve already paid taxes. Then, when you sell your investments, you’ll have to pay capital gains tax on any profits you earn – in effect, you’ll be paying taxes on your income and on your profits.

Tax-advantaged accounts are given special tax treatment by the government to encourage people to save for retirement.

401(k), which is a type of retirement account where you’re able to invest part of your paycheck before it’s deposited into your bank account. Employers may offer matching contributions. One disadvantage is the potential administrative fees charged. Some 401(k) providers charge additional administrative fees on top of the cost of individual investments.

IRAs usually provide more investment choices than 401(k)s. While 401(k)s are only available if you have an employer who offers one to you, anyone who has earned income at a job—or has a spouse who’s earned income—can contribute to an IRA.

In a Roth IRA or 401(k), you won’t have to pay taxes when you withdraw your money during retirement. Instead, you’ll pay taxes on your money before you contribute it to your Roth retirement account.

Self-Employed Retirement Plans

If you are self-employed or own a small business, there are different types of retirement accounts to consider. Employers may offer 401(k)s because there are tax advantages for both the employer and the employee. If you are self-employed, there are other types of retirement plans that allow you to receive tax benefits as both an employer and an employee: Solo 401(k)s, Simplified Employee Pension, or SEP IRAs, and Savings Incentive Match Plan for Employees, or SIMPLE IRAs.

A 529 plan, also known as a qualified tuition plan, provides tax advantages for investment accounts dedicated to tuition, room and board, and books.

Stock And Bonds

stock is a small ownership in a company. A shareholder, or someone who buys a stock, owns a fraction of that company and a small portion of its future earnings. Equities include funds and other types of investments—anything you can own a share of. There are two main ways investors profit from owning stocks: capital gains and dividends.

If a stock and its price goes up, it is called price appreciation, which is an increase in value. Investors realize capital gains when they sell stock for a profit. A dividend is a cash payment a company gives to its investors to share some of its profits. Dividends are typically paid on a quarterly basis but are sometimes paid on a monthly, semiannual, or annual basis. However, just because a company has paid dividends in the past doesn’t guarantee that it’ll pay them in the future.

Adding international stocks to a domestic portfolio can decrease volatility without sacrificing returns. This is because different countries have unique economic cycles, and different situations around the globe impact international markets differently.

Global Investments

developed market has a large and diverse economy, meaning it has many types of industries. The U.S., Canada, Germany, and Japan are examples of developed countries. Emerging markets are typically characterized by lower income and restrictions on capital movement and foreign investment. Some examples are Brazil, Russia, and India. The economies of these types of countries can be vulnerable to ups and downs and translate to volatility in stocks. Diversifying by sector is investing in groups of similar types of companies. Within these sectors, there are smaller categories called industries, and within those industries are subindustries. Diversifying across sectors can help manage risk in your portfolio.

A bond (also referred to as a fixed-income investment) is a debt instrument you lend to a company or government agency called the bond issuer. The money you lend the bond issuer is the principal. The issuer agrees to pay you interest at a fixed rate on a schedule, called the coupon rate, usually twice a year. At the end of that period, known as the maturity date, the bond issuer returns the original principal to the investor.

But this doesn’t mean that bonds are without risk. Three of the main risks of owning bonds are default risk, inflation risk, and interest rate risk.

  • Default risk, or credit risk, is the risk that the bond issuer will either fail to make interest payments, or it won’t be able to return the principal.
  • Inflation risk, or the risk that your money will lose its value over time, can hurt the value of bonds because their interest rate is potentially a lot lower than the potential return from stocks.
  • Interest rate risk is the risk that while you own a bond, interest rates may change. What if interest rates suddenly increase, and you’re stuck with your current investment? You could be missing out on a better opportunity.

Bond Types

  • Government bonds are issued by the U.S. Treasury, they are backed by the U.S. government, and are considered the safest type of bond. 
  • Municipal bonds, which are issued by state and local governments, are often low-paying, but the interest payments may be tax-free. 
  • Corporate bonds, issued by businesses, are the riskiest but offer the highest potential for return.  

Due to market interest rate fluctuation and risk, long-term bonds offer higher rates of return. 

Low Risk Investment Types

Certificates of deposit, or CDs, are a type of savings account with a fixed interest rate where you promise to keep your money in the bank for a certain amount of time. Unlike a regular savings account, with a CD, your money is locked up while you earn interest on it, so you won’t be able to withdraw it unless you pay a penalty. In exchange for keeping your money in the bank, the bank will you pay a higher interest rate than a typical savings account.

Treasury bills, also known as T-bills, are cash backed by the U.S. government and always mature in less than one year. When you purchase a T-bill, you’re lending money to the government. Both your interest and principal are backed by the full faith and credit of the U.S. government, which means low risk—and low returns—for investors. 

Deposit accounts offer investors even more liquidity than CDs and T-bills, because they allow you to withdraw money from a savings account at any time. 

Funds are groups of different investments that allows you to own multiple investments with a single purchase and reduce risk by exposing yourself to more types of investments. The biggest drawbacks are the fees required to pay the fund manager. The expense ratio measures how much the investment company charges you to participate in the fund. It includes the cost of paying the fund manager, administrative fees, and operating costs. 

For example, if a fund has an expense ratio of 0.20, 0.2% would be taken out to cover the fund’s expenses. So if you were to invest $1,000 in a fund with a 0.20 expense ratio, you’d owe $2 ($1,000 x 0.002 = $2).

Typically, exchange-traded funds (ETFs) have lower expense ratios than mutual funds.

We return to ETFs and Mutual Funds – which may consist of the same types of investments, but trade differently. You purchase mutual funds as a lump sum, or one-time investment, but you buy individual shares of ETFs. Some mutual funds require a minimum initial investment and/or a load fee – a commission the investor pays to the person selling the fund.

Mutual Fund Load, No-Load and Back-End Load

A mutual fund that charges you a load takes a percentage of your investment. Investors pay a front-end load when they purchase shares in a mutual fund. For example, if you were to invest $1,000 in a mutual fund with a 7% front-end load, you’d be charged $70. Therefore, your initial investment would only be $930. Some funds have a back-end load, which investors pay when they sell their shares in a mutual fund. Typically, the back-end load will decrease the longer you own the fund.

ETFs trade throughout the day and the price might change. More advanced strategies like trading options are possible. Both ETFs and mutual funds may be appropriate for a buy-and-hold investor, ETFs could also be appropriate for someone who is interested in actively trading. You can find ETFs with lower expense ratios than mutual funds—but this is not true for every ETF, which is why it’s important to closely examine expense ratios before any potential purchase.


In an active fund, a fund manager handpicks investments based on careful analysis and research in an attempt to outperform the overall market. Some active funds may allow you to invest in assets that aren’t publicly traded or provide access to foreign markets.

Target-date funds select a fund based on your projected retirement date. While the fund may start with an aggressive allocation, over time, the fund manager will adjust the portfolio to grow more conservative as you grow older. Target-date funds are a common choice in many 401(k) offerings. Though the higher level of maintenance incurs high fees, and of course there is no guarantee it will outperform the market.

Index Funds align with the goals of passive investors because rather than attempt to outperform or risk underperforming the market, an index fund seeks to achieve similar returns to its benchmark – the index whose performance it’s trying to match.

An S&P 500 index fund will likely contain around 500 investments, while a Dow Jones Industrial Average index fund should contain about 30. The Dow is weighted by price, while the S&P 500 is weighted by market capitalization (shares x price = market cap)

Index funds historically have increased in value.

Market Capitalization

Large-, mid-, and small-cap categories are based on the following values:

  • Large-cap companies, which have a market cap of $10 billion or higher, are also known as blue chips. They typically have a history of consistent earnings and revenue growth, and their stocks are commonly considered more stable than small- or mid-cap stocks.
  • Mid-cap companies, which have a market cap between $2 billion and $10 billion, tend to have a better financial footing, so they have a lower risk of failure than small caps and higher growth potential than large caps.
  • Small-cap companies, which have a market cap less than $2 billion, are commonly small, young companies. Their growth potential is high, as is the risk of failing during economic downturns.

Fund Types

  • Growth Funds: Composed of companies that have exhibited above-average growth.
  • Value / Fundamental Funds: Stocks with records of solid financial statements.
  • Blend Funds: Mix of growth and value stocks in a fund that’s as diversified as possible.

When searching for index funds, investors can look for funds with any combination of market cap and style—for example, you could search for large-cap value funds, small-cap growth funds, etc. A common choice for many investors who are building their first portfolio might be a large-cap blend, for example, an S&P 500 index fund, a Dow index fund, or a Nasdaq index fund. 

Portfolio Setup

Here are some common domestic indices you might see:

  • S&P 500: Tracks about 500 of the largest U.S. companies publicly traded on either the Nasdaq or the New York Stock Exchange, handpicked by a committee to represent the U.S. economy
  • Dow Jones Industrial Average: Tracks 30 large-cap U.S. companies
  • Nasdaq Composite: Tracks the 3,000+ stocks that are traded on the Nasdaq (if you hear a media report refer to the “The Nasdaq,” it’s likely referring to the Nasdaq Composite)
  • Nasdaq-100: A market-cap weighted index of the 100 largest non-financial companies traded on the Nasdaq
  • Russell 3000: Tracks 3,000 of the largest publicly traded companies in the U.S. and accounts for 98% of the market
  • Russell 1000: Tracks the top 1,000 stocks in the Russell 3000
  • Russell 2000: These are the stocks from the Russell 3000 that aren’t in the Russell 1000. The Russell 2000 consists of 2,000 small-cap companies from the Russell 3000 Index. Though it contains two-thirds of the same stocks that are in the Russell 3000, it represents about only 8% of the Russell 3000’s market capitalization.
  • Wilshire 5000: The Wilshire 5000 is a market-cap weighted index that tracks all publicly traded U.S. stocks, which is only around 3,600.

Any of the above is good, but it’s most important to choose any diversified index fund with a low expense ratio.

Other exchanges include Japan – Nikkei 225, which is an index for the Tokyo Stock Exchange, and the Financial Times Stock Exchange, or FTSE 100 measures the performance of 100 companies traded on the London Stock Exchange.

The MSCI – Morgan Stanley Capital International

  • MSCI ACWI (All Country World Index) ex-USA: This index includes more than 2,000 international large- and mid-cap stocks, owned by companies in 22 countries with developed markets (excluding the U.S.) and 24 countries in emerging markets. It provides broad exposure to stocks all throughout the world.
  • MSCI World ex-USA Index: Though this index’s name includes “world,” it doesn’t actually include all of the world’s countries. This index specifically tracks the performance of about 1,000 large- and mid-cap stocks in 22 countries in developed markets, and excludes U.S. stocks.
  • MSCI Emerging Markets Index: This index includes large- and mid-cap stocks from companies in 24 countries with emerging markets.

 Ex-USA means these indices exclude U.S. companies. Also, if a fund’s name includes “international,” it will most likely exclude U.S. stocks.

Bond Indices

  • Barclays Capital U.S. Aggregate Bond Index: This market-cap weighted index is the most commonly used bond benchmark. It represents most of the U.S.-traded taxable bonds (which means it excludes municipal bonds) and a few foreign bonds.
  • Barclays Global Aggregate Index: This index measures global bonds from 24 developed and emerging markets, including Treasury, government, and corporate bonds.

General Investment Tips

  • Recurring contributions can help you put saving on autopilot.
  • Set up recurring mutual fund orders.
  • Use your 401(k) to purchase more shares of mutual funds.
  • Use stocks, mutual funds and ETF dividends for reinvestment.
  • Enroll in a dividend reinvestment plan, or DRIP – historically, about one-third of stocks’ annual return is due to dividends
  • Mutual funds are legally required to share capital gains when they sell investments. These profits are called mutual fund distributions. A DRIP allows you to use your distributions to automatically purchase additional shares of a mutual fund.


Rebalancing is buying and selling investments to adjust your portfolio to your original allocation that aligns with your time horizon.

Over time, your investments will likely grow at different rates, resulting in a higher percentage of equities than your original allocation. This shift away from the original allocation is called drift.

Fear and Greed

The best way to face fear is accept the fact that you will lose money at some point. Statistically, there will be around 10 recessions in your lifetime. Historically, after these declines, there are periods of sustained recoveries. On the flip side, greedy investors may make risky decisions or try to jump on a bandwagon. Invest according to your time horizon and risk tolerance, contribute early and often – and to prevent yourself from sabotaging your portfolio, adhere to these five rules of investing:

  1. Contribute early and often
  2. Minimize fees and taxes
  3. Diversify your portfolio
  4. Invest according to your time horizon and risk tolerance
  5. Focus on your long-term goals


  1. Set a Goal: Identify a specific financial goal and choose appropriate account types for your investing goals.
  2.  Allocate a Portfolio: Determine a portfolio allocation appropriate for your time horizon and risk tolerance.
  3. Choose Investments: Search for low-fee index funds.
  4.  Manage a Portfolio: Monitor your portfolio’s performance and rebalance your investments as needed.