Common Definitions

With Your Investments, It All Boils Down to This

What really matters is the personal relationship you have with the company and the person you trust to advise you and manage your portfolio on your behalf. In order for that person to best serve you, education is key. As importantly, if you don’t understand or are confused about your investments and how they work, a good financial adviser wants you to speak up. We want to educate our clients.

Here’s a common problem: Someone opens an investment account and contributes to it on a regular basis. That person may think, “Okay, I’m all set,” and they forget about it. Wrong—that’s not in anyone’s best interest. It’s very important that our clients understand how their account is allocated (the percentage invested in stocks, bonds, cash, or other vehicles), which investments they have chosen, and perhaps most importantly, the rate of return on this portfolio. That is the percentage your portfolio grows annually. You should always know your rate of return.

What is standing in the way? Commonly, people don’t fully understand some of the basics of investing, including the types of investment accounts and what the terminology means. Without this foundation, it may be very difficult for someone to make informed investment decisions. Obviously, your financial advisor is well educated, but relying on his or her expertise does not help the financial advisor understand your intentions and the types of investments you’d like to make.

The Basic Investment Terms

If you have an employer-sponsored retirement account, it is likely referred to as one of the following plan types: 401(k), 403(b), or 457. These accounts allow for ongoing contributions through automatic payroll deductions, growing over time. The employer may also decide to match a percentage of your contributions. These savings are not taxed until money is withdrawn from the account.

With an individual retirement account, or IRA, the savings is not tied to an employer. A traditional IRA offers tax-deferred savings up to a government-assigned annual limit; with a Roth IRA, you contribute money after paying taxes on it—when you withdraw the money after retirement, it is not subject to taxation. People who are self-employed can open SEP-IRAs, which work like a traditional IRA but allow much greater annual contributions.

A brokerage account is opened with a stock brokerage or investment firm. Using a brokerage account, the investor can buy and sell many investment products, through the broker. The investor owns the account and directs the broker which trades he or she wants to make.

A managed account is overseen by a professional money manager. With managed accounts, you entrust the manager to consider your needs, willingness to take on risk, and other factors and make suitable financial decisions on your behalf. Typically, managers are paid fees for their activities.

The types of investment vehicles available generally fall into different categories: stocks, bonds, mutual funds, cash, and alternative investment products (annuities, private equity, even cryptocurrencies). Mutual funds are further subdivided into equity, fixed-income, index, target date, and target risk funds.

The main point is that there are innumerable options for investing. Your choice of investment type and vehicle can depend on several factors, including your account type, investment goals, investable assets, risk tolerance, and amount of time until you plan to retire. With all these considerations, it is imperative that individuals are educated as much as possible and understand how their money is being used, to help optimize their rate of return.

If you are confused by all this, that would not be surprising. At Isakov Planning Group, we build a personal relationship with our clients by eagerly answering their questions and educate them on (1) the types of investments available, (2) what it means to invest, and (3) how to be intentional with their investments. Contact us today to learn not only the basics, but on how to decide on the right investment strategy to meet your personal goals.