At Johnson Bixby, we pride ourselves on educating clients about their portfolios and the investment strategies we use so they can make more informed decisions. While our team lives in a world of financial jargon and we are quite comfortable navigating it, we realize most people are not. In the below blog post, we continue our Understanding Investment Jargon series, breaking down several common investing words to help you become a more knowledgeable investor.
When you hear about how the overall stock market is doing, you’ll often hear that ‘The Dow’ was up or down a certain amount. ‘The Dow’ is an abbreviation for The Dow Jones Industrial Average, an index of 30 large U.S. companies. This index is one of the most well-known indicators of how the overall stock market is performing, along with other indexes like the S&P 500 (an index of the 500 largest U.S. companies). Examples of some of the companies in The Dow are Apple, Home Depot, and VISA.
Expense ratio is a less common term but an important one for investors to know. The expense ratio refers to the cost of owning a particular investment, typically associated with mutual funds and (ETFs). If a mutual fund has an expense ratio of 1.00%, that means the fund company is keeping $10 out of every $1,000 held with them. These fees help cover the ongoing cost of managing the fund, including researching, administration, and marketing. Generally, lower expense ratios are preferred because you keep more of your investment dollars, and we at Johnson Bixby are always considering this cost when we analyze funds to construct our clients’ portfolios.
Target Date Fund
Folks who are currently participating in an employer retirement plan (401k, 403b, etc.) may recognize this term but not fully understand it. Target date funds are mutual funds that hold a mix of stocks and bonds that automatically get more conservative over time as the investor gets closer to retirement. For example, a 2025 Target Date Fund is more conservative (holds less stock and more bonds) than a 2060 Target Date Fund, which is likely to hold mostly stock. These are also known as ‘glidepath’ or ‘lifecycle’ funds.
We saved the hardest one for last, and if you aren’t especially interested in the stock market you may not have heard this one before. The P/E ratio refers to the price-to-earnings ratio, a number you get when dividing a company’s stock price by the company’s earnings per share. You can do it for an individual company like McDonalds, or for the S&P 500 as a whole. If the ratio is higher-than-average, that company, or the broader stock market, may be ‘expensive’ or ‘overvalued’. Vice versa for lower-than-average P/E ratios. However, this ratio is one of many valuation measures and is far from the only way to determine whether this or that stock is valued appropriately.
Hopefully you’ve enjoyed our series on investment jargon, and it helps demystify some of the terms you’ve heard or read over time. If you have any more terms you’d like explained, or this has sparked questions about your particular financial situation, reach out to your planner today.