Jargon-free definitions of the important financial terms and approaches you will see repeatedly throughout The 7 Secrets of Money book:

  • Active investing: Buying investments to beat the stock market. This strategy is usually based on stock picking, market timing or a combination of both of these.
  • Asset allocation: The proportion of your investments you decide to hold in different asset classes – the most crucial decision any investor will take.
  • Asset class: A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations. The four main asset classes are equities (stocks), fixed-income (bonds), property and cash. Within each asset class there are sub-asset classes which will exhibit different characteristics, such as small companies (small cap) and large companies (large cap) or government-fixed income and corporate-backed fixed income.
  • Bear market: A stock market in which the prices of shares are falling and expected to continue to fall.
  • Behavioural finance: The study of the influence of psychology on the behaviour of financial practitioners and investors and the subsequent effect on markets and investor behaviour.
  • Bond: A fixed-income investment. A bond is a loan, usually to a company or government, with a formal contract to repay borrowed money with interest at fixed intervals.
  • Bull market: A stock market in which prices are rising and are expected to continue rising.
  • Buy and hold: Buying investments for the long term and avoiding trading apart from small purchases and sales necessary to bring a portfolio back into balance (see Rebalancing).
  • Diversification: The process of spreading your investments globally across a number of different types of markets and asset classes.
  • Equity mix: Deciding which types of equities you want to own in your portfolio. This will include the proportion of value stocks and growth stocks to own as well as the size of the companies involved.
  • Gilt: A bond issued by a government which might carry less chance of default than a corporate bond.
  • Index fund or Index tracker: A collective investment scheme that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions.
  • Passive investing: A ‘buy-and-hold’ approach to investment, rather than seeking to forecast potential short- term returns.
  • Rebalancing: The process of buying asset classes which have fallen below their agreed allocations and selling those which have risen above to bring a portfolio back into balance.
  • Smart indexing: A term coined by the authors of this book to describe our recommended passive approach. This smart approach determines which asset classes are worth holding for the long term, based on academic evidence gathered over the last 50 years. Assets are purchased in the most efficient and diverse manner – without undue trading costs or stock- specific risk – to achieved your desired returns.