A is for Annuity:  An annuity provides a regular income of a fixed amount for the rest of your life, or an optional fixed time period.  A lifetime annuity would have been great when interest rates were around 12%, instead of the current rates of 2%.

B is for Balanced Mutual Fund:  These funds invest in some combination of stocks, bonds and cash depending on what the fund manager believes will do well in the near term.  Be wary.  Diversification to nullify risk is not a good objective – making money is.  If the performance of different investments will cancel one another out – one good + one bad = middle of the road – what’s the point?

C is for Compound Interest:  When interest is added to your principal and then itself earns interest.  A painless way to increase your saving, especially for astute investors who start young.   Not so great when you’re paying down a 35-year mortgage.  Einstein called it the 8th wonder of the world. “He who understands it earns it – he who doesn’t pays it.”

D is for Discount : My favourite word when shopping, as in “How much of a discount will you give me if I buy a case?  For this shirt with a loose button?  For this lamp with a missing finial (or whatever it’s called)?  Stores are very competitive with regards to sales and, more often than not, you’ll get it.  It’s all in how you ask.

E is for Economic Cycle:  All economies move in cycles of expansion and contraction.  In each stage of a cycle, some investments will tend to perform better than others.  For example, in a recovering economy, companies tend to earn larger profits so their stock price goes up.

F is for Freedom Fifty-Five:  Insurance companies used to promote this concept as something to look forward to after years of slogging away at our unfulfilling jobs.  Unfortunately, many Boomers have recently discovered that it was but a fairy tale.

G is for Gordon Gecko:  Michael Douglas played this character in the movie “Wall Street”.  His famous line is “Greed is good.”  Too much greed, however, can put you on the fast road to financial collapse.

H is for Holographic Will:  This is a will that is handwritten and dated by you.  You must make sure that everything in the will is absolutely clear to avoid delays while lawyers figure out what you meant.  These are not valid in every province.

I is for Index Fund:  An Index fund aims to replicate the movements of an index of a specific financial market (e.g. S&P/TSX Composite, DEX Universe Bond), usually in a Mutual Fund or Exchange Traded Fund.  They can hold all the securities in the index in the same proportions or a representative sampling.  Their primary advantages are low operating expenses and low portfolio turnover.

J is for Joint Tenancy:  This is a special form of ownership by two or more persons of the same property (e.g. bank account, real estate).  Each has an equal undivided right to keep or dispose of the property.  Joint tenancy creates a right of survivorship which provides that if anyone of the joint tenants dies, the remainder of the property is transferred to the survivors.

K is for Keystone Pipeline:  The concept of this pipeline was to send bitumen down to the U.S. for processing.  It now looks like it may be on the road to China, as our southern neighbours don’t want it.

L is for Lottery Mentality:  More than one in five lottery players surveyed think that this is a realistic and practical strategy for accumulating wealth – that they don’t have enough money to save (most of these people were poor).  They rely on the emotional benefit of hope.

M is for Market Order:  A market order is the default order when you make a trade.  The order will be completed as soon as possible at the best available current price.

N is for Net Worth Statement:  This is a snapshot of your financial health.  It helps keep you on track and stay focused.  Review your net worth on a regular basis and revel in seeing the asset side increase and the liability side decrease.

O is for Options:  Generally considered as a strategy for more advanced investors, options are not hard to understand but they can be risky.  A call option is a contract that gives the buyer the right (but not the obligation) to buy a stock at a specified price called the “strike price” by a certain date.  A put option gives the holder the right to sell a stock at a certain price within a specific period.

P is for Past Performance:  This is what many mutual fund investors look at before making a purchase decision.  Most often, yesterday’s top performing hot funds are tomorrow’s slumpers.  You can’t hear it too often – past performance is no predictor of future success.

Q is for Quote:  “A study of economics usually reveals that the best time to buy anything is last year.”  Marty Allen

R is for Rule of 72:  This calculation results in the approximate number of years that it will take for your investment to double.  Divide the interest rate into 72.  E.g. At 4% your investment will take 18 years to double in value. (72/4).

S is for Segregated Funds:  An insurance product, segregated funds are mutual funds that allow for the potential for growth in the market, but your original investment is guaranteed.  After a certain length of time (usually 10 years) you’ll receive the deposit guarantee amount (less the fees) or the market value, whichever is greater.  Seg funds may qualify for protection from your creditors even in bankruptcy, which makes them good for business owners.

T is for Tax Refund:  The return of money that has been freely given to the government.  Some people think it’s a good way to save and resist the temptation to spend the money when they get paid.

U is for Universal Life Insurance: Universal life insurance combines the protection coverage of term insurance with a savings component which builds up a cash value.  Investment growth is not taxed within the policy and will flow tax-free to your beneficiary as a death benefit.

V is for Value:  The strategy of buying stocks that are considered underpriced.  Some industries or sectors may be out of favour.  A company can be growing slowly but pays their shareholders a high dividend as compensation.  Value stocks may not perform as well in a bull market, but they won’t do as poorly in a bear market.

W is for Withholding Tax:  Amounts withdrawn from a RRSP are subject to withholding tax, from 10% to 30% (in Quebec, 21% – 35%) based on the amount of the withdrawal.  The tax is taken by the financial institution before payout and remitted to the government.  It is reported as tax paid on your tax return, and, depending on your taxable income, may be refunded.

X is for X-box :  270,000 X-Box 360 consoles were sold in the U.S. in January 2012 and a total (since inception) of 57.6 million units have been sold world wide.  (Yeah, I couldn’t think of anything else for this letter.)

Y is for Yield: Yield is the return – interest or dividends – received from an investment and is usually expressed annually as a percentage based on its cost.  Bonds have 3 yields – coupon (fixed interest rate), current (based on the current price of the bond) and yield to maturity.  Mutual fund yields are net of expenses.

Z is for Zero Coupon Bond:  Also called “strip bonds”, these bonds don’t pay interest but are traded at a deep discount rendering a profit at maturity when the bond is redeemed at its full face value.  They fluctuate in price much more than regular bonds.


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