Ever get the feeling that the culture is beset by a blizzard of buzzwords; that is, fancy professional jargon that is meant to sound smart, but mostly comes off as pretentious or downright useless? In that regard and in honor of the late Joan Rivers, who used the term as her trademark, can we talk? In this case, let’s consider the language of investment advice and the need for more plain-talking clarity and fewer cliches. The subject is explored by Richard Satran in a terrific piece for usnews.com headlined 10 Financial Advisor Buzzwords That Annoy Investors. Here are excerpts from the article:
“Financial advisors don’t talk so much about ‘story stocks’ or ‘megadeals’ anymore. In the post-crash era, the financial clichés they use are more often about rebuilding trust than creating sizzle.
“But some clients or prospects say the new jargon can be as big of a turnoff as the whispered deals and hot tips of the past. The softer sell is a tactic aimed at the same outcome: Build confidence by sounding smart and certain about what you are selling. Understanding the meaning of the jargon can help you avoid investing mistakes.
“To be sure, the new language is often derived from well-founded investing principles like diversifying investments and avoiding risk. Still, people should never be satisfied by something that just sounds right. ‘If you don’t understand the investment, you should do what Warren Buffett does’, says Anthony Webb, senior research economist at the Center for Retirement Research at Boston College. ‘You should run in the other direction’.
Among the “terms financial advisors often use, and sometimes overuse, and that many investors find confusing or just plain annoying:
“Alternatives. This is catchall buzzword that covers everything from commodity funds to real estate trusts. In simplest terms, it refers to investments that are not everyday stocks or bonds, and it’s a category that’s appealing to people shell-shocked by the financial turmoil of the past five years. Commodities have been especially popular in the post-crash era as investors worry that easy money would boost inflation. But that alternative burned big holes in many portfolios as commodities continue to slump after more than a year of broad declines.
“Momentum. This trading term has become a mainstream buzzword over time, and seemingly more meaningless. Stock prices sometimes seem to possess ‘momentum’ in one direction or the other, and there is no doubt traders use such trends to guide short-term buy and sell decisions. But applying this physics term to the decidedly unscientific world of markets and economics is a stretch. Science only shows that you can measure the speed and velocity of an object and calculate its next movement. But stocks are not objects in space. When a broker uses the term, ask how that one works.
“Compound rates. The simple economic truth is that an interest-rate investment that reinvests the yield, including most money market funds and certificates of deposit, grows at a mathematically faster rate. But it doesn’t apply to other kinds of investments. Stock prices go up and down. They don’t get any direct benefit from compounding interest. But that doesn’t stop financial advisors from making the claim.
“Headwinds. When investments are under pressure, this is a favored buzzword. It’s supposed to work like the calm voice of an airline pilot saying, ‘We’re going to be experiencing a bit of turbulence for a few minutes up ahead here’. Financial advisors will also borrow pilot-speak for the opposite effect: Tailwinds means it’s a good investment. But wind factors are a lot easier to measure than economic factors. So be wary when they are used to explain investments.
“Large-cap (and mid-cap, and small-cap). An explosion of new funds has created a Babel of names. But fund companies each use their own definitions in naming fund categories. It’s confusing for investors, and funds don’t always fit into neat boxes. For example, small-cap funds that hold fast-growing stocks can really be a mix of small-cap stocks and mid-cap stocks. The only way to know what you are buying is to read the fund prospectus and scour a fund’s holdings.
“Alpha. It’s what everyone wants, in a sense, and it’s probably the ultimate investing buzzword. It’s defined as the measure of how much your investment outperforms the averages, also known as benchmarks (it can also measure underperformance, but the buzzword usually refers to positive returns). Beta is a similar term. It measures how volatile a stock is versus the average. They are both based on past performance, so they only tell you so much.
“It also shows the danger of buying into buzzwords: They might have a long shelf life, but it doesn’t mean they don’t eventually go stale.”
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