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Decoding the 10 Most Common Financial Acronyms

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Do you ever feel financial advisors speak a different language? Many clients feel their advisors throw around financial terminology that creates more confusion than clarity. Financial planners use mnemonics and acronyms since they are a great way to remember things. But the shorthand can be confusing to those that are unfamiliar with them. According to Investopedia, there are around 1900 financial acronyms, and more being created daily. Join us on this episode as we decode 10 of the most common to give you a head start in the next meeting with your advisor.

Do you let FOMO direct your investment decisions?

FAANG and FOMO go hand in hand. FAANG refers to the hot tech stocks like Facebook, Amazon, Apple, Netflix, and Google. This acronym is reminiscent of the late 90’s tech stock boom when only the biggest tech stocks were sustaining the entire market. FOMO (the fear of missing out) leaves you feeling like you are getting left behind if a decent portion of your portfolio is not invested in these stocks. This is where it’s important to recognize how your emotions are influencing your investing decisions. History has proven how slippery the slope can be when letting your emotions drive your investing strategy.

How BPS is just as important as GPS

BPS is how a mutual fund expense ratio or financial advisor’s fee is often quoted. BPS simply stands for Basis Points, the number of decimals after a whole number. For example, 50 BPS is 0.50%. Understanding the total annual cost can help you more accurately compare the value you are getting from your investment strategy or financial planning relationship.

In the third slot is the CAPE ratio. This is an acronym for the Cyclically Adjusted Price Earnings ratio, a popular measure to help judge whether the stock market is cheap or expensive according to historical averages. A highly correlated long-term indicator of future returns, the CAPE ratio continues to be a good measure for understanding stages in the market cycle.

Related: Five Ways to Improve Your Financial Decisions

Are you part of the FIRE generation?

FIRE is a newer movement, developing more over the last 10-15 years. It stands for Financially Independent, Retire Early. Many people are looking for the flexibility to work less or retire earlier in life. Folks that attempt to drastically limit spending or save considerably may be trying to achieve FIRE. Given the gravity of these decisions and the length of low to little expected income, it’s most important to understand the risks. This is where evaluating your full financial picture with annual cash flow comparisons and tax planning opportunities can add extra benefits at the margins.

Should you do a QCD from your RMD or use your DAF?

Does your financial advisor speak like this? More importantly, is your advisor bringing these things up? Understanding these terms could shave your tax burden considerably if used correctly. QCD, DAF, and RMD are important acronyms for the charitably inclined which can also lower your annual tax burdens. RMD stands for the Required Minimum Distribution that you are required to take at age 70 ½ each year. QCD is the Qualified Charitable Distribution if you are over the age of 70 ½ which sends a percentage of the RMD directly to charity, therefore, reducing your taxable income. The Donor Advised Fund, DAF, provides opportunities to take bigger deductions in higher tax years.

Listen to this episode to hear all 10 financial acronyms decoded (plus a few bonus ones) to be fully engaged at the next meeting with your financial advisor.

Outline of This Episode

  • [1:27] Acronyms are a great way to remember things
  • [5:17] FAANG
  • [6:21] FOMO
  • [7:40] CAPE
  • [8:51] BPS
  • [9:56] FIRE
  • [12:10] RMD
  • [13:58] QCD
  • [14:38] DAF
  • [15:52] NAPFA
  • [17:48] ACH
  • [19:39] REIT
  • [20:44] ETF
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