Ever hear something like this and scratch your head wondering what it means?
Our exclusive quantitative modeling system using proprietary algorithms will optimize your portfolio for minimum volatility with maximum alpha exceeding the efficient frontier.
Sure, those big words definitely sound impressive, but what do they truly reveal about the person or firm saying them? Are they indicative of an expertise that would benefit investors, or just financial word salad meant to both dazzle and intimidate them into believing that investing is way too complex for people to do without professional help? As an adviser, I say it’s the latter. Yet cutting through the clutter before investing your nest egg is key.
Fortunately, doing so just got a whole lot easier, not to mention more fun.
I laughed; I cried
Jason Zweig, personal finance columnist for the Wall Street Journal, has just come out with a new book, The Devil’s Financial Dictionary (PublicAffairs, 2015). Reading his book was an emotional ride for me, as I found myself laughing at the wit of his definitions while nearly crying because they were so true.
I spoke with Zweig, who told me that all professions use jargon. This jargon has the two-pronged toxic effect of impressing consumers, then making them go along with the expert advice to avoid feeling dumb by admitting they don’t understand it.
Zweig notes that consumers lost trillions of dollars in 2008 when stock and (most) bond prices plunged, and that those experts who were responsible pocketed billions of dollars in profit. Obviously, those experts didn’t understand their own jargon but they did just fine anyway. On the other hand, you as the consumer will need to understand, and it’s actually pretty easy.
Here are a few of my favorite definitions from Zweig’s book, though I took the liberty of abridging them.
Alpha: n. Luck. Technically excess return.
Buy-and-hold: v. and adj. To hang on for the long term—thus infuriating market “experts.”
News: n. Noise; the sound of chaos; the reason the prices of investments move; the bane of investors.
Proprietary algorithms: n. Mathematical formulas ostensibly used to manage money that instead etherize the minds of prospective and current clients.
Wealth manager: n. A member of the middle class who tells members of the upper class how to manage their wealth, starting by urging them to give him or her approximately 1 percent of it every year.
In the book, Zweig notes that the financial past doesn’t repeat itself exactly but it rhymes. Human nature never changes, and believing “this time it’s different” may cost you your financial future. So it goes for Wall Street, where everything has been tried before and whatever is the latest fad will almost certainly turn out the same as it did the last time.
Zweig wrapped up our discussion by saying he believes people learn better and retain the knowledge when they have fun acquiring the knowledge. I agree.
Not only should you never make an investment you don’t completely understand, I argue that you should never make an investment you couldn’t explain to any second grader. When you hear complex financial jargon, either ask your adviser for the definition or look it up yourself. In fact, you may even want to wait until after you’ve looked it up before you ask your adviser the meaning. The Devil’s Financial Dictionary would be an excellent source for that information, and it’s a really fun read that might just save your retirement nest egg.
Some of Zweig’s definitions are available free online. Another online financial dictionary for learning the meaning of financial jargon is Investopedia.com. Personally, I find Zweig’s definitions far more valuable to consumers.
I can’t stress enough that better investments tend to be simple, transparent and without the complex jargon.
Allan Roth is the founder of Wealth Logic, an hourly-based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren’t meant to convey specific investment advice.
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