The Bogleheads' Guide to Investing, 2nd Edition

Appendix I Glossary of Financial Terms

Active management:

An investment strategy that seeks to outperform the returns of the financial markets or a particular benchmark.

Annualize:

To make a period of less than a year apply to a full year. For example, a six-month return of 5 percent would be annualized at 10 percent.

Annuity:

A tax-deferred insurance product that provides payments for specified intervals, including a lifetime. Annuity products and payments can differ, depending on which insurance company you select.

Automatic reinvestment:

An arrangement whereby mutual fund distributions (dividends and capital gains) are used to buy additional shares.

Benchmark index:

An index used by a mutual fund manager to compare against his or her fund’s performance.

Beta:

A measure of a fund’s sensitivity to market movements.

Bond:

A certificate of debt issued by a government or corporation.

Bond credit risk:

The possibility that a bond issuer will not repay interest and/or principal in a timely manner.

Bond duration:

Provides an estimate of a bond fund’s volatility. For example, a bond fund with a three-year duration will decrease in value approximately 3 percent if interest rates rise 1 percent, while a bond fund with a five-year duration will decrease in value by approximately 5 percent if interest rates were to rise by the same 1 percent.

Bond fund maturity:

The average length of time the bonds in a fund mature.

Capital gain:

The difference between the purchase price and the sale ...