Investment product and account terms to know
When it comes to investing, there are a lot of terms to understand to help you make confident, informed decisions. If you’re already familiar with these 11 investing acronyms, let’s go over account and product types.
Your account options depend on your financial goals and investment needs. Some are taxable, which means the income in the account is subject to taxes when it’s earned. Others are not taxable, so taxes are deferred until you withdraw money from the account.
Employer-sponsored retirement accounts let you make ongoing contributions and invest your savings for potential growth over time. They typically offer automatic payroll deductions and tax-deferred savings
An Individual Retirement Account (IRA) is a type of investment account that helps you save for retirement and is not tied to your employer. A traditional IRA offers tax-deferred savings, and with a Roth IRA, you contribute using after-tax money.
Brokerage accounts are investment accounts you can open with a stock brokerage or investment firm. These accounts offer flexibility because you’re able to buy and sell a multitude of investment products. While the invested assets belong to you, you still need the broker, or firm, to execute orders on your behalf.
Managed accounts are investment accounts overseen by a professional money manager. With managed accounts, you can be more hands-off with your investment decisions because a manager will actively make them for you for a fee. The managers typically consider your financial needs, goals, risk tolerance, and investable assets when making these decisions.
The products you choose to invest in can depend on a variety of factors, including your account type, investment goals, investable assets, risk tolerance, and amount of time until you plan to retire.
Bonds are loans made to a company or government. You’re lending the bond issuer money with an understanding you’ll be paid back interest along with the face amount (original investment) of the bond. Bonds are a fixed-income investment, meaning investors can expect regular income payments throughout the year—typically once or twice a year. You purchase bonds through a brokerage account or directly from the government.
A stock is essentially a piece of ownership (equity) in a company and is bought and sold on an exchange. When you buy one, you’re purchasing a small slice of that company’s earnings and assets. They’re a way to help potentially grow your assets and outpace inflation over time.
Mutual funds are a pooled investment vehicle, managed by a professional, that let investors purchase stocks, bonds or other investments in a single transaction. These funds follow a set strategy that determines the type of investments they include and their risk level.
There are many types of mutual funds. Some offer asset allocation benefits, while others focus on growing your investment or delivering ongoing income.
A type of mutual fund invested in the stocks of companies.
A type of mutual fund that pays a set rate of return by investing in bonds and other debts to generate income.
A type of mutual fund that passively tracks (mirrors) an index—like the S&P 500—instead of paying a professional to choose and manage investments.
Generally considered a long-term investment, a target date fund looks to grow assets over a specified period of time. They are named after the year an investor plans to start using the assets—or access the money. For instance, if your intended retirement is 2030, your target date fund would have 2030 in the name. In most instances, the risk profile will automatically adjust more conservatively as you near the target date.
Target risk fund
This type of fund works to provide investors a relatively steady rate of risk exposure throughout the duration of the fund’s life. They’re usually termed “conservative,” “moderate risk”, or “aggressive” depending on their level of exposure.
Alternative investments don’t typically fall into one of the conventional investment categories, like stocks, bonds, or cash. Some examples of alternative investments include REITs (real estate investment trusts), hedge funds, private equity, and crypto currencies.
Annuities are a contract purchased from an insurance company that can help you save for retirement and provide income in retirement. They offer long-term benefits like tax-deferred growth and inflation protection, and also provide a way to turn part of your retirement savings into a steady income stream for life—the only investment you can purchase that creates regular pension-like income.
There are many types of annuities. Some protect your income from loss, some help you save by offering a fixed rate of return for a set period of time, and others are tied to market performance to help maximize your potential growth. All can be used to create a source of guaranteed income in retirement.1
With a fixed deferred annuity your money earns interest at a guaranteed rate for a set period of time, tax-deferred. When you’re ready to receive income, you can choose to receive a guaranteed amount or take withdrawals when you choose.
You can purchase an income annuity with a portion of your retirement savings, and in exchange, receive income in retirement. Immediate income annuities are meant for those who are looking for income soon. Deferred income annuities are for those who are still saving for retirement and want guaranteed income payments to start in the future.
Variable annuities are a long-term investment that provide growth potential based on market performance. You choose how your money will be invested, and the returns will vary depending on the performance of the investment. Earnings grow tax-deferred until they are withdrawn.2
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- Have a financial professional? They can help you figure out which investments may make sense for your retirement goals. If you’d like to meet with one face-to-face, we’ll help you find one.
1 Guarantees are subject to the product terms, exclusions and limitations, and the ability of the issuing insurance companies to pay claims.
2 When investing in a fixed annuity, you may have limited or no access to your original purchase amount.
This material does not constitute a recommendation to buy or sell any specific security. Investing involves risk, including possible loss of principal.
Asset allocation and diversification do not ensure a profit or protect against loss. Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline.
Bonds have interest rate risk and credit risk. As interest rates rise, existing bond prices fall and can cause the value of an investment to decline. Changes in interest rates generally have a greater effect on bonds with longer maturities than on those with shorter maturities. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and/or interest payments.
Before investing, carefully consider the investment option objectives, risks, charges and expenses. Contact a financial professional or visit principalfunds.com or principal.com for a prospectus or, if available, a summary prospectus containing this and other information. Please read it carefully before investing.
Investing in equities involves more risk than other securities and may have the potential for higher returns and greater losses.
Alternative investments are often very high-risk investments and can be illiquid in nature.
Withdrawals taken prior to age 59½ may be subject to a 10% federal tax penalty. Surrender penalties are usually assessed if you withdraw all or a portion of your principal during the guarantee period. Such withdrawals may also be subject to a market value adjustment.
Deferred income annuity contracts are irrevocable, have no cash surrender value and no withdrawals are permitted prior to the income start date.
If you are considering a variable annuity to fund a qualified retirement plan or IRA, you should do so for the variable annuity’s features and benefits other than tax deferral. In such cases, tax deferral is not an additional benefit of the variable annuity.
Investing in a variable annuity involves risk of loss—investment returns and contract value are not guaranteed and will fluctuate.
Deferred variable annuities are long-term vehicles designed for retirement purposes and contain underlying investment portfolios that are subject to market fluctuation, investment risk and possible loss of principal. If you take withdrawals from a variable annuity prior to age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.
The commentary represents the opinions of Principal Global Investors. It should not be considered investment advice. No forecast based on the opinions expressed can be guaranteed and may be subject to change without notice. No investment strategy, such as diversification, can guarantee profit or protect against loss.
Insurance products and plan administrative services provided through Principal Life Insurance Co. Securities offered through Principal Securities, Inc., 800-547-7754, member SIPC and/or independent broker-dealers. Principal Life, and Principal Securities are members of the Principal Financial Group®, Des Moines, Iowa 50392. Principal Global Investors leads global asset management and is a member of the Principal Financial Group®.